Tax “break” about to expire on debt “forgiveness”

Posted on November 9, 2012 by Neil Garfield

Editor’s Comments on policy:

Depending upon what Congress does between now and the end of the year the waiver of a tax on debt forgiveness as ordinary income will expire. My take is that it should expire and that at the same time the debt should be reduced by virtue of payments received or due from  subservicers, Master Servicers,  insurers, and counterparties to credit default swap contract, where appropriate. This is because (a) it was never secured and (b) it was never funded or acquired for “value received” by the parties whose name appears as payee and mortgagee on closing papers and (c) the debts have been paid off multiple times by multiples sales of the same loan under the structure of an outright sale (of something they didn’t own), insurance, credit default swaps and even federal bailout.

The added reason is that the homeowners were defrauded: the appraisals were cooked and the borrower justifiably relied upon them as did the investors. So we are talking restitution here not forgiveness.

That would leave each borrower with a tax instead of a mortgage. It would also give back the money to the Federal government and investors. In many cases the investors are also the borrowers if they pay taxes or are depending upon a managed institutional fund that bought the bogus mortgage bonds. By converting the defective mortgage, note and assignments to a tax, the borrower’s liability would be reduced and payable in installments.

Obama wants as little Federal involvement as possible, but he is missing the point that a large scale fraud took place here that ended up corrupting the title records in all fifty states and in which investors suffered losses only because their agents, the investment banks, never shared the enormous profits they received from “trading” (Tier 2 yield spread premium), buying insurance in which the investment bank was the payee instead of the investors, and buying additional coverage from credit default swaps again making themselves the payee instead of the investors.

This is a mirror of the closings at which the loans were supposedly originated. Instead of making the investors or their REMIC the payee on the note or recording an assignment with actual payment in cash, the banks “borrowed” ownership from the investors and made a ton of money trading on it.

The Federal government MUST get involved here and straighten this out or there will continue to be uneven inconsistent opinions emanating from state and federal courts across the country making the title situation (and uncertainty in the marketplace) even worse than it is now.

The fact is that in most loans the amount received from Federal bailouts and the hedge contracts that were used, as well as the outright multiple sales of the same loans, have been paid in full several times over whether they are in foreclosure or not — and that includes the prior “foreclosures” that were put through the system based upon false, defective documentation and fraudulent representations to the borrowers and all others involved in the process.

The remedy I propose is indeed extreme if you look at it as a gift. But if you look at it from the point of view that the investors and borrowers were lured into the scheme by the same lies to support a PONZI scheme that collapsed as soon as investors stopped buying the bogus mortgage bonds, it is easy to see that the balance due from borrowers is zero. In fact, it is even possible that legally the overpayment left over after the investors are paid, might be due back to homeowners by virtue of the terms of the notes they signed. That might also be taxable but the homeowner would have the money with which to pay the tax.

This proposal would stimulate the economy by automatically reducing the amount of household debt based upon tax brackets, while also increasing revenue to pay back the Federal government for all the “favors” done for the banks. Whether the Feds decide to prosecute the banks for restitution would their choice.

As it stands now, as long as homeowners focus their strategy or DENY and DISCOVER and demand to see the actual transfers of money to prove ownership of the loan and the existence of an unpaid loan receivable, the decisions are already turning toward the borrowers, albeit slowly. One way or the other, this issue with taxation of the “forgiveness” of debt when in fact it was actually paid is going to surface.

Think about it. Comments welcome.

Tax break for struggling homeowners set to expire
http://money.cnn.com/2012/11/07/real_estate/mortgage-forgiveness-tax-break/

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , | 142 Comments »

Don’t Panic About the Tax Part of Short-Sale

Posted on October 1, 2012 by Neil Garfield

This is not a legal opinion that you can rely upon and I don’t represent you nor have I looked at anything in your case. Check with an experienced tax lawyer or accountant and you’ll find loopholes large enough to move an ocean liner.

The realtors are jumping up and down saying sell now or you will run into tax problems. Of course they always have a reason to tell you to do something now rather than later because that is the only way they make money. But in this case they are both right and wrong (in my opinion). As background let me say that I have my degree in  Auditing and Taxation when I received my MBA, I practiced tax law for two years, and I have a large network of tax specialists, domestic and international with which I regularly consult. So this opinion expressed below is not something pulled out of the whiskey bottle.

Simply stated I don’t think the money they are talking about is a net taxable result to you whether it is considered forgiveness, reduction or correction or anything else. I think the existing law is superfluous because of the claims for damages that get settled alongside of the short-sale documents. In fact, it is my opinion that after a foreclosure sale or short sale, the taxable event runs the other way — to the bank that got the free house or free money on the basis of fraudulent representations of ownership of the loan.

Secondly and perhaps more importantly, I believe that it is in the best interest of borrowers to let the waiver of tax liability expire, despite the apparent threat of having to pay for the “income” generated by the waiver or forgiveness of debt.

The reason is simple — it completely removes the argument that the homeowner is seeking a free house. Using Deny and Discover, our new name for an old strategy — if the mortgage lien is found to be defective and it therefore can’t be used in collection or enforcement through foreclosure then the note becomes unsecured and can be discharged in bankruptcy and of course is subject to set-off arising out of claims for tortious interference , identity theft, and overpayment of the loan balance.

Why do you think that no “pool” or “trust” has EVER sought to enforce anything against any homeowner and that the curtain comes down when you demand to know details of the pool, the trust, the trustee, the trustor, the beneficiaries and where the accounts are kept?

If the tax waiver is eliminated, then everyone will know that you are seeking relief, yes, but not without having to pay taxes on income generated by the removal of a liability that once existed under common law (not under the note, which was never the evidence of a the real loan).

The tide has turned and these mortgages are going to be found as imperfect liens incapable of enforcement — for those people who fight them. The notes are trash. The legal obligation to pay for the money you received runs at common law (since there is no contract, note or mortgage) to the party that loaned the money to you. The note will therefore be disregarded because it is NOT evidence of the obligation — because it contains the name of a party who was supposed to be the lender but never loaned you the money. AND the investors, who didn’t have a clue about what was really going on, have no way of determining whose money is in which loan, which is why they are all suing the investment banker — something I have been encouraging the homeowners to do since day 1 of this blog.

The worst case scenario is that the removal of the debt gives rise to ordinary income, the tax on which would be spread out over at least 4 years, but probably much more time than that.

In numbers it works like this: if your loan was for $100,000 and now that balance doesn’t exist anymore because of any reason except you paid for it, then there could be an increase in your taxable income by $100,000, which under current rules means you can add $25,000 per year to your income for 4 years as unearned income not subject to payroll tax or social security.

If you end up owing taxes, it will be on average around 15% of the original loan. But your house will be free from any mortgage. And when you pay that tax it will be around $3750 per year or a little over $300 per month. So at the end of 4 years you will have paid your taxes, $15,000, and you still have your house free and clear. If you need more time you can get it.

In many cases even the $25,000 won’t be enough to raise them into a category where income are due (poverty areas).

So my opinion, out of the box, is to let the sunset provision set in and then push the banks to admit that they never had any rights to the loans. If you follow the money trail and don’t get lost in the document trail your chances of success are good. Thus the tax provision is the ultimate forced principal reduction. It cures what ails us and pushes the bankers back into their corners.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , | 30 Comments »

Taxation of Securitized Trusts

Posted on September 17, 2010 by Neil Garfield

TAXATION OF SECURITIZED TRUSTS(2)

For those litigators advanced enough in their knowledge of accounting and taxation, you will uncover here and upon closer search of this blog and other resources that a rich store of materials can be used to great effect in attacking the pretender lenders, but you really must know what you are talking about and you must pick your choice of strategy very carefully. Since our friends are not the only ones reading this blog, I will reserve further comment for those who retain expert services.

FROM JOSE

Pinnacle, Indymac, Wells, Cendant through PHH, with head quarters in PA, First Magnus Financial, J.P. Morgan Chase, all used this detour to make trillions of dollars and then come back to us the TAX payers through or Corrupt Congress people for a bail out. Come on.

Yes there is gold, but most lawyer I have talked to, are for some reason freaked at the idea of going into Federal Court.
That is where TILA has teeth

Filed under: CDO, GTC | Honor, HERS, Mortgage, STATUTES, taxes, trustee | Tagged: , | Leave a comment »

The Emperor’s New Clothes: THOSE FORECLOSURES ARE NOT REAL FOLKS, GET IT?

Posted on November 20, 2009 by Neil Garfield

NOW AVAILABLE on KINDLE/AMAZON

The Emperor\’s New Clothes: THOSE FORECLOSURES ARE NOT REAL FOLKS, GET IT?

1-in-10-u-s-mortgage-delinquencies-reach-a-record-high-going-up

The Emperor is still strutting around as though he was fully clothed in the best silk, color and design. Wall Street is still the darling of government and a whole lot of other people, even if it was a little bad these past few years. We’ve been through the part where the swindler’s came to town, where the government officials ashamed of their apparent blindness and ignorance raved about the new derivative innovations, and the parade of foreclosures based upon invisible clothes. But we have not arrived at the part in the story where the little child yells out that the old fool has no clothes on. And we still don’t hear everyone laughing at wall Street and sending them home to lick their own wounds instead of inflicting it on everyone else.

The swindlers are still in town selling invisible clothes to everyone gullible enough to buy nothing and call it something. We are running on vapor since 1983 when derivatives were zero. Now we have credit derivatives with a nominal value of somewhere over $500 Trillion — that is ten times the total money in circulation from government origins. That’s “nominal value” because they don’t exist and they have no value. There is no substance to them to the extent that they are based on secured debt and possibly all other debt. There is no mortgage, there is no note, although there might be an obligation. But if there is an obligation it probably has been extinguished by either set off for predatory “lending” (actually illegal sale of unregistered securities fraudulently masquerading as loan products) or extinguished by payment directly or indirectly from Uncle Sam, more investors or others. In this fairy tale (national nightmare), the swindler’s take over the government instead of sneaking out of town with their hoard of ill-gotten gains.

Think about it. If virtually ALL of the securitized residential mortgages that were originated for the last 10 years are in some sort of trouble, how much brain power does it take to conclude that there was something wrong with them to begin with?

If virtually ALL of the mortgage backed securities that were created and sold in the last 10 years went into default, how much brain power does it take to conclude that there was something wrong with them to begin with?

So if virtually all the transactions originating the source money and all the transactions that were funded from the source money went bad, how much brain power does it take to conclude that there was no substance to the transaction and that the whole thing was a fantasy from Wall Street, who are now strutting around with their pockets bulging with the all the money everyone else (investors and “borrowers”) lost?

I’ve been as gentle as I could, giving everyone a chance to catch up but we are now on the precipice of a cliff far deeper than anything we have seen before including one year ago. And nobody on the side lines is really getting it. We continue our march toward the edge of the cliff, push the ones in front off, in the hope or belief that we won’t ever get there. So here it is, my opinion to be sure, but anyone who has been following my writings since April, 2007 knows that I called the stock market crash, the credit freeze and the collapse of the world economies and why. So it’s not like I don’t have a track record. I wasn’t the only one and people with far more credibility than me spotted the same things and continue to scream bloody murder, “the emperor has no clothes!” See comments by Roubini, Krugman, Volcker et al.

  1. Geithner and Summers have to go. They are the emperor’s closest confidants who don’t want to look stupid even if it destroys the entire country. The current emperor is still on a learning curve so we have to cut him some slack. The prior ones, well….read on.
  2. The recession is real but most of it could be reversed by simply admitting the obvious: those derivatives have no value, the mortgages are mostly invalid, the notes are mostly invalid, and the obligations are mostly extinguished by the swindlers’ own chicanery with Federal bailouts and Credit Default Swaps, which were the cloth of the Emperor’s invisible clothes.
  3. The need for the AIG bailout can be argued. But nobody can argue that the people who benefited from it are the same people who got us into this mess. They took a system that was working and turned it into a system that couldn’t work. They turned mortgage lending on its head: mortgages that were likely to perform were valuable only as cover for most of the illegal activities underneath. The real incentive was to create mortgage pools that would fail and where they could collect on credit default swaps worth as much as 30 times the original nominal value. Vapor on Vapor.
  4. That means they have every motivation to make certain you go into default and no motivation whatsoever to modify, settle, allow short-sale or do anything for the benefit of a homeowner who wants to settle the matter honorably. You can’t do that when you are dealing with dishonorable people with motives that amount to acts of domestic terrorism. There is no talking to them because if they can get you to default on that $300,000 loan they probably are going to get paid $9,000,000 just on your default. How do you like them apples? Check it out. It is true.
  5. Any obligation — whether it is a loan for refinancing a house, buying a house, student loan, auto loan etc. that have the attributes discussed in this blog — does NOT have any security or note that can be enforced and all of them can be extinguished in bankruptcy — probably even including the nondischargeable student loans. (More on that another time).
  6. Therefore, much of the recession, all of the foreclosures and much of the lost wealth that is “missing” is legally, morally and ethically and in actuality and reality, a fantasy. Some 20 million homeowners or more with these residential mortgages securitized through a money laundering scheme are sitting on wealth they have been convinced they don’t have. But they do. Those houses are free and clear — legally, morally and ethically.
  7. All the homes in the MERS database are probably free from any encumbrance legally, ethically and morally. Trillions of dollars of wealth that is claimed as “lost” is still possessed by people who don’t know they have it and the game is on to make sure that if they ever figure it out it will be too late.
  8. Imagine the purchasing power in our consumer economy if the mortgage obligations and other obligations simply vanished. What would happen to the recession? What would happen to unemployment? What would happen to tax revenues without ever raising the rate of taxation? It would all self correct. And speaking of taxes, how about all those trillions of dollars in “fees” and “profits” that were sequestered off shore, never reported and thus never taxed? what would happen to the national and state deficits?
  9. All this is happening because the wrong people are controlling the conversation and most people are listening because the “experts” because they are so smart “must know better.” Consider me the child who yelled “But the Emperor has no clothes.” A million experts with long resumes, PhD’s and persuasive catch words can’t change the fact that the money laundering scheme of the last 10 years was clothed in “Apparent” legality but in substance was simply fraud perpetrated by people who were not any smarter or better than the common swindler. They did, however, have one ace in the hole — the Emperors were in on it. Maybe we have a chance with the current administration, maybe not.
  10. Unless we do something about this, we will suffer the indignity of decline into third world status as the wealthy few squeeze the life out of the rest of the country. Is this too extreme for you? Go to the International Money Fund website or the World Bank website or any other website or book that addresses basic economics. You won’t find anything different there. Just words, like these, with a little more polish and a little more academic tone, with the same message.


Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , , , | 13 Comments »

Give me a little help here: Trusts, REMICs, and the Authority of the Trustee or Trustee’s Attorney to Represent

Posted on June 25, 2009 by Neil Garfield

When U.S. Bank comes in as Trustee for the the holders of series xyz etc., the use of the words Trustee and series certificates give it an air of legitimacy. But this is probably just another bluff. Reading the indenture on the bond (mortgage backed security) and the prospectus, you will see that the “Trust” may or may not be the the Special Purpose Vehicle that issued the bonds.

And of course I remind you that the “borrower” (whom I call an “issuer” for reason explained in other posts) signed a note with one set of terms and the source of funding, the investor received a bond with another set of terms (and parties) who in turn received some sort of transmittal delivery or conveyance of a pool of “assets” from a pool trustee or other third party who obtained the “assets” under an entirely different set of terms (and parties) including a buy back provision which would appear to negate the entire concept of any unconditional “assignment” (a primary condition for negotiability being the absence of conditions and the certainty that the instrument sets forth all obligations without any “off-record” activity creating a condition on payment).

In short, we have a series of independent contracts that are part of a common scheme to issue unregulated securities under false pretenses making the “borrower” and the “investor” both victims and making the “borrower” an unknowing issuer of an instrument that was intended to be used as a negotiable instrument and sold as as a security.

One of the more interesting questions raised by another reader is this issue of trusts. care to comment on the following? I’ll make it an article and post it. Send it to me at ngarfield@msn.com. Want to be a guest on the podcast show? Submit an article that gets posted.

1. What is a trust? How is it defined? How is it established for legal existence? Does it need to be registered or recorded anywhere?
2. Can a trust legally exist if it is unfunded? (If there is nothing in the trust to administer, is there a trust?)
3. What are the powers of the Trustee of an unfunded trust? Can a Trustee claim apparent or actual authority to represent the holders of bonds (mortgage backed securities) issued by a Special Purpose Vehicle — as an agent? as a trustee? Again what are the “Trustee’s” (agent?) powers?
4. Who can be a Trustee.
5. Can a financial services entity otherwise qualified to do business in the state claim to be an institutional trustee?
6. Can a financial services entity that does not qualify to do business in the state, not chartered or licensed do business as a bank? a lender? a securities issuer? a trustee? a trust company?
7. If the mortgage backed securities (bonds) are sold to investors what asset or res can be arguably in the trust?
8. If the mortgage backed securities (bonds) contain an indenture that purports to convey a pro rata share of the mortgages and notes in a pool to the owner of the certificate of mortgage backed security (bond) what asset or res can be arguably in the trust?
9. If the Special Purpose Vehicle has filed with the IRS as a REMIC conduit (see below) then how it own anything since by definition it is a conduit and must act as a conduit or else it loses tax exempt status and subjects itself to income and capital gains taxes?

FROM WIKOPEDIA:

Real Estate Mortgage Investment Conduits, or “REMICs,” are a type of special purpose vehicle used for the pooling of mortgage loans and issuance of mortgage-backed securities. They are defined under the United States Internal Revenue Code (Tax Reform Act of 1986), and are the typical vehicle of choice for the securitization of residential mortgages in the US.

REMIC usage

REMICs are investment vehicles that hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. A REMIC assembles mortgages into pools and issues pass-through certificates, multiclass bonds similar to a collateralized mortgage obligation (CMO), or other securities to investors in the secondary mortgage market. Mortgage-backed securities issued through a REMIC can be debt financings of the issuer or a sale of assets. Legal form is irrelevant to REMICs: trusts, corporations, and partnerships may all elect to have REMIC status, and even pools of assets that are not legal entities may qualify as REMICs.[2]

The Tax Reform Act eliminated the double taxation of income earned at the corporate level by an issuer and dividends paid to securities holders, thereby allowing a REMIC to structure a mortgage-backed securities offering as a sale of assets, effectively removing the loans from the originating lender’s balance sheet, rather than a debt financing in which the loans remain as balance sheet assets. A REMIC itself is exempt from federal taxes, although income earned by investors is fully taxable. As REMICs are typically exempt from tax at the entity level, they may invest only in qualified mortgages and permitted investments, including single family or multifamily mortgages, commercial mortgages, second mortgages, mortgage participations, and federal agency pass-through securities. Nonmortgage assets, such as credit card receivables, leases, and auto loans are ineligible investments. The Tax Reform Act made it easier for savings institutions and real estate investment trusts to hold mortgage securities as qualified portfolio investments. A savings institution, for instance, can include REMIC-issued mortgage-backed securities as qualifying assets in meeting federal requirements for treatment as a savings and loan for tax purposes.

To qualify as a REMIC, an entity or pool of assets must make a REMIC election, follow certain rules as to composition of assets (by holding qualified mortgages and permitted investments), adopt reasonable methods to prevent disqualified organizations from holding its residual interests, and structure investors’ interests as any number of classes of regular interests and one –- and only one -– class of residual interests.[3] The Internal Revenue Code does not appear to require REMICs to have a class of regular interests.[4]

Qualified mortgages

Qualified mortgages encompass several types of obligations and interests. Qualified mortgages are defined as “(1) any obligation (including any participation or certificate of beneficial ownership therein) which is principally secured by an interest in real property, and is either transferred to the REMIC on the startup day in exchange for regular or residual interests, or purchased within three months after the startup day pursuant to a fixed-price contract in effect on the startup day, (2) any regular interest in another REMIC which is transferred to the REMIC on the startup day in exchange for regular or residual interests in the REMIC, (3) any qualified replacement mortgage, or (4) certain FASIT regular interests.”[5] In (1), “obligation” is ambiguous; a broad reading would include contract claims but a narrower reading would involve only what would qualify as “debt obligations” under the Code.[6] The IRC defines “principally secured” as either having “substantially all of the proceeds of the obligation . . . used to acquire or to improve or protect an interest in real property that, at the origination date, is the only security for the obligation” or having a fair market value of the interest that secures the obligation be at least 80% of the adjusted issue price (usually the amount that is loaned to the mortgagor)[7] or be at least that amount when contributed to the REMIC.[8]

Permitted investments

Permitted investments include cash flow investments, qualified reserve assets, and foreclosure property.

Cash flow investments are temporary investments in passive assets that earn interest (as opposed to accruing dividends, for example) of the payments on qualified mortgages that occur between the time that the REMIC receives the payments and the REMIC’s distribution of that money to its holders.[9] Qualifying payments include mortgage payments of principal or interest, payments on credit enhancement contracts, profits from disposing of mortgages, funds from foreclosure properties, payments for warranty breaches on mortgages, and prepayment penalties.[10]

Qualified reserve assets are forms of intangible property other than residual interests in REMICs that are held as investments as part of a qualified reserve fund, which “is any reasonably required reserve to provide for full payment of” a REMIC’s costs or payments to interest holders due to default, unexpectedly low returns, or deficits in interest from prepayments.[11] REMICs usually opt for safe, short term investments with low yields, so it is typically desirable to minimize the reserve fund while maintaining “the desired credit quality for the REMIC interests.”[12]

Foreclosure property is real property that REMICs obtain upon defaults. After obtaining foreclosure properties, REMICs have until the end of the third year to dispose of them, although the IRS sometimes grants extensions.[13] Foreclosure property loses its status if a lease creates certain kinds of rent income, if construction activities that did not begin before the REMIC acquired the property are undertaken, or if the REMIC uses the property in a trade or business without the use of an independent contractor and over 90 days after acquiring it.[14]

Regular interests

It is useful to think of regular interests as resembling debt; they tend to have lower risk with a corresponding lower yield. Regular interests are taxed as debt.[15] A regular interest must be designated as such, be issued on the startup day, contain fixed terms, provide for interest payments and how they are payable, and unconditionally entitle the holder of the interest to receive a specific amount of the principal.[16] Profits are taxed to holders.

Residual interests

Residual interests tend to involve ownership and resemble equity more than debt. However, residual interests may be neither debt nor equity. “For example, if a REMIC is a segregated pool of assets within a legal entity, the residual interest could consist of (1) the rights of ownership of the REMIC’s assets, subject to the claims of regular interest holders, or (2) if the regular interests take the form of debt secured under an indenture, a contractual right to receive distributions released from the lien of the indenture.”[17] The risk is greater, as residual interest holders are the last to be paid, but the potential gains are greater. Residual interests must be designated as such, be issued on the startup day, and not be a regular interest (which it can effortlessly avoid by not being designated as a regular interest). If the REMIC makes a distribution to residual interest holders, it must be pro rata; the pro rata requirement simplifies matters because it usually prevents a residual class from being treated as multiple classes, which could disqualify the REMIC.[18]

Forms

A REMIC can issue mortgage securities in a wide variety of forms: securities collateralized by Government National Mortgage Association (Ginnie Mae) pass-through certificates, whole loans, single class participation certificates and multiclass mortgage-backed securities; multiple class pass-through securities and multiclass mortgage-backed securities; multiple class pass-through securities with fast-pay or slow-pay features; securities with a subordinated debt tranche that assumes most of the default risk, allowing the issuer to get a better credit rating; and Collateralized Mortgage Obligations with monthly pass-through of bond interest, eliminating reinvestment risk by giving investors call protection against early repayment.

The advantages of REMICs

REMICs abolish many of the inefficiencies of collateralized mortgage obligations (CMOs) and offer issuers more options and greater flexibility..[19] REMICs have no minimum equity requirements, so REMICs can sell all of their assets rather than retain some to meet collateralization requirements. Since regular interests automatically qualify as debt, REMICs also avoid the awkward reinvestment risk that CMO issuers bear to indicate debt. REMICs also may make monthly distributions to investors where CMOs make quarterly payments. REMIC residual interests enjoy more liquidity than owner’s trusts, which restrict equity interest and personal liability transfers. REMICs offer more flexibility than CMOs, as issuers can choose any legal entity and type of securities. The REMIC’s multiple-class capabilities also permit issuers to offer different servicing priorities along with varying maturity dates, lowering default risks and reducing the need for credit enhancement.[20] REMICs are also fairly user-friendly, as the REMIC election is not difficult, and the extensive guidance in the Code and in the regulations offers “a high degree of certainty with respect to tax treatment that may not be available for other types of MBSs.”[21]

The limitations of REMICs

Though REMICs provide relief from entity-level taxation, their allowable activities are quite limited “to holding a fixed pool of mortgages and distributing payments currently to investors.”[22] A REMIC has some freedom to substitute qualified mortgages, declare bankruptcy, deal with foreclosures and defaults, dispose of and substitute defunct mortgages, prevent defaults on regular interests, prepay regular interests when the costs exceed the value of maintaining those interests,[23] and undergo a qualified liquidation,[24] in which the REMIC has 90 days to sell its assets and distribute cash to its holders.[25] All other transactions are considered to be prohibited activities and are subject to a penalty tax of 100%,[26] as are all nonqualifying contributions.

To avoid the 100% contributions tax, contributions to REMICs must be made on the startup day. However, cash contributions avoid this tax if they are given three months after the startup day, involve a clean-up call or qualified liquidation, are made as a guarantee, or are contributed by a residual interest holder to a qualified reserve fund.[27] Additionally, states may tax REMICs under state tax laws.[28] “Many states have adopted whole or partial tax exemptions for entities that qualify as REMICs under federal law.”[29]

REMICs are subject to federal income taxes at the highest corporate rate for foreclosure income and must file returns through Form 1066.[30] The foreclosure income that is taxable is the same as that for a real estate investment trust (REIT)[31] and may include rents contingent on making a profit, rents paid by a related party, rents from property to which the REMIC offers atypical services, and income from foreclosed property when the REMIC serves as dealer.[32]

The REMIC rules in some ways exacerbate problems of phantom income for residual interest holders, which occurs when taxable gain must be realized without a corresponding economic gain with which to pay the tax.[33] Phantom income arises by virtue of the way that the tax rules are written. There are penalties for transferring income to non-taxpayers, so REMIC interest holders must pay taxes on gains that they do not yet have.

Filed under: ATM, bubble, CDO, community banks, CORRUPTION, credit unions, Eviction, foreclosure, foreign relations, GTC | Honor, Investor, MODIFICATION, Mortgage, Obama, politics, securities fraud, Servicer | Tagged: , , , , , , , , , , , , , , | 19 Comments »

Energy Policy and Return on Investment

Posted on May 2, 2008 by Neil Garfield

 

While we love our contentious politics and passionately favor our pretty candidates, we lose sight of the fact that there is actually some work to do and that the policies that will get that work done are complex, filled with nuance, trapdoors and obstacles.

Politics is well-suited to sound bites, but governance is far more complex than that. We favor Obama’s candidacy not because he knows everything about energy policy or economics — he doesn’t and neither do any of the other candidates. We favor him because he understands that any policy that is actually effective must engage the voters and decision-makers in the private and public sectors and his approach is more likely to achieve that plan of engagement. He is betting that people will accept some ambiguity and mistakes in the pursuit of good governance.

The business case discussed below must present the voter or decision-maker not only with some proposal that is based upon his direct benefits, but all the indirect benefits he/she will receive, the fact that there will be government incentives, and the fact that his/her competitors are getting the benefit of having already subscribed to the new policy. If the decision-maker is not sold on all these factors, he/she won’t do it. His/her job is on the line. Everyone wants to be a hero but nobody wants to risk cutting their employment throat. 

As the following article points out, the largest problem confronting us in changing the energy paradigm is the bean counter. Return on investment (ROI) is a term that is widely used and presumed to mean something. Unfortunately it  doesn’t mean anything except to the speaker. We all mean different things when we talk about whether a project is “worth” doing. That’s where government comes in as the referee.

Good government policy defines the scope of a project, the benefits and the costs in a way that educates people and has them speaking about it in the same way, using terms that are understood by everyone the same way. It is from the higher government point of view that decision-makers in the private sectors can gain a perceptual advantage as they see their place in their industry and their place in the economy as a whole.

Good government policy provides incentives and reliable information for decision-makers to make good decisions not only indiivudally for their own companies, but collectively so that each industry and each company, along with the economy as a wholoe has an opportunity to achieve a stable growth pattern, secure in the knowledge that we remain ahead of teh curve.

Energy policy is part of the larger government role of national security. We can all agree that we want to pursue policies that will increase the likelihood of peace and prosperity, where tax rates are low, tax revenues are high (because of high growth economic activity and productivity) and reducing entangling alliances and policies that might increase the the prospect of an expensive war or distract us from maintaining the value of our currency, while keeping the pressures of inflation checked.

Thus we all know that good national and state economic policy includes effective administration of an energy policy. However in a democratically driven republic with capitalist economic underpinnings nothing works without “consent of the governed.” Cooperation of voters and private sector decision-makers is not merely helpful, it is required. Consent cannot be effectively coerced without most of the rest of the voters or decision-makers subscribing to the policy (peer pressure and reducing the perception of risk because others are doing it). 

Thus the mission of the next administration will be to communicate effectively with the private sector and with voters to change the paradigm of energy production and consumption.

 

  • For example, plug-in hybrids that will provide a range of perhaps 40-50 miles on battery power alone, requires somewhere to plug them in. 
  • If they are plugged in overnight when usage is lowest, then the utility companies get increased revenues and profits, and government should reward the utility companies with credits for participating in the reduction of the carbon footprint of transportation. 
  • But if the cars are plugged in during peak hours, it could be a financial disaster for the utility companies unless they are able to secure cheap energy to absorb the already overloaded hours.
  • This opens the door for wind turbine and solar capture farms in areas that are presently unused, and which would be environmentally unaffected by installation of renewable energy sources. 
  • It opens the door for entrepreneurs to convert existing hybrids to plug in versions and for car manufacturers to offer new vehicles with the hybrid capability to  run on battery alone, run on gasoline, run on diesel and even to run on alternative bio diesel.
  • It opens the door for entrepreneurs to offer home conversion for solar (PV) electricity for powering up those hybrids, golf carts etc. during PEAK times.
  • This in turn opens the door for companies that deliver products and services to businesses and residences to convert to such vehicles, including government society services like police, fire, public transportation etc.
  • The result if properly administrated and orchestrated, is a direct cost savings to all the participants, direct increase in profit for the private sector, direct decrease in major costs for government services, and indirect benefits that are more important at higher levels of government than a particular locale or even state.
  • ALL of this requires an effective leader who gives voice, vision and direction motivated by a desire to produce a benefit to society (everyone) rather than part of a society with merely leads to abuses that are always traced to schemes that are merely masked agendas for transfer of wealth, accumulation of power and the enslavement of the citizenry. 

 

Thus the business case discussed below must present the decision-maker not only with some proposal that is based upon his direct benefits, but all the indirect benefits he will receive, the fact that there will be government incentives, and the fact that his competitors are getting the benefit of having already subscribed to the new policy. If the decision-maker is not sold on all these factors, he/she won’t do it. His/her job is on the line. Everyone wants to be a hero but nobody wants to risk cutting their employment throat. 

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Sales & Marketing: Why ROI Calculators are a Formula for Failure

Financial justification tools face three major challenges: Prospects don’t believe their output; facilities managers are not financially trained; and sales reps are not trusted to explain the numbers.

Denis Du Bois
May 02, 2008
Rebates, ITCs, projected energy costs, NPV… Finance is not a shallow subject, but most people barely get their toes wet before they drown. Just ask three CFOs to explain “return on investment.” You’ll soon be gasping for air, even if you thought you knew what it meant.

When it comes to sustainability, for-profit corporations still do more talking than buying. Without a business case, few projects end up getting past the “nice idea” stage.

This is as true for chiller plant controls as it is for a utility-class wind farm. Capex approvers need convincing that sustainability goes beyond saving polar bears, and isfiscally the right thing to do for their company.

Take energy efficiency as an example, performance contracts aside. Unless a sales rep can get C-level executives to think about energy as a manageable P&L line item, instead of as a fixed expense, the rep will be going out the way they came in — empty-handed. No business case, no deal.

Point of failure

Who prepares the business cases for your proposals? Unless you can find a way to keep your finance department out of doing it, this is a bottleneck in the sales process. Thus the popularity of ROI calculators.

Does your company use an ROI calculator?
Post a comment and share your experience.

Sales reps who open up an ROI calculator are likely to experience a vague sense of dread. The facilities manager doesn’t really understand or believe the result — accounting isn’t their profession, after all — but they provide the numbers and nod politely.An attempt to explain the results is likely to embarrass the sales rep — accounting isn’t their profession, either — but they try. The prospect does more nodding, and grows more skeptical.

So, companies say they have tools to calculate payback, reps say they use them, and prospects say they understand the results. The marketing department, who spent plenty to have the ROI tool developed, hears neutral feedback or nothing at all. They don’t know the tool is ineffective and has fallen into disuse.

Soon, though, the tool is out of date. The state grant expires, the latest energy bill changed the depreciation rules again, or energy costs have outpaced the projections. Even a spreadsheet that is still valid is not trusted beyond a few months after it was created.

What’s the formula?

In companies where I’ve seen ROI tools succeed, there have been common traits. First, these typically are larger companies with multiple products, so they have more than one ROI tool. One or two people with financial backgrounds are assigned to researching, building, and maintaining the tools. They take pride in their product.Second, each tool is designed to allow the prospect and sales rep to produce a believable business case. That means believable for the customer even if it’s not as favorable to the vendor. When it’s readable and believable, it has a chance of showing up in the C-level decision maker’s e-mail. All assumptions and constants are footnoted with credible sources, and none of them are locked. If the prospect wants to reduce the power factor or increase the number of cloudy days, let them. It’s their ROI.

Finally, train sales reps and give them a support line. Try as you may to make the user interface simple, it’s still Excel and it’s still complex. Webinars are effective at teaching sales reps how to use these tools, especially in a third-party sales channel — and the recording of the webinar stays around for reference. Reps then need to know who to call for help whenever they get stumped in front of a prospect.

To close a business-to-business sale, you need to demonstrate the cause-and-effect relationship between investing in your product and achieving a business goal. In the C-suite, there’s nothing as powerful as a good ROI tool in the hands of someone who is comfortable using it.

 

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