REMICS – The New Vehicle for Banks to Defraud Taxpayers
As Florida real estate slowly pulls itself out of the foreclosure fraud files; there is finally a government agency standing up to the bully of banks!
Last week, Reuters News Service published an exclusive article exposing yet another way the banks have been defrauding taxpayers. This time it wasn’t directly through improper lending practices, robo-signing or bad assignments of mortgage.
Now, the IRS discovered that banks acting as servicers for “REMICs”, otherwise known as Real Estate Mortgage Investment Conduits, have been claiming tax-exempt status on the income they generate under favorable tax code provisions.
So what is a REMIC? A REMIC is a passive entity where mortgages are pooled and securitized into investments. Generally, the investors in REMICs are large funds, pension plans, and 401ks.
Not only did the banks failed to comply in any manner with the requirements of the Internal Revenue Code that allow this favorable tax treatment, they have apparently decided to ignore the IRC altogether.
So what does this mean for taxpayers?
It means that the banks have been systematically ignoring IRC provisions, thinking the IRS is too sheepish to enforce the law. These entities, as a result of the actions of the banks servicing the mortgages, have failed to pay billions of dollars in taxes, and robbed the government, and thus the American people, of that money.
The reason that REMICs were afforded this massive tax break is due to the fact that they are meant to be vehicles for passive investing, and as such they have rules for strict compliance that require that all mortgages passing into a REMIC must be transferred into a trust within 90 days of trust formation.
The IRS confirmed to Reuters that an investigation is ongoing based on mounting evidence banks mishandled the transfer of mortgages and violated tax requirements.
The real question is, how was this discovered? In all likelihood the banks, in trying to cover up one misdeed, inadvertently tipped their hand to a much larger one. In order to foreclose on a home, the bank must show that they own the mortgage and the note. In order to prove ownership of the mortgage, if it was not the originating lender, the bank would have to show an assignment of mortgage. In many foreclosures, assignments are often executed and recorded just before filing the foreclosure, or sometimes even after the foreclosure has been filed. The problem: these assignments show that the mortgages could not have been transferred 90 days after the trust was formed, since they are being transferred by assignment now, often years later than the Code requirements.
This may be more bad news for the banks, but good news for the American people if the IRS can recover some of these taxes. Due to the strict compliance requirements under the REMIC code provisions, any transfer made outside of the requirements that produces income is subject to 100% taxation of that income. Essentially, this provision ensures that the REMICs cannot benefit at all from income earned on improperly transferred mortgages. Adam Levitin, a Professor at Georgetown University Law School, points out in the article that this could result in “potentially enormous tax revenue that would be passed on to the federal government . . . given the federal budget deficit that’s not something to sniff at.”
While other experts seem to be concerned about potential harmful effects on the investors, their fears are unfounded. In anticipation of such problems, there are very specific provisions in the REMIC pooling and servicing agreements which provide for indemnification by the servicing bank for any acts of the servicer which result in loss of the REMIC status by the trust. While no one really knows what the IRS will do with its investigation, it is clear that federal agencies are at least trying to stem widespread bank misdeeds outside of the court system. While it may or may not help struggling homeowners directly, it is nice to see one government agency that is finally not afraid to take on the banks.