Monday, October 19, 2009

Congress Rides to Rescue with Treasury Magic

With the swipe of the legislative wand, Congress continues changing the bleak financial landscape in favor of the big money boys. Treasury and the IRS announced:

Special servicers can at any time reduce the interest rate or extend the term of securitized loans held in real estate mortgage investment conduits (REMICs) and investment trusts.
Old rules required default, triggering massive tax penalties and credit derivatives (credit default swaps).

Congress gifted REMIC's with nonprofit, tax exempt status in 1986.

REMICs are special-purpose investment vehicles used to pool mortgage loans and mortgage-backed securities. Securities or debt financings structured as REMIC trusts can be accounted for as a sale of assets and removed from an originating lender's balance sheet, exempting the trust from federal taxes. Under the old rules, modifying commercial loans after they were placed in a REMIC pool triggered a 100% tax penalty and potential loss of tax-exempt status. Fearing the worst, servicers would either not return borrowers' phone calls or advise them to call back after entering default.

Who knew Goldman Sachs and other company sponsored SIV's were the moral equivalent of safety net hospitals or churches?

Any unilateral changes in loan terms would've jeopardized their nonprofit status. Not any more, the big money boys can have their cake and eat it too.

This Congressional spell is but the latest magical gift. Others include:

1. A $25 billion tax break for firms buying back their debt for pennies on the dollar (Obama stimulus plan)

2. The $1 billion in tax credits or Treasury loans for innovative health care firms in the Baucus Health Reform Bill.

3. Including legacy CMBS's under TALF.

I'm sure there are many more. These are the few this part-time blogger has run across.

Congressional Corporafornication, the red and blue gift that keeps on giving. Even the Federal Reserve Bank is pitching in on commercial mortgage redo's.

No comments: