REMICs, FASITs and Other Mortgage-Backed Securities, written by Gary J. Silversmith, Esq., focuses on Real Estate Mortgage Investment Conduits (REMICs) and financial asset securitization investment trusts (FASITs) and describes in detail the other various types of mortgage-backed securities (MBSs), including pass-through securities and mortgage-backed bonds.
This Portfolio places special emphasis on the secondary mortgage market and the MBS programs offered by the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association. A secondary mortgage market is created by lenders who originate loans secured by real estate and then sell the loans to investors. The transfer of the loans to new owners is what constitutes the secondary market. The mortgage loans can be purchased or sold individually, or they can be grouped into a collection of loans commonly called mortgage pools.
This Portfolio discusses the taxation of holders and issuers of MBSs and the various tax reporting requirements. The structure and form of MBSs and mortgage pools, the applicable securities and regulatory laws, and the typical investors in MBSs are also examined. The earnings-based account is discussed in this Portfolio, although this instrument is not strictly “mortgage-backed.”
The Working Papers provide a detailed comparison of pass-through MBSs, a chart of REMIC tax and information return requirements, a sample prospectus for a REMIC, and the legislative histories of REMICs and FASITs.
REMICs, FASITs and Other Mortgage-Backed Securities allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
Detailed Analysis
I. Introduction
Introductory Material
A. Development of Pass–Through Mortgage–Backed Securities
1. General
2. Historical Highlights
B. Growth of Pass–Through Mortgage–Backed Securities
C. Mortgage–Backed Securities as an Investment
1. Vehicle for Investing in Mortgages
2. Lender's Alternatives
II. Explanation of Mortgage–Backed Securities
A. Types of Mortgages
2. Adjustable–Rate Mortgages
3. Multifamily Mortgages
4. Commercial Mortgages
a. General
b. Credit Rating
B. Types of Mortgage–Backed Securities
1. Pass–Through Securities
a. Definition
b. Investor Considerations
2. Mortgage–Backed Bonds
a. Straight Mortgage–Backed Bond
(1) General
(2) Legal Limitations on Financial Institution Issuers
b. Zero–Coupon Mortgage–Backed Bonds
c. Pay–Through Mortgage–Backed Bonds
(2) Advantages Over Straight Mortgage–Backed Bonds
d. Pay–Through Mortgage–Backed Builder Bonds
(2) Use of a Subsidiary
(3) Attributes
(4) Installment Sale Treatment
(5) Taxation of Bondholders
e. Pay–Through Bonds/Collateralized Mortgage Obligations (CMOs)
(2) Evaluating CMOs
(3) CMO Attributes
(4) Private–Issue Obligations/CMO Developments
(5) Companion CMOs
(6) Accounting Treatment
(7) Tax Treatment
(a) Issuer: Classification as Debt or Asset Sale
(b) Holder: Classification as Debt Versus Equity
(c) Taxation of Holders
(d) Discount Income
(e) Withholding Taxes
(f) Investors
f. Collateralized Mortgage Loan
3. Direct Pay Letter of Credit
4. Collateralized Preferred Stock
b. Tax Aspects
(1) Dividends–Received Deduction
(2) Issuance Through a Subsidiary
5. Earnings–Based Account (Participation Certificate of Deposit)
6. Senior/Subordinated Securities
7. Stripped Securities
b. Tax Implications
c. Use in a REMIC
III. Real Estate Mortgage Investment Conduit (REMIC)
A. Qualifications as a REMIC
B. Composition of a REMIC
1. Regular Interests
2. Residual Interest
C. Treatment of Transfers to a REMIC
D. Taxation
1. Regular Interest Holders
2. Residual Interest Holders
3. Taxation of REMICs
4. Treatment of REMIC Interests Held by Financial Institutions and REITs
5. Tax Filing and Information Return Requirements
6. Liquidation of a REMIC
E. Use of Other Vehicles to Hold Mortgage Pools
F. Advantages of REMICs
G. Use with Subordinated Interests
H. Use with Shifting Interest
I. Taxable Mortgage Pool
J. Future of REMICs
IV. Financial Asset Securitization Investment Trust
A. Background
B. Qualification as a FASIT
1. Election to Be Treated as a FASIT
2. Regular Interests and the Ownership Interest
a. Regular Interests
(1) In General
(2) High-Yield Regular Interests
(3) Regular Interests Held by Foreign Residents
b. The Ownership Interest
3. Permitted Assets
a. Cash and Cash Equivalents
b. Permitted Debt Instruments
(2) Short-Term Debt Instruments Issued by the Owner or a Related Person
(3) Debt Instruments That Are Not Permitted Assets
c. Foreclosure Property
d. Hedges and Guarantees
(2) Hedges and Guarantees Issued by the Owner or a Related Person
(a) Hedges
(b) Guarantees
e. Contracts to Acquire Hedges or Debt Instruments
4. Prohibited Transactions
a. In General
b. Acquisitions Presumed Not to Be Loan Origination
5. Cessation of a FASIT
a. Consequences of Cessation for the FASIT and the Underlying Arrangement
b. Consequences of Cessation for the Owner
c. Consequences of Cessation for Regular Interest Holders
C. Tax Treatment of the Owner
1. In General
2. Gain Recognition on Property Transferred to a FASIT or Supporting FASIT Regular Interests
3. Determining the Value of Property
b. Special Valuation Rule
(1) Reasonably Expected Payments
(2) Special Rules
(a) Beneficial Ownership Interests
(b) Stripped Interests
(c) Contemporaneous Purchase and Transfer of Debt Instruments
(d) Guarantees
4. Transfers of Ownership Interests
5. Reporting and Other Procedural Requirements
Owner's Annual Reporting Requirements
b. Treatment under Subtitle F
D. Tax Treatment of a FASIT Regular Interest
E. Transitional Rule for Pre-Effective Date FASITs
2. Safe-Harbor Method for Determining FASIT Gain
a. Step One: Establishing Pools of Assets
b. Step Two: Determining FASIT Gain or Loss at the Pool Level
c. Step Three: Determining the Percentage of Total FASIT Gain That Must Be Recognized by the End of the Current Taxable Year
d. Step Four: Determining the Total Amount of FASIT Gain Not Attributed to Pre-Effective Date FASIT Interests
e. Step Five: Determining the Amount of FASIT Gain or Loss to Be Recognized in the Taxable Year
3. Example
a. Facts
b. Status as a Pre-Effective Date FASIT
c. Facts: 1999
d. FASIT Gain Recognition for 1999
e. Facts: 2000
f. FASIT Gain Recognition for 2000
F. Anti-Abuse Rule
V. Pass–Through Mortgage–Backed Securities
A. Certificate Yield
1. Prepayments
2. Evaluating Value
a. Twelve–Year Prepayment
b. FHA Experience
c. Constant Percent Prepayment Rates
d. Public Securities Association Method
3. Investor Strategy
a. Market Evaluation
b. Consistency of Prepayments
c. Timing of Pass–Through
B. Operation of Pass–Through Security Program
1. Lender Application to Participate
2. Formation of Mortgage Pools
3. Documents
4. Evidence of Ownership
5. Trading Securities
C. Credit Ratings
VI. Government–Sponsored Entities in Secondary Mortgage Market
A. Government National Mortgage Association
1. History
2. Pass–Through MBS Guarantee
3. Programs
a. History
b. Operations
c. Procedures
d. Mortgages in Pools
4. Certificates
a. Denominations
b. Mutual Funds
c. Unit Trusts
d. Futures
B. Federal Home Loan Mortgage Corporation
2. Government Relationship
3. Statutory Limitations on Mortgage Purchases by Freddie Mac and Fannie Mae
4. Taxation
5. Pass–Through MBS Guarantee
C. Federal National Mortgage Association
3. Statutory Limitations on Mortgage Purchases
5. Pass–Through MBS Denominations
6. Pass–Through MBS Guarantee
D. Comparison of Fannie Mae/Freddie Mac Pass–Through MBS Programs
E. Federal Agricultural Mortgage Corporation
VII. Investors in Pass–Through Mortgage–Backed Securities
A. Profile
B. Foreign
C. State–Regulated Entities
VIII. Securities and Regulatory Laws
A. ERISA
2. Diversification Requirement
3. Party–in–Interest Rules
B. Securities and Regulatory Laws
1. Securities Act of 1933 Registration Requirements
b. Exemptions
c. Methods of Registration
2. Securities Exchange Act of 1934
3. Regulation T
4. Restrictions on Thrift Institutions and National Banks/Mortgage–Backed Bonds
5. Restriction on Thrift Institutions and National Banks/Pass–Through MBSs
6. State–Chartered Mutual Savings Banks/ Mortgaged–Backed Bonds
7. The Glass–Steagall Act
8. State Blue Sky Laws
9. Investment Advisers Act of 1940
10. Trust Indenture Act of 1939
11. Investment Company Act of 1940
12. NYSE Margin Requirements
13. Dealer Regulation
14. Bank Holding Company Act
C. Legality of Pass–Through Mortgage–Backed Security Investments
IX. Structure of Mortgage Pools for Pass-Through Mortgage-Backed Securities
A. Issuer's Objectives
B. Forms of Structuring Mortgage Pools
1. Real Estate Investment Trust
2. Investment Company
3. Limited Partnership
4. Grantor Trust
5. Real Estate Mortgage Investment Conduit (REMIC)
6. Limited Liability Companies
C. Characterization of Mortgage Pools for Tax Purposes
1. Characterization of a Mortgage Pool as a Business Entity Taxable as a Corporation
2. Classification of Mortgage Pool as a Business Entity Taxable as a Partnership
3. Classification of Mortgage Pool as a Grantor Trust
D. Real Estate Mortgage Investment Conduits (REMICs)
E. Characterization of Sale of Mortgage Loans for Accounting Purposes
X. Taxation of Pass–Through Mortgage–Backed Security Certificate Holders
A. Receipt of Certificates
B. Items of Income and Deduction
2. Backup Withholding
3. Withholding for Foreign Certificate Holders
4. Market Discount Income
5. Original Issue Discount (OID) and Premium
6. Stripped Bonds
7. Interest Income
8. Ginnie Maes
C. Status of Pass–Through MBSs Held by REITs, Domestic Building and Loan Associations and Other Thrift Institutions
XI. Taxation of Pass–Through Mortgage–Backed Security Issuer
A. Receipt of Mortgages by Issuer and Issuance of Certificates
B. Treatment by Issuer of Income and Expenses Attributable to the Pool of Mortgages
C. Grantor Trust Rules
D. Reporting Obligations
1. General Requirements
a. Pre-2007 Information Reporting
b. Post-2006 Information Reporting.
(2) Providing Information
(3) De Minimis Tests
(4) Safe Harbor Reporting
(5) Middlemen's Responsibilities
(6) Form 1099
2. Abandonment and Foreclosures
3. Taxpayer Identification Number Reporting (Backup Withholding)
XII. Reporting Obligations on Seller/Servicers of Pass–Through Mortgage–Backed Securities
XIII. The Future of the Secondary Mortgage Market
Working Papers
Table of Worksheets
Worksheet 1 Comparison of Pass–Through Mortgage–Backed Securities.
Worksheet 2 Legislative History of REMICs (H.R. 3838, Sections 671–675 and Excerpts from Conference Report to Accompany H.R. 3838).
Worksheet 3 Sample Prospectus for a Real Estate Mortgage Investment Conduit (REMIC).
Worksheet 4 Form 1066 and Form 8811
Worksheet 5 Preambles to Temporary and Final REMIC Regulations [860A through 860G]
Worksheet 6 Preamble to Proposed REMIC Regulations on Notice of Allocation of Allocable Investment Expense
Worksheet 7 Chart of REMIC Tax and Information Return Requirements.
Worksheet 8 Legislative History of FASITs
Worksheet 9 Preamble to Proposed Fasit Regulations
Worksheet 10 IRS Final Rules (T.D. 9004) on Safe Harbor Transfers of Noneconomic Residual Interests in Real Estate Mortgage Investment Conduits
Worksheet 11 Preamble to Proposed Regulations on Inducement Fees Paid to Holders of Noneconomic Residual Interests in REMICs
Bibliography
OFFICIAL
Statutes:
Regulations:
Legislative History:
Treasury Rulings:
Cases:
UNOFFICIAL
Periodicals:
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1997