IRS Jumps Into F'closure Fraud Fray; Paperwork Transfer Screw-Ups May Doom Favorable Tax Treatment For Securitized Mortgage Interest Trusts

Reuters reports:

• The Internal Revenue Service has launched a review of the tax-exempt status of a widely-held form of mortgage-backed securities called REMICs. The IRS confirmed to Reuters that the review comes in response to mounting evidence that banks violated tax requirements by mishandling the transfer of mortgages to REMICs, short for Real Estate Mortgage Conduits.
• Should the IRS find reason to take tough action, the financial impact could be enormous. REMIC investments are held by pension funds, in individual retirement plans such as 401(k)s and by state and local government entities. As of the end of 2010, investments in REMICs totaled more than $3 trillion, according to data supplied by the Securities Industry and Financial Markets Association.

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• The review, however, is a sign that the widespread bank misdeeds in home foreclosure cases are spilling over to threaten the interests of investors in mortgage-backed securities. The banks originated the mortgages and packaged them into securities.
• These banks' transgressions, confirmed in court decisions and through recent action by federal bank regulators, include the failure to formally transfer ownership of mortgages to the trusts that invested in them and the subsequent creation of fraudulent mortgage assignments and other false documents.

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• For the IRS, one of the main issues will be whether REMICs actually owned the mortgages from which they received income. If not, for tax purposes they wouldn't qualify as REMICs, and the income would become taxable.

For more, see IRS weighs tax penalties on mortgage securities.