You are on page 1of 69

New York Trust Law

Under New York law, the extent of a trust’s authority is determined by common law. It
is undisputed that the powers of a trust are limited by the trust agreement.1 However, it is an
open question as to whether a trust is presumed to have power unless there is an express
limitation on that power in the trust agreement (Third Restatement)2 or whether a trust is
presumed to not have a power unless the trust agreement expressly authorizes such power or the
power is necessary for the execution of an expressed power (Second Restatement).3 While New
York courts have adopted other provisions of the Third Restatement of Trusts,4 no New York on
record has adopted § 85 of the Third Restatement. New York courts for over seventy years have
adhered to the general principles of the Second Restatement.5 It would be presumptive for a
“foreign” court to hold that New York adheres to the Third Restatement § 85 when no New York
court has ruled on the issue and New York has followed the general principles of the Second
Restatement for over seventy years. Even if New York adheres to the Third Restatement, a
trust’s powers are still limited under the Third Restatement by the terms of the trust.6 When
constructing a trust agreement the purpose “is to ascertain the intention of the testor or settlor. . .
When possible, intention should be determined from the four corners of the instrument and the
7
surrounding circumstances not in dispute.” “No words used by the testator should be cast aside
8
as meaningless, but the effect must be given, if possible, to every word and provision.”
In the context of mortgage securitization trusts, under both Restatements, as the trust
agreements (pooling and servicing agreements) expressly limit the trustees’ authority to
adherence with the provisions of the I.R.S. R.E.M.I.C. Code, mortgage securitization trusts are
not authorized to operate in violation of the I.R.S. R.E.M.I.C. Code. An analogous case is In re
9
Olney’s Estate where a trustee was liable for operating outside his specifically limited authority.

1
AG Capital Funding Partners v. State Street Bank, 2008 N.Y. Lexis 1815 (N.Y. 2008)
(Indenture Trusts); In re Application of IBJ Schroder Bank & Trust Co., 706 N.Y.S.2d 114, 115
(N.Y.A.D. 2000); Restatement (Third) of Trusts § 85 (2007).
2
Restatement (Third) of Trusts § 85 (2007).
3
Restatement (Second) of Trusts § 186 (1959).
4
In re Terranova, 873 N.Y.S.2d 651 (N.Y.A.D. 2009) (§ 240); The Presbytery of Hudson River
of the Presbyterian Church (U.S.A.) v. Trustees Of First Presbyterian Church and Congregation of
Ridgeberry, 821 N.Y.S.2d 834 (N.Y.Sup. 2006) (§ 13); Sankel v. Spector, 819 N.Y.S.2d 520 (N.Y.A.D.
2006) (§ 35); Sankel v. Spector, 799 N.Y.S.2d 356 (N.Y.Sup. 2005) (§ 35) (§ 36); In re Goodman, 790
N.Y.S.2d 837 (N.Y.Sur. 2005) (§ 50); Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., 805
N.E.2d 1037 (N.Y. 2004) (§ 170); Matter of Estate of Aronoff, 653 N.Y.S.2d 844 (N.Y.Sur. 2006) (§ 11);
Matter of Bankers Trust Co., 219 A.D.2d 266 (N.Y.A.D. 1995) (§ 227).
5
In re Application of IBJ Schroder Bank & Trust Co., 706 N.Y.S.2d 114, 115 (N.Y.A.D. 2000);
Donnelly v. Bank of New York Co., 801 F.Supp. 1247, 1256-1257 (.S.D. N.Y. 1992); Matter of Sackler,
149 Misc.2d 734, 738 (N.Y. Sur. 1990); In re Neill’s Estate, 89 N.Y.S.2d 394, 399 (N.Y.Sur. 1949); In re
Leeds’ Will, 276 N.Y.S. 950, 232 (N.Y. Sur. 1935); In re Wolanski’s Estate, 283 N.Y.S. 797, 800
(N.Y.Sur. 1935); In re Ebbets’ Estate, 267 N.Y.S. 268, 275 (N.Y. Sur. 1933).
6
Restatement (Third) of Trusts § 85 (2007).
7
Matter of Sackler, 149 Misc.2d 734, 738 (N.Y. Sur. 1990).
8
In re Olney’s Estate, 20 N.Y.S.2d 884, 892 (N.Y. Sur. 1940); see also Estate of McKenna, 451
N.Y.S.2d 617, 620 (N.Y.Sur. 1982).
9
In re Olney’s Estate, 20 N.Y.S.2d 884 (N.Y. Sur. 1940).
In Olney, the trustee reinvested assets of the trust in a stock that was not one of four securities
10
types that were specifically authorized for reinvestment by the trust agreement. As such, the
11
trustee’s action was unauthorized and he was liable for losses as a result of the transfer. Under
New York statutory law, any action undertaken by a trust that is not within the authorized
powers of a trust is void.12

10
In re Olney’s Estate, 20 N.Y.S.2d 884, 893 (N.Y. Sur. 1940).
11
In re Olney’s Estate, 20 N.Y.S.2d 884, 893 (N.Y. Sur. 1940).
12
McKinney’s Consolidated Law of New York Annotated, Estates Powers and Trusts Laws § 7-
2.4 (2002); see Allison & Ver Valen Co. v. McNee, 9 N.Y.S.2d 708 (N.Y. Sur. 1939).
New York Trust Law

Under New York statutory law, any action undertaken by a trust that is not within the
authorized powers of a trust is void. “If the trust is expressed in the instrument creating the estate
of the trustee, every sale, conveyance or other act of the trustee in contravention of the trust,
except as authorized by this article and by any other provision of law, is void.” 1
In New York, the extent of a trust’s authority is determined by common law. It is
undisputed that the powers of a trust are limited by the trust agreement. 2 However, it is an open
question as to whether a trust is presumed to have power unless there is an express limitation on
that power in the trust agreement (Third Restatement) 3 or whether a trust is presumed to not have
a power unless the trust agreement expressly authorizes such power or the power is necessary for
the execution of an expressed power (Second Restatement). 4 While New York courts have
adopted other provisions of the Third Restatement of Trusts, 5 no New York court on record has
adopted § 85 of the Third Restatement. New York courts for over seventy years have adhered to
the general principles of the Second Restatement. 6 It would be presumptive for a “foreign” court
to hold that New York adheres to the Third Restatement § 85 when no New York court has ruled
on the issue and New York has followed the general principles of the Second Restatement for
over seventy years. Even if New York adheres to the Third Restatement, a trust’s powers are
still limited under the Third Restatement by the terms of the trust. 7 When constructing a trust
agreement the purpose “is to ascertain the intention of the testor or settlor. . . When possible,
intention should be determined from the four corners of the instrument and the surrounding

1
McKinney’s Consolidated Law of New York Annotated, Estates Powers and Trusts Laws § 7-
2.4 (2002); see Allison & Ver Valen Co. v. McNee, 9 N.Y.S.2d 708 (N.Y. Sur. 1939).
2
AG Capital Funding Partners v. State Street Bank, 2008 N.Y. Lexis 1815 (N.Y. 2008)
(Indenture Trusts); In re Application of IBJ Schroder Bank & Trust Co., 706 N.Y.S.2d 114, 115
(N.Y.A.D. 2000); Restatement (Third) of Trusts § 85 (2007).
3
Restatement (Third) of Trusts § 85 (2007).
4
Restatement (Second) of Trusts § 186 (1959).
5
In re Terranova, 873 N.Y.S.2d 651 (N.Y.A.D. 2009) (§ 240); The Presbytery of Hudson River
of the Presbyterian Church (U.S.A.) v. Trustees Of First Presbyterian Church and Congregation of
Ridgeberry, 821 N.Y.S.2d 834 (N.Y.Sup. 2006) (§ 13); Sankel v. Spector, 819 N.Y.S.2d 520 (N.Y.A.D.
2006) (§ 35); Sankel v. Spector, 799 N.Y.S.2d 356 (N.Y.Sup. 2005) (§ 35) (§ 36); In re Goodman, 790
N.Y.S.2d 837 (N.Y.Sur. 2005) (§ 50); Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., 805
N.E.2d 1037 (N.Y. 2004) (§ 170); Matter of Estate of Aronoff, 653 N.Y.S.2d 844 (N.Y.Sur. 2006) (§ 11);
Matter of Bankers Trust Co., 219 A.D.2d 266 (N.Y.A.D. 1995) (§ 227).
6
In re Application of IBJ Schroder Bank & Trust Co., 706 N.Y.S.2d 114, 115 (N.Y.A.D. 2000);
Donnelly v. Bank of New York Co., 801 F.Supp. 1247, 1256-1257 (.S.D. N.Y. 1992); Matter of Sackler,
149 Misc.2d 734, 738 (N.Y. Sur. 1990); Rievman v. Burlington Northen R. Co., 618 F.Supp. 592
(D.C.N.Y. 1985) (Indenture trustee); In re Neill’s Estate, 89 N.Y.S.2d 394, 399 (N.Y.Sur. 1949); In re
Leeds’ Will, 276 N.Y.S. 950, 232 (N.Y. Sur. 1935); In re Wolanski’s Estate, 283 N.Y.S. 797, 800
(N.Y.Sur. 1935); In re Ebbets’ Estate, 267 N.Y.S. 268, 275 (N.Y. Sur. 1933); The Colorado and Southern
Railway Co. v. Blair, 108 N.E. 840, 842 (N.Y. 1915) (Indenture trustee).
7
Restatement (Third) of Trusts § 85 (2007).
8
circumstances not in dispute.” “No words used by the testator should be cast aside as
9
meaningless, but the effect must be given, if possible, to every word and provision.”
In the context of mortgage securitization trusts, under both Restatements, as the trust
agreements (pooling and servicing agreements) expressly limit the trustees’ authority to
adherence with the provisions of the I.R.S. R.E.M.I.C. Code, mortgage securitization trusts are
not authorized to operate in violation of the I.R.S. R.E.M.I.C. Code. An analogous case is In re
10
Olney’s Estate where a trustee was liable for operating outside his specifically limited authority.
In Olney, the trustee reinvested assets of the trust in a stock that was not one of four securities
11
types that were specifically authorized for reinvestment by the trust agreement. As such, the
12
trustee’s action was unauthorized and he was liable for losses as a result of the transfer.

8
Matter of Sackler, 149 Misc.2d 734, 738 (N.Y. Sur. 1990).
9
In re Olney’s Estate, 20 N.Y.S.2d 884, 892 (N.Y. Sur. 1940); see also Estate of McKenna, 451
N.Y.S.2d 617, 620 (N.Y.Sur. 1982).
10
In re Olney’s Estate, 20 N.Y.S.2d 884 (N.Y. Sur. 1940).
11
In re Olney’s Estate, 20 N.Y.S.2d 884, 893 (N.Y. Sur. 1940).
12
In re Olney’s Estate, 20 N.Y.S.2d 884, 893 (N.Y. Sur. 1940).
It is a principle of the law of trusts that a trustee has only the authority granted by
the instrument under which he holds, either deed or will. This fundamental rule has
existed from the beginning and is still law. It applies to every kind of trustee whether
a trustee to hold, invest and pay over income or a mere trustee to sell or to liquidate
for the benefit of creditors.

Allison & Ver Valen Co. v McNee (1939) 170 Misc 144, 9 NYS2d 708.

Viewed, thus, as a gift, the transaction was inchoate. An intention may be assumed,
and indeed is not disputed, that what was incomplete at the moment, should be
completed in the future. The difficulty is that the intention was never carried out….
The transaction, failing as a gift because inchoate or incomplete, is not to be
sustained as the declaration of a trust ( Beaver v. Beaver, supra; Matter of Crawford,
113 N. Y. 560, 566; Wadd v. Hazelton, 137 N. Y. 215). The donor had no intention of
becoming a trustee herself. The donee never got title, and so could not hold it for
another. There was no equitable assignment.

Farmers' Loan & Trust Co. v. Winthrop, 238 N.Y. 477, 487 (N.Y. 1924)

Second, a settlor must describe securities which are said to constitute the assets of
the trust so that they may be definitely ascertainable. "If the owner of several bonds
declares that one of them is held in trust for another but does not specify which bond
is so held, no trust is created" (1 Scott, Trusts [3d ed], § 76, p 684). The same
principle is true as to after-acquired property ( § 86, pp 711-714).

Sussman v. Sussman, 61 A.D.2d 838 (N.Y. App. Div. 2d Dep't 1978)

[b] Restrictions on Acts by Trustee in Contravention of Trust Terms

Any sale, conveyance or other act of a trustee in contravention of the trust


instrument is void unless specifically authorized by law.50 Beneficiaries are thus
protected from the unauthorized actions of a trustee, and third persons who
knowingly enter into transactions with a trustee are charged with knowledge of the
trust provisions. For example, where the existence of a trust is disclosed in the
assignment of the mortgage to the trustee, the parties are charged with the
knowledge of the trust's terms and with whether the assignment was in breach of
the trust even though the terms of the trust were not expressed.51

In Dye v. Lewis,52 a third party purchased mortgaged property from the mortgagee
pursuant to a contract that was approved by the trustees of the mortgagor. The
terms of the contract provided that upon the full payment of the purchase price by
the third party to the mortgagee, the trustees would agree to discharge the
mortgage. The trust provided the trustees with the power to release any portion of
the mortgaged real property, "provided, in the opinion of Trustees same can be done
without prejudice to the security herein provided for the bondholders." The property
at issue constituted the only security provided for the beneficiaries of the trust
indenture, and thus the consent of the trustees to discharge the mortgage without
any provision for payment or substitution of security constituted a dissipation of the
security. Therefore, the court found that the trustees' actions were beyond the
powers of the trustees and accordingly void.
On the other hand, in the companion case of Dye v. Lincoln Rochester Trust Co.,53
the court held that the language of the trust indenture quoted above granted the
trustees the authority to subordinate the lien. Thus, the trustees were acting within
their authority, and the third party mortgagee was protected unless it knew of
circumstances that would reasonably put it on notice of a breach of trust. The court
stated that "An act within [the trustee's] authority will bind the trust estate or the
beneficiaries as to third persons acting in good faith and without notice, although the
trustee intended to defraud the estate, and actually did accomplish his purposes by
means of the act in question."54

Though an act in contravention of the trust is void, the trust will not be voided by
such act. Where an act of self-dealing is specifically prohibited by a trust instrument,
and this provision is violated by the trustees, the court may declare the violative
transactions void pursuant to EPTL 7-2.4 but, regardless of the consequences of the
Internal Revenue Code with respect to the transaction, the court will not ordinarily
void the trust.55

3-46 Warren's Heaton on Surrogate's Court Practice § 46.05

[d] Trustee Must Hold Trust Property Separately

A trustee must keep trust property segregated from his individual property, and all
transactions by the trustee with respect to the trust property must be in his name as
trustee.62 In fact, a grant of authority by the trust instrument to the contrary will be
void as against public policy. In one case, trustees permitted a firm of stockbrokers
to keep in their possession stock certificates that were in the name of the nominee of
the brokers. The trustees defended their action based on the language in the Will
that provided the trustees with the authority to "hold any security in bearer form in
their discretion and/or register any security held by them hereunder in their own
name or in the name of their nominees, with or without the addition of words
indicating that they hold such security in a fiduciary capacity."63 The court held that
the possession and registration in the nominees was against public policy despite the
trust provision. The court, however, would not address the right of the trustee, given
the language of the trust, to register with the nominee while maintaining possession,
but the court hinted this would also violate public policy.

Notwithstanding the foregoing, a bank or trust company acting as trustee may, with
the consent of the individual trustee, if any, register and hold securities in the name
of the nominee of such bank or trust company.64 Also, an individual trustee may
direct a bank or trust company incorporated in New York, a national bank located in
New York, or a private banker authorized to engage in business in New York, to
register and hold securities in the name of the nominee of such bank or private
banker. Such bank may not redeliver the securities to the trustee without
reregistering the securities in the name of the individual as trustee.65 These
statutory exceptions were provided for in a 1939 amendment to the predecessor to
EPTL 11-1.6 (i.e., former Surrogate's Court Act Section 231). According to the
legislative history to this amendment, former Surrogate's Court Act Section 231
needed to be liberalized since it was impossible for the stock exchanges to make
prompt sales of securities held in the name of the trustee. The safeguards employed
by corporate fiduciaries who placed securities in the name of nominees were believed
to be sufficient to prevent misappropriation.66
A 1970 amendment to EPTL 11-1.6 added provisions that clarify the various methods
by which bearer securities may be earmarked by a bank holding them as trustee.
Specifically, this addition provides that securities held in bearer form by a bank must
be kept separate from the assets of the bank and may be held either in a manner
such that all bearer certificates of a particular trust are segregated from the
certificates of all other fiduciary accounts, or the bearer certificates belonging to
fiduciary accounts that are of the same class and from the same issuer are held in
bulk, including the merging of certificates into larger denominations.67 Banks that
elect the second option are subject to the regulations issued by the banking board or
the comptroller of the currency, and such banks, on demand of a trustee, must
provide written certification of the securities held for the particular trust.

3-46 Warren's Heaton on Surrogate's Court Practice § 46.05

§ 186 Extent of Trustee's Powers

Except as stated in §§ 165-168, the trustee can properly exercise such powers and
only such powers as

(a) are conferred upon him in specific words by the terms of the trust, or

(b) are necessary or appropriate to carry out the purposes of the trust and are not
forbidden by the terms of the trust.

COMMENTS & ILLUSTRATIONS: Comment:

a. When it is said that a trustee "can properly" do an act, it is meant that he can do
the act without violating any duty to the beneficiary; he has both a power and a
privilege to do the act.

b. The terms of the trust. The terms of the trust may clearly appear from written or
spoken words of the settlor or may be determined by interpretation of the words or
conduct of the settlor in the light of the circumstances. See § 164, Comment c. The
expression "terms of the trust" here as elsewhere in the Restatement of this Subject
is used in this broad sense and is not limited to the specific language of the
instrument, if any, under which the trust is created.

c. Deviation from the terms of the trust. In accordance with the rule stated in §
166, although a power is conferred upon the trustee by a term of the trust, he
cannot properly exercise the power if the term of the trust is illegal.

In accordance with the rules stated in § 167, the court may confer upon a trustee
powers not conferred upon him by the terms of the trust, or even powers specifically
denied to him by the terms of the trust, or may direct him not to exercise a power
which is conferred upon him by the terms of the trust.

The mere fact that owing to a change of circumstances not anticipated by the settlor
the accomplishment of the purposes of the trust would be defeated or substantially
impaired if the trustee were not permitted to exercise a power, does not of itself
confer power upon the trustee to act without obtaining the permission of the court,
unless there is an emergency such that he has no opportunity to apply to the court
for such permission. See § 167. Thus, if a power to mortgage trust property is not
conferred upon the trustee by the terms of the trust either in specific words or
otherwise, he does not have a power to mortgage merely because owing to a change
of circumstances it becomes necessary to mortgage the property in order to prevent
the loss of the trust property. In such a case, however, the court may confer upon
the trustee power to mortgage the trust property. See § 191, Comment d.

d. General scope of trustee's powers. In addition to the powers conferred in specific


words by the terms of the trust, the trustee has such powers as are necessary or
appropriate to carry out the purposes of the trust and are not forbidden either in
specific words or otherwise by the terms of the trust. It is to be inferred that the
settlor intended to confer upon the trustee such powers as under the circumstances
known to or anticipated by the settlor are necessary or appropriate to carry out the
purposes of the trust.

The trustee can properly exercise such powers as it appears from the language used
in the trust instrument were intended to be conferred upon him, although not
conferred in specific words. Thus, a general authority to manage or control or
dispose of the trust property may, depending on the circumstances, be interpreted to
confer a power of sale both of real and personal property.

The existence of powers in the trustee may be gathered not merely from the
language in the trust instrument but from the nature of the purposes of the trust.
Thus, if land is devised in trust to pay the income accruing therefrom to a beneficiary
for life and to convey the land on his death to anotherbeneficiary, the trustee can
properly do such acts as are necessary or appropriate to protect and preserve the
land, to make it productive, and to transfer it upon the death of the life beneficiary.

The extent of the powers of the trustee varies with the character and purposes of the
trust. If the trust is merely for the purpose of having the trustee hold the title to the
trust property until the trust terminates, the powers of the trustee are comparatively
few in number. Where, however, as is more commonly the case today, the purpose
of the trust is to commit the care and management of the trust property to the
trustee, the powers of the trustee are much more extensive.

The trustee may be forbidden by the terms of the trust, either in specific words or
otherwise, to exercise powers which but for such prohibition he could properly
exercise, because they would otherwise be regarded as necessary or appropriate to
carry out the purposes of the trust. If the settlor manifests an intention that certain
property shall be retained by the trustee, the trustee cannot properly sell the
property even under circumstances where but for such manifestation of intention the
trustee would have a power of sale. Thus, where the trustee has power to sell land
because such sale is necessary or appropriate to raise money to make payments
necessary to carry out the purposes of the trust, such power does not extend to
property which by the terms of the trust it appears that the settlor intended should
be retained in specie.

Restat 2d of Trusts, § 186

§ 164 Duties and Powers of the Trustee


The nature and extent of the duties and powers of the trustee are determined

(a) by the terms of the trust, except as stated in §§ 165-168; and

(b) in the absence of any provision in the terms of the trust, by the rules stated in §§
169-196.

COMMENTS & ILLUSTRATIONS: Comment on Clause (a):

a. "Terms of the trust." By the "terms of the trust" is meant the manifestation of
intention of the settlor with respect to the trust expressed in a manner which admits
of its proof in judicial proceedings. See § 4.

b. Intention at time of creation of trust. The intention of the settlor which


determines the terms of the trust is his intention at the time of the creation of the
trust and not his subsequent intention. The duties or powers of the trustee cannot be
enlarged or diminished by a direction of the settlor given subsequent to the creation
of the trust, except to the extent to which the settlor has reserved power to revoke
or modify the trust or to control its administration.

Illustration:

1. By a deed of trust A transfers shares of stock to B in trust for C, without reserving


power to revoke or modify the trust or to control its administration. By the terms of
the deed B is authorized to sell the shares. Subsequently A writes a letter to B
forbidding him to sell the shares. B can properly sell the shares.

c. Determination of terms of the trust. If the manifestation of intention of the


settlor is admissible in evidence, it is a term of the trust whether expressed by
written or spoken words or by conduct. See § 4, Comment a.

The terms of the trust may clearly appear from written or spoken words or may be
determined by interpretation of the words or conduct of the settlor in the light of the
circumstances.

Among the circumstances which may be of importance in determining the terms of


the trust are the following: (1) the situation of the settlor and of the beneficiaries
and of the trustee, such as age, sex, competence, station in life, financial
circumstances, and their relations to each other; (2) the value and character of the
trust property; (3) the purposes for which the trust is created; (4) the usages of
business; (5) the circumstances under which the trust is to be administered; (6) the
formality or informality, the care or lack of care, with which any instrument
containing the manifestation is drawn. See § 4, Comment a.

Restat 2d of Trusts, § 164

§ 166 Illegality

(1) The trustee is not under a duty to the beneficiary to comply with a term of the
trust which is illegal.
(2) The trustee is under a duty to the beneficiary not to comply with a term of the
trust which he knows or should know is illegal, if such compliance would be a serious
criminal offense or would be injurious to the interest of the beneficiary or would
subject the interest of the beneficiary to an unreasonable risk of loss.

(3) To the extent to which a term of the trust doing away with or limiting duties of
the trustee is against public policy, the term does not affect the duties of the trustee.

COMMENTS & ILLUSTRATIONS: Comment on Subsection (1):

a. No duty to comply. The trustee is not under a duty to the beneficiary to do an


act which is criminal or tortious. See § 61. It is immaterial that the act is not criminal
or tortious at the time of the creation of the trust, if it becomes so before the time
for performance.

Illustrations:

1. A bequeaths money to B in trust to pay the income to C. A war breaks out and C
becomes an alien enemy. Payment of money to an alien enemy is illegal. B is not
under a duty to pay the income to C.

2. A, the owner of a whiskey distillery, devises and bequeaths all his property to B in
trust. By the terms of the trust B is directed to carry on the business. After A's death
the manufacture and sale of intoxicating liquor is prohibited by law. B is not under a
duty to carry on the business.

3. A devises Blackacre to B in trust. By the terms of the trust B is directed to erect a


public garage on the premises. Blackacre is situated in a residential district where
such garages are forbidden by a zoning ordinance. B is not under a duty to erect a
public garage on Blackacre.

4. A devises Blackacre to B in trust. By the terms of the trust B is directed to operate


a soap factory on the premises. Blackacre is so situated that it would be a nuisance
to operate a soap factory thereon. B is not under a duty to operate a soap factory on
Blackacre.

As to the effect of the illegality of a trust or of a provision in the terms of the trust,
see § 65.

b. Enforcement against public policy. A trustee is not bound by a term of the trust
which directs him to do an act, although the act itself is not criminal or tortious, if it
is against public policy to compel the performance of such an act. See § 62.
Similarly, a trustee is not bound by a term of the trust which directs him to refrain
from doing an act, if it is against public policy to compel the trustee to refrain from
doing the act. Thus, the trustee is not bound by a term of the trust which violates
the rule against perpetuities or a rule as to accumulations or a rule against restraints
on alienation. See § 62, Comments l-u.

On grounds of public policy the trustee is not under a duty to the beneficiary to
comply with a term of the trust if such compliance would be injurious to the
community as well as to the beneficiary. See § 62, Comment v.

Illustration:
5. A devises a tract of land to B in trust. By the terms of the trust the trustee is
forbidden to erect on the land buildings of more than three stories or to lease the
land for more than one year. After A's death the land becomes the center of the
business district of the city in which it is situated with the result that if the trustee
were to comply with the terms of the trust the income from the land would be much
smaller than it otherwise would be and the development of the community would be
retarded. The restrictions imposed by the terms of the trust are under the
circumstances against public policy, and the trustee is not under a duty to comply
with them.

So too on grounds of public policy the trustee is not under a duty to the beneficiary
to comply with a term of the trust if it is capricious and compliance with it would be
injurious to the beneficiary. See § 62, Comment w.

Illustration:

6. A devises a farm to B in trust to sow it with salt and then to convey it to C. The
provision for sowing the land with salt is against public policy and the trustee is not
under a duty to comply with the provision.

c. Where performance subsequently becomes legal. If by the terms of the trust the
trustee is directed to do an act which is illegal at the time of the creation of the trust
but which subsequently becomes legal, the trustee is ordinarily under a duty
thereafter to comply with the terms of the trust. If, however, the trust fails
altogether for illegality (§ 65), the trustee is not under a duty to perform although
performance subsequently becomes legal.

Comment on Subsection (2):

d. Duty not to comply. Not only is the trustee under no duty to the beneficiary to
comply with a term of the trust which is illegal, but he is ordinarily under a duty not
to comply.

He is not justified in complying if such compliance would be a serious criminal


offense. Thus, in Illustration 2 the trustee is not justified in carrying on the distillery
business.

Similarly, the trustee is not justified in complying if such compliance would be


injurious to the interest of the beneficiary or would subject his interest to an
unreasonable risk of loss. Whether the risk of loss is unreasonable depends upon the
extent of the risk, the amount of loss which might be incurred, and the possible
advantages resulting to the trust. Thus, in Illustration 3 the trustee would not be
justified in erecting a garage, since the operation of the garage might be enjoined.
Similarly, also, in Illustration 6 the trustee would not be justified in sowing the land
with salt.

Similarly, in Illustration 5 the trustee may be under a duty to erect a building of


more than three stories or to lease the land for more than one year if in the absence
of the provision prohibiting these things it would be unreasonable not to do them.

e. Application to court. If the trustee is in doubt whether a term of the trust is


illegal, he may apply to the proper court for instructions. See § 259. The court will
direct or permit the trustee to deviate from a term of the trust if it appears to the
court that compliance is illegal.

Comment on Subsection (3):

f. Provisions as to duties which are against public policy. The duties of the trustee
which are stated in §§ 169-185 can generally be negatived or limited by the
provisions of the terms of the trust. Such provisions, however, may be against public
policy. Thus, no provision in the trust instrument will be effective to permit the
trustee to act in bad faith. For example, if it is provided by the terms of the trust that
the trustee shall convey the trust property to the beneficiary if it would be for his
best interest, otherwise to convey it to a third person on the death of the beneficiary,
and it is further provided that the trustee shall have absolute discretion free from the
control of any court in determining whether to convey to the beneficiary or not, and
the trustee receives from the third person a sum of money for refusing to convey to
the beneficiary although it would clearly be for the best interest of the beneficiary to
convey the property to him, the beneficiary can hold him liable for breach of trust.
See § 62, Comment x; § 187, Comment k.

Comment:

g. Duty of agent. A similar situation may arise in the case of an agency. One who
undertakes to perform service as the agent of another is not liable for failing to
perform such service if, at the time of the undertaking or of performance, such
service is illegal. See Restatement of Agency 2d, § 411. See also, Restatement of
Agency 2d, §§ 86, 116, 412; Restatement of Contracts, §§ 498, 609.

REPORTERS NOTES: In Colonial Trust Co. v. Brown, 105 Conn. 261, 286, 135 A.
555 (1926), a provision directing the trustee not to erect buildings of more than
three stories in height and not to make leases for more than one year was held to be
invalid on grounds of public policy since the enforcement of the provisions would be
injurious to the trust and to the community, even though there was no change of
condition after the testator's death.

A direction to carry on a whiskey distillery business is invalid where the carrying on


of such a business is illegal. See Stout v. Stout, 192 Ky. 504, 233 S.W. 1057 (1921).

Restat 2d of Trusts, § 166

§ 167 Change of Circumstances

(1) The court will direct or permit the trustee to deviate from a term of the trust if
owing to circumstances not known to the settlor and not anticipated by him
compliance would defeat or substantially impair the accomplishment of the purposes
of the trust; and in such case, if necessary to carry out the purposes of the trust, the
court may direct or permit the trustee to do acts which are not authorized or are
forbidden by the terms of the trust.

(2) Under the circumstances stated in Subsection (1), the trustee can properly
deviate from the terms of the trust without first obtaining the permission of the court
if there is an emergency, or if the trustee reasonably believes that there is an
emergency, and before deviating he has no opportunity to apply to the court for
permission to deviate.

(3) Under the circumstances stated in Subsection (1), the trustee is subject to
liability for failure to apply to the court for permission to deviate from the terms of
the trust, if he knew or should have known of the existence of those circumstances.

COMMENTS & ILLUSTRATIONS: Comment on Subsection (1):

a. Change of circumstances. If owing to circumstances not known to the settlor and


not anticipated by him compliance with a specific direction by the settlor would
defeat or substantially impair the accomplishment of the purposes of the trust, the
court will permit or direct the trustee not to comply with the specific direction. This is
true even though it is provided by statute that every conveyance by the trustee in
contravention of the trust shall be absolutely void.

Compliance with a direction may be enough substantially to impair the purposes of


the trust although it may not defeat the whole trust. Thus, although a sale of certain
property is forbidden by the terms of the trust, the court may direct a sale of the
property where its retention would result in a serious loss to the trust estate even
though there may be other trust property which is sufficiently productive to
effectuate the purposes of the trust.

The rules stated in this Section are applicable to leases (see § 189, Comment d), to
sales of land or personal property (see § 190, Comment f), to mortgages (see § 191,
Comment c), to investments (see Comment c), as well as to other situations.

In order to carry out the purposes of the trust, the court may permit or direct the
trustee not to perform an act directed by the terms of the trust.

Illustrations:

1. A bequeaths money to B in trust and directs him to invest the money in bonds of
the Imperial Russian government. A revolution takes place in Russia and the bonds
are repudiated. The court will direct B not to invest in these bonds.

2. A, the owner of a factory manufacturing whiskey barrels, devises and bequeaths


all his property to B in trust for C. By the terms of the trust B is directed to carry on
the business. After A's death the manufacture and sale of intoxicating liquor is
prohibited by law. The court will direct B not to carry on the business.

3. A devises Blackacre to B in trust and directs B to sell Blackacre within one year.
Owing to a depression in the real estate market it is impossible the sell the land
except at a great sacrifice. The court will permit or direct B not to sell Blackacre
within one year.

4. A bequeaths money to B in trust and directs that the money shall be invested only
in railroad bonds. The United States becomes engaged in a war which in the event of
the defeat of the United States would result in a great depreciation of railroad bonds.
The court may permit B to invest in bonds issued by the United States for the
purpose of enabling it to carry on the war.
5. A devises and bequeaths all his property to B in trust, and directs B to erect a
building upon a particular tract of land included in the trust. It is discovered that
quicksand underlies the tract and that the building could not be constructed except
at extraordinary expense. The court may permit or direct B not to erect the building.

In order to carry out the purposes of the trust, the court may permit or direct the
trustee to do acts not authorized by the terms of the trust.

Illustrations:

6. A devises Blackacre to B in trust to pay the income to C and on C's death to


convey Blackacre to D. The income from Blackacre is insufficient to pay taxes
thereon. The court may permit B to sell Blackacre to prevent its being sold for non-
payment of taxes.

7. A devises a piece of land on which is a building containing stores and offices to B


in trust out of the income to support A's children until the youngest reaches the age
of twenty-one, and to apply any income not needed for their support to reducing a
mortgage on part of the land. The building is damaged by fire. The court may permit
B to mortgage the property in order to raise money to make permanent repairs.

8. A devises an apartment house to B in trust to pay the income to C and on C's


death to convey the house to D. Owing to a change in the character of the
neighborhood it is impossible to find tenants at a rent which will render the property
productive. The court may permit B to sell the apartment house.

9. A devises his residence to B in trust to allow C, A's widow, to occupy it during her
lifetime and on her death to convey it to A's children. The house becomes the center
of a manufacturing district so that it becomes undesirable as a residence. The court
may permit B to sell the house.

In order to carry out the purposes of the trust, the court may permit or direct the
trustee to do acts which are forbidden by the terms of the trust.

Illustrations:

10. A devises an apartment house to B in trust to pay the income to C and on C's
death to convey the house to D. By the terms of the trust B is directed not to sell the
apartment house. Owing to a change in the character of the neighborhood it is
impossible to find tenants. The court may permit B to sell the apartment house.

11. A devises a farm to B in trust to pay the income to C for life and on C's death to
convey the farm to D. It is provided that the farm shall not be sold. The income from
the farm is insufficient to pay taxes and mortgage interest. The court may permit B
to sell the farm.

12. A devises a farm to B in trust to manage it as a farm and to pay the net income
to C for life and on C's death to convey the farm to C's children. By the terms of the
trust the farm is to be kept unencumbered. The farm has become included within the
limits of a neighboring city so that its usefulness as a farm has decreased and its
general value has materially advanced. The income is insufficient to pay the taxes
and assessments. The court may permit B to sell or mortgage or lease the land or a
part of it.

b. Deviation advantageous but not necessary. The court will not permit or direct the
trustee to deviate from the terms of the trust merely because such deviation would
be more advantageous to the beneficiaries than a compliance with such direction.

Illustrations:

13. A bequeaths money to B in trust and directs that the money shall be invested
only in railroad bonds. Owing to developments in the electrical science and industry
it appears that bonds of electric companies are as safe an investment as railroad
bonds and yield a higher return. The court will not direct or permit B to invest in
bonds of electric companies.

14. A devises Blackacre to B in trust to pay the income to C and on C's death to
convey Blackacre to D. B receives an advantageous offer to buy Blackacre. The court
will not permit or direct B to sell Blackacre.

By statute in some States it is provided that the court may authorize a sale or
mortgage of trust property, whenever it shall in the opinion of the court best
promote the interest of the beneficiaries, provided that such sale or mortgage is not
prohibited by the terms of the trust.

c. Investments. Where by the terms of the trust the scope of investments which
would otherwise be proper is restricted, the court will permit the trustee to deviate
from the restriction, if, but only if, the accomplishment of the purposes of the trust
would otherwise be defeated or substantially impaired. Thus the court will permit the
investment if owing to changes since the creation of the trust, such as the fall in
interest rates, the danger of inflation, and other circumstances, the accomplishment
of the purposes of the trust would otherwise be defeated or substantially impaired.
Where by the terms of the trust the trustee is not permitted to invest in shares of
stock, the court will not permit such an investment merely because it would be
advantageous to the beneficiaries to make it.

Illustrations:

15. A bequeaths $ 50,000 to B in trust to pay the income to C for life and on C's
death to pay the principal to a designated charitable institution. By the terms of the
will B was directed to invest the fund by depositing it in savings banks. At the time of
A's death savings banks werepaying four percent interest. Subsequently savings
banks are paying interest at two percent. The income is now insufficient for the
support of C. The court may authorize investment of the funds in other legal trust
investments.

16. A bequeaths $ 500,000 to B in trust to pay the income to C for life and on C's
death to pay the principal to a designated charitable institution. By the terms of the
will B was directed to invest only in bonds rated as AAA bonds. At the time of A's
death such bonds were paying interest at about five percent. Subsequently such
bonds are paying interest at three percent. The court will not authorize investment in
common stocks although they are legal trust investments.

If by statute investment in shares of stock is forbidden, the court will not permit such
an investment. The mere fact that it appears that under the circumstances the
statute is unwise is not a sufficient ground for the court to permit a departure from
the statute, the remedy being with the legislature. The propriety of an investment is
determined by the terms of the statute at the time when the investment is made,
and not at the time of the creation of the trust, unless it is otherwise provided by the
terms of the trust. See § 227, Comment b.

d. Where terms of the trust provide for change of circumstances. The settlor may
manifest an intention to authorize the trustee, in the event of a change of
circumstances, to do acts not otherwise authorized, if such acts are necessary to
prevent a defeat or substantial impairment of the purposes of the trust. In such case
it is not necessary for the trustee to apply to the court for permission to do the act,
since it is not a deviation from the terms of the trust to do the act.

Comment on Subsection (2):

e. Deviation without permission of court. If owing to circumstances not known to


the settlor and not anticipated by him, to comply with the terms of the trust would
defeat or substantially impair the purposes of the trust, and the trustee deviates
from the terms of the trust without having first obtained the permission or direction
of the court to do so, the trustee is not liable to the beneficiary if the court
subsequently approves such deviation.

If the trustee deviates from the terms of the trust without first obtaining the
permission or direction of the court, he does so at his own risk; when the propriety
of the deviation is doubtful, the doubt is to be resolved by the court and not by the
trustee.

f. Deviation subsequently approved. If the trustee without first applying to the court
deviates from a term of the trust and subsequently applies to the court for approval
of the deviation, the propriety of the deviation will be determined as of the time
when the approval of the court is sought, except where the trustee acted in an
emergency. Thus:

1. The court will not approve a deviation if the deviation is such that the court would
not have authorized it at the time of the deviation and would not have authorized it
at the time when the propriety of the deviation is before the court.

Restat 2d of Trusts, § 167


IN THE CIRCUIT COURT OF JEFFERSON COUNTY, ALABAMA

DEUTSCHE BANK NATIONAL TRUST )


COMPANY AS TRUSTEE UNDER POOLING )
AND SERVICING AGREEMENT DATED AS )
OF MAY 1, 2004 MORTGAN STANLEY ABS )
CAPITAL 1 INC. TRUST 2004 –HE3 )
MORTGAGE PASS-THROUGH )
CERTIFICATES, SERIES 2004-HE3, )
)
Plaintiffs, )
)
vs. ) Case No.: CV-2008-903732
)
)
ANDREA BENNETT & )
MICHAEL BENNETT )
)
Defendants, )

DEFENDANTS RESPONSE IN OPPOSITION TO PLAINTIFFS’ MOTION FOR


SUMMARY JUDGMENT

STANDARD OF REVIEW

Rule 56 of the Alabama Rules of Civil Procedure details the procedure for a party in a

legal action to file a Motion for Summary Judgment. Ala. Civ. P. R. 56. The Court may grant

Summary Judgment to either party upon a motion showing that there is no genuine issue as to

any material fact and that the moving party is entitled to a judgment as a matter of law. Ala. R.

CIV. P. 56. The burden is on the one moving for summary judgment to demonstrate that no

genuine issue of material fact is left for consideration by the jury; the burden does not shift to the

opposing party to establish a genuine issue of material fact until the moving party has made a

prima facie showing that there is no such issue of material fact. Armstrong v. McGee, 579

So. 2d 1310 (Ala. 1991)(emphasis added). However, once the movant makes a prima facie

showing that no genuine issue of material fact exists, the nonmovant has the burden to present
substantial evidence creating such an issue. Mathis v. Harrell Co., 828 So. 2d 248, 255 (Ala.

2002). Substantial evidence is evidence of “such weight and quality that fair-minded persons in

the exercise of impartial judgment can reasonably infer the existence of the fact sought to be

proved." Wright v. Wright, 654 So. 2d 542, 543 (Ala. 1995) (quoting West v. Founders Life

Assurance Co. of Florida, 547 So. 2d 870, 871 (Ala. 1989)).

In a motion for Summary Judgment, when factual allegations in pleadings of a party

opposing a motion for Summary Judgment are supported by affidavits or other evidentiary

material, they must be taken as true in ruling on the motion, as the court does not try issues of

fact but determines whether there are issues to be tried. Arata v. Martin-Prine Entertainment,

342 So. 2d 925 (Ala. Civ. App. 1977). Moreover, the Court must review the record in the light

most favorable to the non-movant and must resolve all reasonable doubts against the movant.

Jones v. Blanton, 644 So. 2d 882 (Ala. 1994). If the court has reasonable doubts concerning the

existence of a material fact all doubts must be resolved in favor of the nonmoving party. Hughes

v. Hertz Corp.,670 So. 2d 882 (Ala. 1995). Furthermore the Alabama Supreme Court has said,

to defeat a Motion for Summary Judgment, it is not necessary that the non movant prove his

case; it is necessary only that the non-movant present evidence creating a genuine issue of

material fact. Ex parte Nelson, 607 So. 2d 1259 (Ala. 1992).

The Supreme Court has made plain, trial by affidavit is no substitute for trial by jury

which so long has been the hallmark of even handed justice.” Robinson, 463 F.2d 853, 856

(D.C. Cir. 1971); Poller v. Columbia Broadcasting System, Inc., 368 U.S. at 473, 82 S.Ct. at 491.

463 F.2d 853, 856 (D.C. Cir. 1971). In addition, the Alabama Supreme Court has held, “Where

evidentiary matter in support of the motion for summary judgment does not establish absence of

genuine issue, summary judgment must be denied even if no opposing evidentiary matter is
presented.” Vasko v. Jardine, 346 So. 2d 962 (Ala.1977). After reviewing the pleadings and all

other filings in the court record, the trial court must determine if “there is no genuine issue as to

any material fact and that the moving party is entitled to a judgment as a matter of law.” Id

before the movant is entitled to the entry of summary judgment in their favor.

ARGUMENT

I. SUMMARY JUDGMENT IS IMPROPER IN THIS CASE BECAUSE


THERE EXISTS A GENUINE ISSUE OF MATERIAL FACT IN DISPUTE
AS TO WHETHER THE FORECLOSURE SALE WAS PROPER.

In its motion for summary judgment, the plaintiff contends that it is entitled to the entry

of summary judgment because there is no dispute that the bank is entitled to possession of the

property. This proposition is simply incorrect and the plaintiff is completely wrong. The

plaintiff in this case is not the proper party. The plaintiff in this case did not acquire title by

virtue of the October 8, 2008 mortgage assignment and the plaintiff lacks standing to institute or

maintain a foreclosure action against the defendants in this case as will be set forth in this

responsive pleading.

Alabama law places limitations upon who may foreclose. Those persons entitled to

foreclose are set out in Alabama Code Section 35-10-12. In the evidentiary submissions made

by the Plaintiff in support of its summary judgment motion they have filed with the Court an

assignment of mortgage dated October 8, 2008 (Exhibit N to the Defendant’s motion for

summary Judgment). This assignment is from New Century Mortgage Corporation to the

Plaintiff trust. This mortgage assignment is void and unenforceable as will be demonstrated

herein.
I. A. THE PLAINTIFF TRUST LACKS STANDING TO PROSECUTE A
FORECLOSURE AGAINST THE DEFENDANTS AND ITS OCTOBER 8, 2008
ASSIGNMENT IS VOID AND UNENFORCEABLE

Alabama law is clear that all Courts are required to inquire of the subject matter

jurisdiction in the case or controversy which is present before the Court. International

Longshoremen's Asso. v. Davis, 470 So. 2d 1215, 1216 (Ala. 1985) held that “Subject matter

jurisdiction can neither be conferred by agreement nor can it be waived. Indeed, it is incumbent

upon the court to notice subject matter jurisdiction sua sponte.” Further "When a party without

standing purports to commence an action, the trial court acquires no subject-matter jurisdiction."

State v. Property at 2018 Rainbow Drive, 740 So. 2d 1025, 1028 (Ala. 1999).

I.B. THE PLAINTIFF TRUST WAS NOT THE OWNER OF THE NOTE AT
THE TIME OF FORECLOSURE AND WAS NOT OPERATING AS THE AGENT OF
THE OWNER OF THE NOTE AT THE TIME OF FORECLOSURE

The Plaintiff in this action claimed the present right to foreclose against the plaintiffs in

this case. However, as the defendant’s own exhibits clearly demonstrate, the note in this case

was in the name of New Century Mortgage Corporation at the time that the Trust commenced the

foreclosure against the defendants in this action (See Exhibit A to the plaintiff’s Summary

Judgment motion). There is no dispute that the promissory note in this case has never been

conveyed to the Plaintiff trust. There is no dispute that the plaintiff trust is not the owner of the

indebtedness. This uncontradicted evidence is in direct and stark contrast to the claims of the

plaintiff trust in its motion.


I. C. THE PLAINTIFF TRUST CANNOT ENFORCE THE MORTGAGE LIEN
WITHOUT HAVING AN INTEREST IN THE PROMISSORY NOTE

In the present case, the plaintiff trust has foreclosed upon the property of the defendants

allegedly by virtue of an assignment of mortgage from New Century. However, in the present

case there has never been a transfer of the underlying indebtedness. Alabama law is very clear

that the right to foreclose follows the indebtedness and not the lien. “The power of sale is a part

of the security, and may be exercised by an assignee, or any person who is entitled to the

mortgage debt.”--Code 1907, § 4896; McGuire v. Van Pelt, 55 Ala. 344; Buell v. Underwood, 65

Ala. 285; Wildsmith v. Tracy, 80 Ala. 258; Ward v. Ward, 108 Ala. 278, 19 So. 354. And a

transfer of the debt, by writing or by parol, is in equity an assignment of the mortgage.--

McMillan v. Craft, 135 Ala. 148, 33 So. 26; Buckheit v. Decatur Co., 140 Ala. 216, 37 So. 75. as

cited in Harton v. Little, 176 Ala. 267, 270 (Ala. 1911).

I. D. THE PLAINTIFF TRUST IS PROHIBITED FROM ACQUIRING ANY ASSETS


BY THE VERY TERMS OF ITS TRUST AGREEMENT AND CAN NEVER ACQUIRE
OWNERSHIP OF THE DEFENDANTS’ PROMISSORY NOTE

The plaintiff trust is a New York Corporate Trust formed to act as a “REMIC” trust

pursuant to the IRS Tax Code. The plaintiff trust is formed and by its terms subject to New York

law regarding its rights, duties, powers and obligations. The Trust was formed by the execution

of a trust agreement referred to in the finance and securitization industry as a “Pooling and

Servicing Agreement” or “PSA”. The trust agreement is filed of record with the Securities and

Exchange Commission and is found at the hyperlink to the SEC filings with the following

address: http://www.secinfo.com/dRSm6.113y.d.htm#6vvh . This document is attached the

defendants’ response as Exhibit 1 in PDF format.


In summary this trust was created on or about May 1, 2004. The Trust by its terms set a

“cut-off date” of May 27, 2004. Pursuant to the terms of the Trust and the applicable IRS

Regulations this date was also the “Start up date” for the trust under the IRS tax code. The Start

up date is significant because the IRS tax code ties the limitations upon which a REMIC trust

may be funded with its assets to this date. The relevant portion of the IRS tax code addressing

the definition of a REMIC is:

26 USCS § 860D

§ 860D. REMIC defined.

(a) General rule. For purposes of this title, the terms 'real estate mortgage

investment conduit' and 'REMIC' mean any entity--

(1) to which an election to be treated as a REMIC applies for the

taxable year and all prior taxable years,

(2) all of the interests in which are regular interests or residual

interests,

(3) which has 1 (and only 1) class of residual interests (and all

distributions, if any, with respect to such interests are pro rata),

(4) as of the close of the 3rd month beginning after the startup day

(emphasis supplied) and at all times thereafter, substantially all of the

assets of which consist of qualified mortgages and permitted

investments,
The IRS Code also provides definitions of prohibited transactions and prohibited

contributions. In the context of this case, the relevant statute is the definition of prohibited

contributions which is as follows:

26 U.S.C. 860G(d)(1) states that, except as provided in

section 860G(d)(2), “if any amount is contributed to a REMIC

after the startup day, there is hereby imposed a tax for the taxable

year of the REMIC in which the contribution is received equal to

100 percent of the amount of such contribution.”

26 U.S.C. 860G(d)(2) states:

(2) Exceptions. Paragraph (1) shall not apply to any

contribution which is made in cash and is described in any of the

following subparagraphs:

(A) Any contribution to facilitate a clean-up call (as defined in

regulations) or a qualified liquidation.

(B) Any payment in the nature of a guarantee.

(C) Any contribution during the 3-month period beginning on

the startup day.

(D) Any contribution to a qualified reserve fund by any holder

of a residual interest in the REMIC.

(E) Any other contribution permitted in regulations.

These sections are addressed in the Trust agreement dealing with the parties to the trust

agreement and their obligations to avoid any action which might jeopardize the tax status of any
REMIC and / or impose any tax upon the Trust for prohibited contributions or prohibited

transactions.

Specifically, section 8.11 of the Trust agreement deals with tax matters of the Trust and

states in pertinent part:

Section 8.11 Tax Matters.


It is intended that the assets with respect to which any REMIC election pertaining to the
Trust Fund is to be made, as set forth in the Preliminary Statement, shall constitute, and that the
conduct of matters relating to such assets shall be such as to qualify such assets as, a "real
estate mortgage investment conduit" as defined in and in accordance with the REMIC
Provisions. In furtherance of such intention, the Trustee covenants and agrees that it shall act as
agent (and the Trustee is hereby appointed to act as agent) on behalf of the Lower Tier REMIC
and Upper Tier REMIC and that in such capacity it shall:

(f) to the extent that they are under its control, conduct matters relating to such assets at all times
that any Certificates are outstanding so as to maintain the status of each of the Upper Tier
REMIC and Lower Tier REMIC as a REMIC under the REMIC Provisions;

(g) not knowingly or intentionally take any action or omit to take any action that would cause the
termination of the REMIC status of either the Lower Tier REMIC or the Upper Tier REMIC
created hereunder;

These sections of the trust agreement are important to the Court’s analysis of the facts in

this case because of the interplay between the Trust agreement under New York Law and the

adoption and ratification of the IRS tax code regarding REMICs and the limits upon these trusts

placed by the agreement itself, New York Trust law and the IRS tax code.

I. E. THE PLAINTIFF TRUST IS PROHIBITED FROM ACQUIRING ANY ASSETS


IN VIOLATION OF THE TRUST AGREEMENT PURSUANT TO NEW YORK LAW
AND ANY ATTEMPT TO ACQUIRE ASSETS IN VIOLATION OF THE TRUST
AGREEMENT IS VOID

As stated earlier in this response this Trust is formed and governed by New York law

according to section 10.03 of the Trust agreement. Under New York law, the extent of a trust’s
authority is determined by common law. It is undisputed that the powers of a trust are limited by

the trust agreement. 1 New York courts for over seventy years have adhered to the general

principles of the Second Restatement. 2 When constructing a trust agreement the purpose “is to

ascertain the intention of the testor or settlor. . . When possible, intention should be determined

from the four corners of the instrument and the surrounding circumstances not in dispute.” 3 “No

words used by the testator should be cast aside as meaningless, but the effect must be given, if

possible, to every word and provision.” 4

In the context of mortgage securitization trusts the trust agreements (pooling and

servicing agreements) expressly limit the trustees’ authority to adherence with the provisions of

the I.R.S. Code defining REMIC’s. Mortgage securitization trusts are not authorized to operate

in violation of the I.R.S. Code. An analogous case is In re Olney’s Estate where a trustee was

liable for operating outside his specifically limited authority. 5 Under New York statutory law,

any action undertaken by a trust that is not within the authorized powers of a trust is void. “If the

trust is expressed in the instrument creating the estate of the trustee, every sale, conveyance or

other act of the trustee in contravention of the trust, except as authorized by this article and by

any other provision of law, is void.” 6

1
AG Capital Funding Partners v. State Street Bank, 2008 N.Y. Lexis 1815 (N.Y. 2008) (Indenture
Trusts); In re Application of IBJ Schroder Bank & Trust Co., 706 N.Y.S.2d 114, 115 (N.Y.A.D. 2000);
Restatement (Third) of Trusts § 85 (2007).
2
In re Application of IBJ Schroder Bank & Trust Co., 706 N.Y.S.2d 114, 115 (N.Y.A.D. 2000); Donnelly
v. Bank of New York Co., 801 F.Supp. 1247, 1256-1257 (.S.D. N.Y. 1992); Matter of Sackler, 149
Misc.2d 734, 738 (N.Y. Sur. 1990); In re Neill’s Estate, 89 N.Y.S.2d 394, 399 (N.Y.Sur. 1949); In re
Leeds’ Will, 276 N.Y.S. 950, 232 (N.Y. Sur. 1935); In re Wolanski’s Estate, 283 N.Y.S. 797, 800
(N.Y.Sur. 1935); In re Ebbets’ Estate, 267 N.Y.S. 268, 275 (N.Y. Sur. 1933).
3
Matter of Sackler, 149 Misc.2d 734, 738 (N.Y. Sur. 1990).
4
In re Olney’s Estate, 20 N.Y.S.2d 884, 892 (N.Y. Sur. 1940); see also Estate of McKenna, 451 N.Y.S.2d
617, 620 (N.Y.Sur. 1982).
5
In re Olney’s Estate, 20 N.Y.S.2d 884 (N.Y. Sur. 1940).
6
McKinney’s Consolidated Law of New York Annotated, Estates Powers and Trusts Laws § 7-2.4
(2002); see Allison & Ver Valen Co. v. McNee, 9 N.Y.S.2d 708 (N.Y. Sur. 1939).
In the present case the attempted assignment of this mortgage to the plaintiff trust is void

under the terms of the Pooling and Servicing agreement and is therefore unenforceable. This is

because Section 2.01 of the PSA provides the only mechanism by which assets of this trust may

be delivered to the trust and sets forth the only party who may convey the assets to the Trust.

Further, because there is no provision of the Trust agreement that provides for the acquisition of

assets in violation of the IRS Code and its REMIC provisions; the assignment of this mortgage to

the Trustee nearly two years after the last possible arguable date that the trust could have

lawfully acquired an asset is void under New York law and is therefore a nullity under Alabama

law.

Done and Filed this the 11th day of January 2010.

/s/ Nick Wooten _________


Nicholas H. Wooten (WOO084)
Of counsel for the Defendants

OF COUNSEL:

WOOTEN LAW FIRM, P.C.


Trial Lawyers
P.O. Drawer 3389
Auburn, Al. 36831
(334) 887 3000
fax: (334) 821-7720
nhwooten@gmail.com
CERTIFICATE OF SERVICE

I hereby certify that on the 11th day of January, 2010, I electronically filed the foregoing
with the Clerk of the Court using the ALAFILE system which will send notification of such filing to
the following: All counsel of record.

/s/ Nick Wooten _____


OF COUNSEL
REMICS
Servicing Real Estate Mortgage Investment
Conduits in U.S. Mortgage Securitizations
Milton A. Vescovacci, Esq. *
The U.S. securitization market is the largest market in the world for issuances of asset
securitizations. As of December 31, 2005, over $1.68 trillion of asset-backed securities
were issued in the U.S.1 The great majority of those asset securitizations involve
securities backed by pools of mortgage loans sold via Real Estate Mortgage Investment
Conduits (or “REMICs”). The purpose of this article is to (1) describe certain features
of REMICs that are generally applicable to pools of mortgage loans in securitizations
and (2) highlight certain REMIC-related provisions that are typically found in servicing
agreements of securitized mortgage pools. Capitalized terms used in this article and not
otherwise defined in the body of the article will have the meanings assigned to them
in Schedule A attached hereto.

I. What is a REMIC?

A REMIC is a corporation, trust, partnership or a segregated pool of assets that qualifies


for special tax treatment under the Internal Revenue Code of 1986, as amended (the
“IRC”). The REMIC Provisions were adopted with the passing of the Tax Reform Act
of 1986. Recent modifications to the REMIC Provisions made by the American Jobs
Creation Act of 2004, which became effective on January 1, 2005, permit new kinds of
debt obligations, such as reverse mortgages, home equity lines of credit and government
Fort Lauderdale originated loans (i.e., small business administration disaster loans), to be securitized using
REMICs. The REMIC Provisions are among the most complex and elaborate sections of
Jacksonville the IRC.
Los Angeles II. Why are REMICs Used in Securitizations?
Madison The principal advantage of forming REMICs for the sale of mortgage-backed securities is
that REMICs are treated as pass-through vehicles for tax purposes which are not subject
Miami to double taxation. For instance, in many mortgage-backed securitizations, the owner of
a pool of mortgage loans sells, transfers or contributes such loans to a special purpose
New York entity, which may be a trust, corporation, limited liability company or partnership, that
is designed to qualify as a REMIC and, simultaneously, the special purpose entity issues
Orlando securities that are backed by the cash flows generated from the transferred assets to
investors in order to pay for the loans. If the special purpose entity or the assets transferred
Tallahassee qualify as a REMIC, then any income of the REMIC is “passed through” and taxable to
the holders of the REMIC Regular Interests and Residual Interests.
Tampa
* The author is a senior associate in the Securitization and Structured Finance Practice Group of
Tysons Corner
Akerman Senterfitt. Akermen Senterfitt is a full service law firm consisting of over 475 attorneys and
advises issuers, originators, servicers, underwriters, investors and trustees in securitization and structured
Washington, D.C. finance transactions.

West Palm Beach 1 Asset-Backed Alert, Summary of Worldwide Securitization Volumes 2005 (December 31, 2005).

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


To qualify for REMIC status, the following criteria must be satisfied:

• The mortgage-backed securities offered to investors must be structured to consist of “Regular


Interests” and “Residual Interests.” The mortgage-backed securities that represent Regular Interests
of a REMIC are considered debt for tax purposes and the Regular Interest holders are considered
creditors of the REMIC. The mortgage-backed securities that represent Residual Interest of a REMIC
are considered equity and the Residual Interest holders are treated as partners for tax purposes.
Only a single class of Residual Interests may be created to qualify as a REMIC; and

• Substantially all of the assets must be Qualified Mortgages and Permitted Investments as of the
third month after a REMIC’s Startup Day. A REMIC may contain a nominal amount (but no greater
than 1%) of non-qualified mortgages assets; and

• A REMIC election must be made on the REMIC’s first tax return by the person authorized to sign
the REMIC’s tax return (e.g., the sponsor of the REMIC or the trustee) in the first taxable year
of the REMIC’s existence, which begins on the Startup Day and ends on December 31st of that
same year in order for a legal entity or a segregated pool of mortgage loans to be treated as a
REMIC thereafter.

Most securitizations in the U.S. that qualify as REMICs use the statutory trust or common law trust
as the legal entity of choice for various reasons including ease of formation and administration and
bankruptcy related reasons, none of which are dealt with in this article. However, a legal vehicle that
fails to satisfy the criteria listed above cannot be a REMIC (pass-through vehicle) and may be treated
as a taxable mortgage pool under IRC § 7701(i), which have less favorable tax considerations and
may be subject to double taxation.

III. What is the Impact of Non-Compliance with REMIC Provisions?

Generally, non-compliance with REMIC requirements subjects a REMIC to loss of its tax-free status
and to a sizeable tax. This can be catastrophic to the REMIC, the investors and, depending on the
contractual arrangement, to whomever causes the REMIC to lose its tax-free status. The IRS has the
discretion to reverse a REMIC’s failed status if such termination is inadvertent or steps were taken to
reinstate the REMIC status within a reasonable time period.

The following events will cause a REMIC to lose its tax-free status and potentially become subject to
a sizeable tax:

• The occurrence of any Prohibited Transaction and the realization of net income from Prohibited
Transactions. Any net income generated from a Prohibited Transaction is subject to a 100% tax.
A Prohibited Transaction can also cause the tax-free status of a REMIC to be lost or suspended. A
Significantly Modified Obligation that is not a Qualified Replacement Mortgage will be considered
a Prohibited Transaction and thus be subject to a 100% tax; or

• The realization of net income from Foreclosure Property. Any net income realized from the operation
of Foreclosure Property is subject to IRC §857(b)(4)(B) as if the REMIC were a real estate investment
trust, which is then subject to tax at the highest corporate tax rate; or

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


• The making of unqualified contributions to a REMIC after the Startup Day. Any contributions to
a REMIC after its Startup Day is taxed at a rate of 100% unless they are made in cash and are
related to: (i) a contribution made to facilitate a Cleanup Call, (ii) a payment in the nature of a
guaranty, (iii) a contribution made during the three-month period beginning on the Startup Day,
(iv) contribution made to a Qualified Reserve Fund by a Residual Interest holder in the REMIC or
(v) a permitted contribution made under the treasury regulations; or

• The transfer of Residual Interests to Disqualified Organizations. Any transfers of Residual Interests
to Disqualified Organizations are taxed at the highest corporate tax rate and are taxable to the
transferor or its agent.

IV. Applicable REMIC Provisions under a Typical Pooling and Servicing Agreement.

A Pooling and Servicing Agreement would typically provide that the trustee of the trust shall elect
to treat the Trust Fund as comprised of a certain number of REMICs. The Trust Fund under a typical
Pooling and Servicing Agreement in a mortgage-backed securitization contains, among other things, the
pool of mortgage loans sold or transferred by the sellers into the trust, including those loans currently
being serviced by the servicer. In addition, a typical Pooling and Servicing Agreement will contain the
principal REMIC provisions that apply to the servicer of the pool of mortgage loans, who agrees to
perform certain functions, make certain payments and provide certain information to help maintain
the status of the REMIC. Some of the typical provisions are described in more detail below:

A. Furnish Necessary Information. The servicer is required to provide to the trustee upon request any
information as the trustee may need with respect to the mortgage loans that the servicer is servicing.

B. Trustee to Act or Not Act. The servicer may require the trustee to take certain actions or refrain
from taking such actions as to the REMIC assets if the servicer furnishes the trustee an opinion of
counsel stating that such actions or inactions may or may not result in an adverse REMIC event.

C. Payment of Prohibited Transaction Taxes. The servicer is required to pay any taxes levied
on the trust resulting from a Prohibited Transaction caused by a breach in the servicer’s
obligations under the applicable Pooling and Servicing Agreement or if the servicer, in its
discretion, has determined to indemnify the Trust Fund against the imposing of such taxes.

D. No Contributions of Assets. The servicer is prohibited from accepting any contributions of assets
to the REMIC, except with respect to substitutions for Defective Qualified Mortgages, unless the
servicer receives an opinion of counsel from the party seeking to make such contributions stating
that such contributions will not cause the REMIC to fail to qualify as a REMIC at any time that the
Certificates are outstanding or subject the REMIC to any tax under federal, state or local laws.

E. No Fees or Income Other Than From Qualified Mortgages or Permitted Investments.


The servicer is prohibited from entering into any arrangement by which the REMIC
will receive any fees or other compensation and allowing the REMIC to accept
any income from assets other than Qualified Mortgages or Permitted Investments.

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


F. No Disposition of Assets. The servicer is prohibited from selling, disposing of or substituting for
any of the mortgage loans it services, except in connection with the (i) default, imminent default
or foreclosure of a mortgage loan, including but not limited to properties acquired or sold by deed
in lieu of foreclosure, (ii) bankruptcy of the REMIC, (iii) termination of the REMIC pursuant to the
applicable Pooling and Servicing Agreement and (iv) purchase or repurchase of mortgage loans
pursuant to the applicable Pooling and Servicing Agreement. Similarly, the servicer is prohibited
from acquiring any assets for the REMIC, selling or disposing of any investments in the collection
accounts for gain and accepting any contributions to the REMIC after the closing date, unless
the servicer receives an opinion of counsel that such, disposition, substitution or acquisition
will not adversely affect the status of the REMIC or unless the servicer has determined, in its
discretion, to indemnify the Trust Fund against any taxes imposed on the REMIC as a result thereof.

G. No Modifications, Waivers or Amendments. The servicer agrees to protect the interests


of the Trust Fund as it would protect its interests in its own mortgage portfolio and
agreed not to make or permit any modification, waiver or amendment of any applicable
mortgage loan which would cause the REMIC to fail to qualify as a REMIC or result
in the imposition of any tax under Section 860F(a) or Section 860G(d) of the IRC.

H. Management of Foreclosure Property. The servicer is required to dispose of any mortgage property
acquired by the Trust Fund with respect to a default or imminent default prior to three years
after the end of the calendar year of such acquisition unless an opinion of counsel is furnished
by the servicer to the trustee to the effect that the holding by the Trust Fund of such mortgage
property subsequent to such 3-year period will not result in the imposition of taxes on Prohibited
Transactions or cause the REMIC to fail to qualify as a REMIC at any time that any Certificates are
outstanding or unless the servicer applied for, prior to the expiration of such three-year period,
an extension of such 3-year period in accordance with IRC §856(e)(3). In addition, the servicer is
restricted from renting (or allowing to continue to be rented) any mortgage property acquired by
foreclosure or otherwise using such property for the production of income in such a manner or
pursuant to any terms that would (i) cause such property to fail to qualify as Foreclosure Property
or (ii) subject the REMIC to the imposition of any federal, state or local income taxes on the income
earned from such property unless the servicer agrees to indemnify the Trust Fund with respect to
the imposition of any such taxes.

In general, a breach by the servicer of any of the relevant REMIC provisions, as those stated above, that
results in a loss of the REMIC’s status or imposition of taxes on the REMIC would be the responsibility
of the servicer, which can be a significant risk to a servicer depending on the severity of such breach
and the results thereof.

In general, a breach by the servicer of any of the relevant REMIC provisions, as those stated above, that
results in a loss of the REMIC’s status or imposition of taxes on the REMIC would be the responsibility
of the servicer, which can be a significant risk to a servicer depending on the severity of such breach
and the results thereof.

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


V. Conclusions.

REMICs have made it relatively easy for sponsors of mortgage-backed securitizations and the investors
of securities issued by legal vehicles qualifying as REMICs to benefit from the tax advantages afforded by
the IRC. As the U.S. mortgage market continues to grow, REMICs will continue to play a significant role
in the securitization of pools of mortgage loans in the U.S. However, strict compliance with the REMIC
Provisions is required to take advantage of the tax benefits afforded by such rules. Non-compliance
can be fatal and costly for the REMIC, the servicer and the investors of the related mortgage-backed
securities.

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


Schedule A

DEFINITIONS

“Cash Flow Investments” means any investment of amounts received under Qualified Mortgages
for a temporary period not to exceed 13 months before distributing the holders of interests in the
REMIC.

“Certificate” means the mortgage-backed pass-through certificates purchased by investors under a


Pooling and Servicing Agreement.

“Clean-up Call” means the redemption of a class of Regular Interests when, by reason of prior
payments with respect to those interests, the administrative costs associated with servicing that class
outweigh the benefits of maintaining the class. Factors to consider in making this determination
include the number of holders of that class of Regular Interests, the frequency of payments to holders
of that class, the effect the redemption will have on the yield of that class of Regular Interests, the
outstanding principal balance of that class, and the percentage of the original principal balance of
that class still outstanding. The notion being that the cash flows produced by the mortgage pool are
insufficient to cover the expenses of the continued administration of the trust. A Clean-up Call is not
a Prohibited Transaction.

“Defective Qualified Mortgage” means a Qualified Mortgage that (i) is in default or in imminent default,
(ii) was fraudulently obtained, (iii) breached a seller representation or warranty as to the characteristics
of the mortgage or (iv) does not fall within the “Principally Secured” definition. Defective Qualified
Mortgages must be disposed of from a REMIC within 90 days of discovering its defect.

“Disqualified Organizations” means the U.S., any state or its political subdivisions, foreign governments,
international organizations, agency or instrumentality of the foregoing, any tax-exempt organization
unless it is subject to unrelated business tax, and any energy or telephone cooperatives.

“Foreclosure Property” means any real property (including interests in real property) and any personal
property incident to real property acquired as a result of a foreclosure sale or having otherwise reduced
such property to ownership or possession by agreement or process of law after there was a default
or imminent default of a Qualified Mortgage held by the REMIC or on an indebtedness which such
property secured, in each case, subject to a 3-year grace period which period can be extended further
with special approval of the Secretary of the Treasury.

“Issue Price” means the issue price of any Regular Interest or Residual Interest in a REMIC as determined
by under Section 1273(b) of the IRC in the same manner as if such interest were a debt instrument;
except that if the interests is issued for property, Section 1273(b)(3) of the IRC would apply to whether
or not the requirements of such section are met.

“Permitted Investments” means any Cash Flow Investment, Qualified Reserve Asset or Foreclosure
Property.

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


“Pooling and Servicing Agreement” means an agreement entered into by and among the originator
and seller of the mortgage loans, if applicable, a depositor that acquires the mortgage loans from the
originator/seller and then sells them to a trust that qualifies as a REMIC and issues mortgage-backed
securities, the trustee of the trust and the servicer of the mortgage loans as agent of the trust.

“Principally Secured” means an interest in real property means that the fair market value of the property
securing the obligation either: (i) was equal to or more than 80% of the adjusted issue price of the
obligation at its origination date or at the time such property was contributed to the REMIC or (ii)
substantially all of the obligation proceeds were used to purchase or improve or protect the property
securing the obligation at origination. In the case of any obligation originated by the United States
or any state (or any political subdivision, agency, or instrumentality of the United States or any state),
such obligations will be Principally Secured by an interest in real property if more than fifty percent
(50%) of such obligations which are transferred to, or purchased by, the REMIC are Principally Secured
by an interest in real property (determined without regard hereto).

“Prohibited Transaction” means the disposition of a Qualified Mortgage, not related to any of the
following:

i. A potential default on the regular interest where the threatened default resulted from a default
on one or more Qualified Mortgage;
ii. To facilitate a Clean-up Call;
iii. Other than: (i) pursuant to a substitution of a Qualified Replacement Mortgage for a Qualified
Mortgage or repurchase of a defective obligation in lieu thereof, (ii) incident to a foreclosure,
default or imminent default of a mortgage, (iii) a bankruptcy or insolvency of the REMIC or (iv) a
qualified liquidation;
iv. Receipt by a REMIC of income derived from any asset other than a Qualified Mortgage or a
Permitted Investment;
v. Receipt by a REMIC of fees or other compensation; or
vi. Gain from disposition of a Cash Flow Investment other than related to a qualified liquidation or
unless it was necessary to prevent a default on the regular interest where the threatened default
resulted from a default on one or more Qualified Mortgage.

“Qualified Mortgage” means (A) any obligations (including any participation or certificate of beneficial
interest therein) that are Principally Secured by an interest in real property (e.g., including stock of
real property cooperatives and Qualified Replacement Mortgages) and which is (i) transferred to the
REMIC on the Startup Day in exchange for Regular Interests or Residual Interests in the REMIC, (ii) is
purchased by the REMIC within the 3-month period beginning on the Startup Day if related to a fixed
price contract in effect on such Startup Day, or (iii) represents an increase in the principal amount
under the original terms of an obligation described in clause (i) or (ii) if such increase (I) is attributable
to an advance made to the obligor pursuant to the original terms of a reverse mortgage loan or
other obligations, (II) occurs after the Startup Day, and (III) is purchased by the REMIC pursuant to a
fixed price contract in effect on the Startup Day, (B) any Qualified Replacement Mortgage, and (C)
any regular interest in another REMIC transferred to the REMIC on the Startup Day in exchange for
Regular Interests or Residual Interests of the REMIC. Qualified Replacement Mortgages or defeased

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


mortgages can also be Qualified Mortgages as long as: (i) the lien over the real property is lifted, (ii)
the substitute collateral are government securities, (iii) defeasance is done pursuant to the terms of
the mortgage and (iv) the defeasance is entered into after 2 years from the Startup Day. In addition,
Regular Interests in other REMICs fall within the purview of the definition of a Qualified Mortgage
if transferred to the REMIC on the Startup Day in exchange for the Regular Interests and Residual
Interests of the REMIC. Further, Qualified Mortgages shall also include any obligations originated by
the United States or any state (or any political subdivision, agency, or instrumentality of the United
States or any state) if more than fifty percent (50%) of such obligations which are transferred to, or
purchased by, the REMIC are Principally Secured by an interest in real property (determined without
regard to this sentence).

“Qualified Reserve Asset” means any intangible property held for investment and as part of a Qualified
Reserve Fund.

“Qualified Reserve Fund” means any reasonable required reserve to (i) provide for full payment of
expenses of the REMIC or amounts due on regular interests in the event of defaults on Qualified
Mortgages or lower than expected returns on Cash Flow Investments, or (ii) provide a source of
funds for the purchase of obligations described in clauses (A)(ii) or (iii) of the definition of Qualified
Mortgages. The aggregate fair market value of the assets held in any Qualified Reserve Fund may not
exceed fifty percent (50%) of the aggregate fair market value of all of the assets of the REMIC on the
Startup Day, and the amount of any such Qualified Reserve Fund shall be promptly and appropriately
reduced to the extent the amount held in such Qualified Reserve Fund is no longer reasonably required
for purposes specified in the foregoing clauses (i) or (ii). A reserve will not be treated as a Qualified
Reserve Fund for any taxable year (and all subsequent taxable years) if more than 30 percent (30%)
of the gross income from the assets in such fund for the taxable year is derived from the sale or other
disposition of property held for less than three (3) months. Gain on the disposition of a Qualified
Reserve Asset shall not be taken into account if the disposition giving rise to such gain is required to
prevent default on a Regular Interest where the threatened default resulted from a default on 1 or
more Qualified Mortgages.

“Qualified Replacement Mortgages” means Qualified Mortgages received either in exchange for other
Qualified Mortgages within 3 months after a REMIC’s Startup Day or in exchange for a Defective
Qualified Mortgage within 2 years after a REMIC’s Startup Day.

“Qualified Reserve Fund Payment” means any payment made to a Qualified Reserve Fund.

“Regular Interest” means any interest in a REMIC which his issued at the Issue Price on the Startup
Day with fixed terms and which is designated as a regular interest if: (A) such interest unconditionally
entitles the holder to receive a specified principal amount (or other similar amount), and (B) interest
payments (or other similar amount), if any, with respect to such interest at or before maturity (i) are
payable based on a fixed rate (or to the extent provided in treasury regulations, at a variable rate), or
(ii) consist of a specified portion of the interest payments on Qualified Mortgages and such portion
does not vary during the period such interest is outstanding. The interest shall not fail to meet the
requirements of the foregoing clause (A) merely because the timing (but not the amount) of the
principal payments (or other similar amounts) may be contingent on the extent of prepayments on
qualified mortgages and the amount of income from permitted investments. An interest in the REMIC
8

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


shall not fail to qualify as a Regular Interest solely because the specified principal amount of the
Regular Interest solely because the specified principal amount of the Regular Interest (or the amount
of interest accrued on the Regular Interest) can be reduced as a result of the non-occurrence of 1 or
more contingent payments with respect to any reverse mortgage loan held by the REMIC if, on the
Startup Day for the REMIC, the sponsor of the REMIC reasonably believes that all principal and interest
due under the Regular Interest will be paid at or the liquidation of the REMIC.

“REMIC” means a Real Estate Mortgage Investment Conduit as further defined in the REMIC
Provisions.

“REMIC Provisions” means the enabling provisions of the IRC applicable to REMICs found under
Sections 860A through 860G and Treasury Regulations §1.860A through §1.860G.

“Residual Interest” means an interest in a REMIC which is issued at the Issue Price on the Startup Day,
which is not a Regular Interest, and which is designated as a residual interest.

“Significantly Modified Obligation” means an obligation subject to changes in its terms such that it is
treated as an exchange other than (i) changes in the terms of the obligation occasioned by a default
or imminent default, (ii) assumptions of the obligation, (iii) waivers of a due-on-sale clause or a due-
on-encumbrance clause, and (iv) conversion of interest rates pursuant to the terms of a convertible
mortgage.

“Startup Day” means generally the day on which a REMIC issues all of its Regular Interests and Residual
Interests. A sponsor of the REMIC may contribute property to a REMIC in exchange for Regular Interests
and Residual Interests over any period of ten (10) consecutive days and the REMIC may designate any
one of those 10 days as the REMIC’s Startup Day.

“Trust Fund” means as it is defined in the applicable Pooling and Servicing Agreement which would
include, among other things, a pool of mortgage loans.

© Copyright 2006 Akerman Senterfitt. All Rights Reserved.


“The Mortgage Loan Foreclosure Mess: the Banks’ Gluttony; Problems with MERS and Sloppy
Securitizations”
Posted: 07 Nov 2010 11:34 PM PST

Yves here. This post by Linda Beale, who was involved in the tax angles of securitizations in her prior life on Wall Street, first
appeared on Angry Bear and on her blog, A Taxing Matter.

It’s a very helpful addition to the discussion of the foreclosure crisis. Because it is also a bit technical at various junctures, I’m
departing from my usual practice with guest posts and adding some commentary. Linda’s post follows:

Yves Smith has an op-ed in the Oct. 31, 2010 New York Times on the mortgage mess. See Naked Capitalism, here, for
full op-ed.

As noted, the mortgage crisis goes much deeper than just bank use of robo-signers for documents. When the
securitization process took off in the early 2000s, banks became sloppy. Loan product was needed, so niceties like
documentation became an expendible. Subprime loans were more grist for the mill–the faster mortgage lenders could
process them, banks could buy and securitize them, the more money they could all make. Since they were selling off the
mortgage loans, they didn’t care how good they were. And since they were often selling them via securitizations that
they “sponsored”, they didn’t want to have to do all that legal busywork that location-specific transfers of mortgages and
notes required, including payment of recording taxes in the county where the land was located every single time a loan
was moved from one owner to another, though they still wanted to collect all kinds of fees from servicing the mortgage
loans that they “sold” via securitization.

Just a little aside on the way these REMIC securitizations worked (edited noon 11/1). Often, original mortgages and
notes were put in a trust and pass-through certificates were issued by the trust–this is the case in particular when
Ginnie, Freddie, or Fannie aggregated a pool of mortgage loans and issued certificates representing ownership interests
in that pool of loans which are treated as obligations secured by interests in real property under Treas. Reg. 1.860G-
2(a)(5).

Certificate holders were “beneficial owners” of the mortgage assets of the trust for tax purposes, though the Trust, or
the trustee on behalf of the trust, would hold legal title to the mortgage loans. The certificates, representing interests in
mortgages, could then be contributed to a REMIC, or mortgage loans could be contributed directly into a REMIC trust.
REMIC regular interests are also treated as qualified mortgages under Section 860G(a)(3)(C), and they could therefore
be contributed to another higher-tier REMIC, resulting in “re-REMICing”. The state law entity status for a REMIC
doesn’t matter–trust, partnership or mere segregated pool of assets (no state law entity at all) could all elect REMIC
treatment for mortgage loans under the Federal income tax rules for REMIC securitizations, if they satisfied the federal
tax code requirements.

Yves here. Achieving REMIC (Real Estate Mortgage Investment Conduit) treatment was an important objective in these
securitizations. They were created in the 1986 Tax Reform Act. REMICs are pass through entities, meaning the entity (in this case a
REMIC trust) is not subject to Federal income taxes; investors are taxed only on the income they receive.

The discussion of re-REMICing is a bit scary. Tom Adams weighted in:

She is just describing a very arcane aspect of the trust construction: because of various restrictions on “regular” and
“residual” interests under REMIC, most MBS actually had two or three layers of REMIC regular and residual interests
in them, which was needed to get deal features like interest only certificates, or certain over-collateralization structures.

No one, other than tax attorneys, were able to decipher this details, but if you look at the definitions sections of a PSA,
you see all of the crazy definitions around the regular and residual interests.

All of the mortgage loan assets and any other eligible collateral would go into the REMIC I trust, which would then
issue certain interests, which would go into the REMIC II trust, and so on, until the tax attorneys were satisfied the
appropriate structure had been created, then the certificates are issued to real certificate holders.

Back to Linda:
The requirements generally were that the REMIC had to hold only certain assets consisting of “qualified mortgages”
and “permitted investments” (covering certain cash flow investments, qualified reserves, and foreclosure properties); it
had to issue only permitted REMIC interests consisting of “regular interests” that were treated as debt for tax purposes
under the tax code and one class of “residual interest” that was treated as the owner of the REMIC under the tax code
(special tax rules applied to require the holders of the residual interest to report certain amounts of income with respect
to the REMIC on their tax returns ); and it had to satisfy an “arrangements” test to ensure that the residual interest was
not held by inappropriate organizations and that appropriate information was provided. Qualified mortgages had to
satisfy a loan to value ratio and had to be contributed to the REMIC either at startup or within 90 days under a fixed-
price contract OR be substituted for defective loans within 2 years of startup. If a loan were discovered to be defective
after that, it would need to be sold out of the REMIC within 90 days, or the REMIC would hold a “bad” asset that could
cause the REMIC to lose its qualification as a REMIC. (There is a de minimis rule that lets a REMIC hold an
insignificant amount of bad assets, but that generally would not cover a REMIC with lots of mortgages that fail to
qualify.) If a REMIC is disqualified, it is almost certainly a “taxable mortgage pool” under section 7701(i) of the Code
that is subject to corporate taxation without the ability to be consolidated with other members of the same affiliated
group.

Earlier private REMIC securitizations–the ones that were done in the late 1990s, for example–were careful to include
detailed representations in the pooling and servicing agreement that the Depositor/Sponsor would assign the mortgage
loans to the trustee for the benefit of the certificate holders–including the original note endorsed to the Trustee, the
original mortgage, assignments of the mortgage, original assignment of leases and rents (for commercial properties),
and original lender’s title insurance policy. The trustee was to hold such documents in trust for the certificate holders.
The following is an illustrative sample of representations that would have been included in a commercial REMIC
pooling and servicing agreement regarding the transfer of mortgage loans from a current owner to the
depositor/sponsor who would transfer them to the trust.

X is the sole owner and holder of the Mortgage Loan and will have, on the Closing Date, good and marketable title to
the Mortgage Loan;

X has full right and authority to sell, assign and transfer the Mortgage Loan as contemplated by the Mortgage Loan
Purchasing Agreement; all of the obligations of X with respect to the Mortgage Loans are legal, valid and binding and
enforceable against X except as may be limited by bankruptcy, insolvency or reorganization (or other similar laws
affecting the enforcement of creditors’ rights, generally) and by general principles of equity; the execution and delivery
of the documents contemplated by the Mortgage Loan Purchase Agreement has been duly authorized and such
execution and delivery….will not constitute a violation of any federal, state or local law or the rules of any regulatory
authority.

As of the cut-off date, the information pertaining to the Mortgage Loan set forth in the Mortgage Loan Schedule is true
and correct in all material respects; X is in possession of a file on each Mortgage Loan containing, among other things
and to the extent applicable, the note, loan agreement, mortgage or deed of trust, and all amendments, allonges or the
like thereto, records of payments, correspondence, and borrower’s address and each such file will be transferred to the
Trustee, and X has not withheld any material information with respect to such Mortgage Loan…

The assignment of the related Mortgage to the Trustee constitutes the legal, valid and binding assignment of such
Mortgage…

But when the banks got greedy in the early 2000s, they applied that brand of “financial innovation” that was bragged
about as bringing us the nirvana of a service-oriented, financial transaction-dominated economy that would grow and
grow and grow. (Of course, it did at first, making lots of money for the financial institutions and particularly for
investment banks. But then it crashed, costing taxpayers while banks continued to make money out of cheap (taxpayer-
made-possible) credit coupled with low interest to depositors and high fees for anything and everything.) Two things
began to happen.

1. For convenience, the assignment/allonge was “indorsed in blank”–meaning that the sponsor wouldn’t actually
complete the document that transferred the mortgage loan to the trustee because it was “not practical to record
mortgages in the name of the trustee” so the sponsor “retains record ownership subject to an obligation to transfer it to
the trustee upon its request.” James Peaslee & David Nirenberg, Federal Income Taxation of Securitization
Transactions (3d Ed. 2001) at 86 n.64 (concluding that this would be done only when the sponsor was “creditworthy”
and so the fact that legal title wasn’t conveyed should “not be very significant”).

Of course, the boom in mortgage lending, securitization glut, and ultimate bankruptcy of key sponsoring banks such as
Lehman and Bear Stearns suggest that this “practical” issue had substantial consequences, at least for the legal
proceedings even if not for the IRS tax status of entities (where legal title is not necessarily determinative of tax
beneficial ownership). The danger, of course, is that bankrupt sponsors that retain legal title might be treated as owning
the mortgage loans and the securitization vehicles to which the loans were purportedly transferred would be left with
nothing, with the result that there would be questions whether the securitizations were legitimate (and if a REMIC,
whether it had been disqualified from REMIC status because it had too many defective assets and therefore owed
corporate taxes).

MBSGuy reacted to this section:

The article is that it notes some specific events that led to the shift in process and policy for delivery of notes and
mortgages. this is the closest I’ve heard that this was a deliberate shift from the practice in the past, as a cost saving
measure (coinciding with the adoption of MERS in private label deals – about 2005). I have heard this mentioned 2
times before, but everyone seemed fuzzy on the details.

If it was official and deliberate policy, it would explain why the banks got so freaked out about it all of a sudden. I don’t,
however, understand why they would not have changed or adjusted the agreements to reflect the change in practice.
How did they not see that this would create problems later: “We are going to stop following the old method of delivery,
but we are going to keep the documents the same”. Doesn’t that sound like a major misrepresentation problem?

As a buyside person, I did not know that they had deliberately decided to stop delivery the notes and assignments to the
trustee in the name of the trust. That would have been important information for me to have. As an old timer, I would
have asked – how will they foreclosure? How will they not violate REMIC rules?

If it is as she suggests, the case against the banks and the trustees just got stronger, in my opinion. I am not yet
convinced that it wasn’t just bad practices, as opposed to deliberate choice.

Back again to the original post:

2. The reason it was “not practical” to record the mortgage in the name of the trustee was that there are almost always
local law mortgage recording taxes to be paid every time a transfer is made. And of course, recording such taxes would
be costly for a securitization–lawyer fees, servicer fees, the recording taxes themselves, document delivery and
verification, etc. That would cut into the profits from the securitization for the sponsor (who might well also be the
servicer). By keeping the legal title with the original sponsor, in spite of the pooling of the mortgages in a securitization,
there would be no transfers until it was time to put the documents in somebody’s hands for foreclosing. That led to
another financial innovation–the Mortgage Electronic Registry System (MERS), invented and owned by Chase,
CitiMortgage, Bank of America, HSBC, Mortgage Bankers Association, Fannie, Freddie, various mortgage companies
and title insurance companies.

MERS apparently exists primarily to permit banks to avoid multiple transfers and multiple mortgage recording taxes in
local jurisdictions where the property is located with each purported assignment of the mortgage. MERS claims that it
serves to provide a consistent database that reduces errors caused by frequent assignments and reassignments of
mortgage loans. See MERS fact sheet (pdf available at home page). But it seems to do the opposite–eliminate the actual
assignment even though securitization has moved the mortgage loan from originator to bank sponsor to servicer or
whatever, and avoid the ability of anyone to know who actually owns the mortgage loan from looking at county
property records. MERS indicates that it records the mortgage (in its name) and that it can foreclose on mortgage loans
as the “nominee for all parties” –or the bank that claims to “own” the loans can foreclose on them. See MERS statement
about JP Morgan Chase (Oct. 13, 2010).

The fact sheet further indicates that MERS expects its standing to foreclose as the agent for the noteholder to be upheld
in litigation and reiterates that MERS holds legal title (which is the reason that only one recording tax has to be paid, if
MERS is held valid) and that it will transfer the legal title to the servicer/sponsor bank for foreclosing if requested.
(This transfer usually takes place, by the way, by the servicer bank personnel signing the indorsement from MERS to
the servicer bank as an officer of MERS–another kind of robo-signing that the industry has perfected.) This does mean
that many Servicers/Sponsors may have interacted with borrowers as though they held legal title when they did not.

As Yves Smith notes, “While a standardized, centralized database was a good idea in theory, MERS has been widely
accused of sloppy practices and is increasingly facing legal challenges.” On the website, I see that MERS claims that it
always has possession of the full documentation and that its arrangements for bank personnel to act as personnel of
MERS are perfectly legitimate.

Yves here. The claim that MERS “always has possession of the full documentation” is completely untrue. I have depositions of the
MERS CEO and general counsel to the contrary. Back to the post:

Yet I can’t help wondering, if MERS always has possession of full documentation, why are there groups that advertise
their ability to create documents, as Yves Smith also notes regarding “Lender Processing Services”? Further, the idea of
letting anyone represent themselves as an employee of MERS when they actually are an employee of a party that might
have a reason for committing fraud by inappropriately claiming to own a mortgage seems at least a questionable
practice and one that should not be tolerated when it compromises the integrity of the mortgage system. If I were a
judge dealing with one of these foreclosure cases, I would have serious qualms about accepting such a document as
“proof” that a particular bank had a right to foreclose.

As noted, under the rules before MERS, the trust established with original mortgage loans would hold legal title, and
the trust would be entitled to act on the mortgage loans on behalf of the REMIC as beneficial owner. That’s especially
important, since pooled trust certificates may not be held in a single REMIC vehicle–in fact, they are often scattered in
various REMICS, and in REMICs of REMICs (REMICs squared and cubed, which may themselves be “re-REMICed” in
the same deal or in later deals). But if the trust doesn’t actually hold legal title–because legal title is left with MERS
from the first, in spite of the documents tracing a transfer from the sponsor to depositor to trust–that means that the
trust actually holds in trust no mortgage loan but only its rights under the various documents and agreements it has
entered into with MERS (and that borrowers have, probably unknowingly, signed off on in borrowing to buy property
from a lender that is securitizing through MERS) to be able to acquire legal title if needed and then assign it, possibly,
to the Servicer who will act on the foreclosure on the trust’s behalf.

Do each of those assignments get appropriately recorded (and taxes paid)? Does this electronic database satisfy the
state and securities law requirements? If not, the important tax question is whether this limited actual legal right
supports a REMIC’s claim to “hold” qualified mortgages (aside from the question of whether these mortgages were
“qualified” in the first place, in cases where appraisals were rigged and borrowers’ ability to pay was unexamined)? It
seems that the legal title should not be determinative for REMIC status. If the loans are defective and do not qualify as
“qualified mortgages” for REMIC status, however, it is possible that some REMICs would have “bad” assets that would
disqualify the REMIC if the loan is not sold within 90 days of discovery of the defective loan problem.

Moreover, if a bankruptcy court were to determine that a sponsor or other entity actually owned (not just as legal title,
but as beneficial owner in the tax sense) mortgage loans that had been thought to be included in the REMIC pool (and
thus the court order allocated all funds connected with that loan, or foreclosure rights and sales proceeds, to parties
other than the REMIC investors), it would appear that the decision removing the loan from the pool would create a loss
to REMIC investors but would not in itself jeopardize REMIC status. If the problem of non-existent documents and
unverified loan quality was substantial, however, is there some possibility that the sham transaction doctrine could be
applied to the REMIC to cause it to lose REMIC status ?

That’s a hard call but seems unlikely given the highly “constructed” nature of the REMIC as a special tax entity under
the Code–any entity or even a non-entity can be given REMIC status if it meets the requirements, regular interests are
treated as debt even if they wouldn’t independently be considered debt under general tax principles, residual interests
are treated as equity even though they may have no entitlement to proceeds and primarily represent a liability to
includes certain “phantom income” amounts in income, the sponsor may continue as servicer and continue to hold the
mortgage loans (in a segregated pool) even when they are REMICed, tiering of REMICs results in a final allocation of
mortgage payments that may differ considerably from the initial allocation in the first-tier REMIC, servicer and trustee
actions are taken under the pooling and servicing agreement with respect to the mortgage loans according to whatever
the documents permit or require (such as servicer advances to which it has reimbursement rights), etc.

Linda does not leave readers with much in the way of reasons as to why the IRS would let certain violations of REMIC rules that
would seem flagrant to a layperson get a free pass. But tax law takes a very different view of matters like beneficial ownership.
However, there are certain issues that might not be easily finessed. For instance, if a bankruptcy court were to conclude that a
bankrupt originator still owned a bunch of loans that had supposedly been securitized, that could mean the securitization vehicle
would no longer be able to be treated as the beneficial owner of the loans. That would seem to pose a problem for the REMIC
treatment.

However, the reality is that the IRS, which is part of the Treasury, is not about to take a strict view of the regs because it will create
lots of havoc with MBS investors.
REMIC

Reference Pages
Paper Tangible Electronic Intangible
Promissory Note
Step x
Electronic Note
Indebtedness

Security Instrument Scan


Security Instrument
Deed of Trust-Mortgage-Security Deed Copy

Enote - Eclosing
Lacks Electronic
Supporting Intangible
Laws “Underlying”
“15 USC 7003” “Collateral”

Electronic Electronic Electronic Electronic


Intangible Intangible Intangible Intangible
“Underlying” “Underlying” “Underlying” “Underlying”
Rating “Collateral” “Collateral” “Collateral” “Collateral”
Underlying
Agency
Collateral Electronic Electronic Electronic Electronic
Reviews
Electronic Intangible Intangible Intangible Intangible
Electronic “Underlying” “Underlying” “Underlying” “Underlying”
Non
Copy of “Collateral” “Collateral” “Collateral” “Collateral”
Compliance
Documents Electronic Electronic Electronic Electronic Electronic
Intangible Intangible Intangible Intangible
Intangible “Underlying” “Underlying” “Underlying” “Underlying”
“Collateral” “Collateral” “Collateral” “Collateral”
“Underlying”
Electronic Electronic Electronic Electronic
Electronic “Collateral” Intangible Intangible Intangible Intangible
“Underlying” “Underlying” “Underlying” “Underlying”
Intangible The Pool “Collateral” “Collateral” “Collateral” “Collateral”
IRS “Underlying”
REMIC Electronic
“Collateral” Intangible
The Pool “Underlying”
“Collateral”
Trust-SPV-MBS-ABS

© Copyrighted 2010 j.mcguire P O Box 1352, Bedford, Texas, 76095-1352


Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without
taking into account any losses from prohibited transactions or any
deductions attributable to any prohibited transaction that resulted in
a loss. In general, prohibited transactions include:

(1) subject to limited exceptions, the sale or other


disposition of any qualified mortgage transferred to the REMIC;

(2) subject to a limited exception, the sale or other


disposition of a cash flow investment;

(3) the receipt of any income from assets not permitted to be


held by the REMIC pursuant to the Code; or

(4) the receipt of any fees or other compensation for services


rendered by the REMIC.

It is anticipated that a REMIC will not engage in any prohibited


transactions in which it would recognize a material amount of net
income. In addition, subject to a number of exceptions, a tax is
imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the startup day. The
holders of Residual Interest Securities will generally be responsible
for the payment of any taxes for prohibited transactions

112

424B5 263rd Page of 298 TOC 1st Previous Next Bottom Just 263rd

imposed on the REMIC. To the extent not paid by those holders or


otherwise, however, taxes that will be paid out of the trust fund and
will be allocated pro rata to all outstanding classes of securities of that REMIC.
(3) Qualified mortgage. The term 'qualified mortgage' means--
(A) any obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real property and
which--
(i) is transferred to the REMIC on the startup day in exchange for regular or
residual interests in the REMIC,
(ii) is purchased by the REMIC within the 3-month period beginning on the
startup day if, except as provided in regulations, such purchase is pursuant to a
fixed-price contract in effect on the startup day, or
(iii) represents an increase in the principal amount under the original terms of
an obligation described in clause (i) or (ii) if such increase--
(I) is attributable to an advance made to the obligor pursuant to the original
terms of a reverse mortgage loan or other obligation,
(II) occurs after the startup day, and
(III) is purchased by the REMIC pursuant to a fixed price contract in effect
on the startup day.
(B) any qualified replacement mortgage, and
(C) any regular interest in another REMIC transferred to the REMIC on the
startup day in exchange for regular or residual interests in the REMIC.

26 USCS § 860G

(4) Qualified replacement mortgage. The term 'qualified replacement mortgage'


means any obligation--
(A) which would be a qualified mortgage if transferred on the startup day in
exchange for regular or residual interests in the REMIC, and
(B) which is received for--
(i) another obligation within the 3-month period beginning on the startup day,
or
(ii) a defective obligation within the 2-year period beginning on the startup
day.

(d) Tax on contributions after startup date.


(1) In general. Except as provided in paragraph (2), if any amount is contributed
to a REMIC after the startup day, there is hereby imposed a tax for the taxable year
of the REMIC in which the contribution is received equal to 100 percent of the
amount of such contribution.

26 USCS § 860G

26 USCS § 860D
§ 860D. REMIC defined.

(a) General rule. For purposes of this title, the terms 'real estate mortgage
investment conduit' and 'REMIC' mean any entity--
(1) to which an election to be treated as a REMIC applies for the taxable year and
all prior taxable years,
(2) all of the interests in which are regular interests or residual interests,
(3) which has 1 (and only 1) class of residual interests (and all distributions, if any,
with respect to such interests are pro rata),
(4) as of the close of the 3rd month beginning after the startup day and at all
times thereafter, substantially all of the assets of which consist of qualified
mortgages and permitted investments,
(5) which has a taxable year which is a calendar year, and
(6) with respect to which there are reasonable arrangements designed to ensure
that--
(A) residual interests in such entity are not held by disqualified organizations (as
defined in section 860E(e)(5) [26 USCS § 860E(e)(5)]), and
(B) information necessary for the application of section 860E(e) [26 USCS §
860E(e)] will be made available by the entity.

26 USCS § 860D

Section 8.11 Tax Matters.


It is intended that the assets with respect to which any REMIC
election pertaining to the Trust Fund is to be made, as set forth in the
Preliminary Statement, shall constitute, and that the conduct of matters
relating to such assets shall be such as to qualify such assets as, a "real
estate mortgage investment conduit" as defined in and in accordance with the
REMIC Provisions. In furtherance of such intention, the Trustee covenants and
agrees that it shall act as agent (and the Trustee is hereby appointed to act as
agent) on behalf of the Lower Tier REMIC and Upper Tier REMIC and that in such
capacity it shall:

(a) prepare and file in a timely manner, a U.S. Real Estate Mortgage
Investment Conduit (REMIC) Income Tax Return (Form 1066 or any successor form
adopted by the Internal Revenue Service) and prepare and file with the Internal
Revenue Service and applicable state or local tax authorities income tax or
information returns for each taxable year with respect to the Lower Tier REMIC
and Upper Tier REMIC containing such information and at the times and in the
manner as may be required by the Code or state or local tax laws, regulations,
or rules, and furnish to Certificateholders the schedules, statements or
information at such times and in such manner as may be required thereby;
(b) within thirty days of the Closing Date, the Trustee will apply for an employer
identification number from the Internal Revenue Service via Form SS-4 or any other
acceptable method for all tax entities and shall also furnish to the Internal Revenue
Service, on Form 8811 or as otherwise may be required by the Code, the name, title,
address, and telephone number of the person that the holders of the Certificates may
contact for tax information relating thereto, together with such additional information as
may be required by such Form, and update such information at the time or times in the
manner required by the Code; (c) make an election that each of the Lower Tier REMIC
and the Upper Tier REMIC be treated as a REMIC on the federal tax return for its first
taxable year (and, if necessary, under applicable state law); (d) prepare and forward to the
Certificateholders and to the Internal Revenue Service and, if necessary, state tax
authorities, all information returns and reports as and when required to be provided to
them in accordance with the REMIC Provisions, including the calculation of any original
issue discount using the prepayment assumption (as described in the Prospectus
Supplement); (e) provide information necessary for the computation of tax imposed
on the transfer of a Residual Certificate to a Person that is a Non-Permitted Transferee, or
an agent (including a broker, nominee or other middleman) of a Non-Permitted
Transferee, or a pass-through entity in which a Non-Permitted Transferee is the record
holder of an interest (the reasonable cost of computing and furnishing such information
may be charged to the Person liable for such tax); (f) to the extent that they are under its
control, conduct matters relating to such assets at all times that any Certificates are
outstanding so as to maintain the status of each of the Upper Tier REMIC and Lower Tier
REMIC as a REMIC under the REMIC Provisions; (g) not knowingly or intentionally
take any action or omit to take any action that would cause the termination of the REMIC
status of either the Lower Tier REMIC or the Upper Tier REMIC created hereunder; (h)
pay, from the sources specified in the last paragraph of this Section 8.11, the amount of
any federal or state tax, including prohibited transaction taxes as described below,
imposed on the Lower Tier REMIC and the Upper Tier REMIC created hereunder before
its termination when and as the same shall be due and payable (but such obligation shall
not prevent the Trustee or any other appropriate Person from contesting any such tax in
appropriate proceedings and shall not prevent the Trustee from withholding payment of
such tax, if permitted by law, pending the outcome of such proceedings); (i) cause
federal, state or local income tax or information returns to be signed by the Trustee or
such other person as may be required to sign such returns by the Code or state or local
laws, regulations or rules; (j) maintain records relating to the Lower Tier REMIC and the
Upper Tier REMIC created hereunder, including the income, expenses, assets, and
liabilities thereof on a calendar year basis and on the accrual method of accounting and
the fair market value and adjusted basis of the assets determined at such intervals as may
be required by the Code, as may be necessary to prepare the foregoing returns, schedules,
statements or information; and (k) as and when necessary and appropriate, represent the
Lower Tier REMIC and the Upper Tier REMIC created hereunder in any administrative
or judicial proceedings relating to an examination or audit by any governmental taxing
authority, request an administrative adjustment as to any taxable year of the Lower Tier
REMIC and the Upper Tier REMIC created hereunder, enter into settlement agreements
with any governmental taxing agency, extend any statute of limitations relating to any tax
item of the Lower Tier REMIC and the Upper Tier REMIC created hereunder, and
otherwise act on behalf of each REMIC in relation to any tax matter or controversy
involving it. The Trustee shall treat the rights of the Class P Certificateholders to
Prepayment Charges, the rights of the Class X Certificateholders to receive Interest Rate
Cap Payments (subject to the obligation to pay Basis Risk Carry Forward Amounts) and
the rights of the LIBOR Certificateholders to receive Basis Risk Carry Forward Amounts
as the beneficial ownership of interests in a grantor trust, and not as an obligation of
either the Lower Tier REMIC or Upper Tier REMIC created hereunder, for federal
income tax purposes. To enable the Trustee to perform its duties under this Agreement,
the Depositor shall provide to the Trustee within ten days after the Closing Date all
information or data that the Trustee requests in writing and determines to be relevant for
tax purposes to the valuations and offering prices of the Certificates, including the price,
yield, prepayment assumption, and projected cash flows of the Certificates and the
Mortgage Loans. Moreover, the Depositor shall provide information to the Trustee
concerning the value to each Class of Certificates of the right to receive Basis Risk
CarryForward Amounts from the Excess Reserve Fund Account. Thereafter, the
Depositor shall provide to the Trustee promptly upon written request therefor any
additional information or data that the Trustee may, from time to time, reasonably request
to enable the Trustee to perform its duties under this Agreement. The Depositor hereby
indemnifies the Trustee for any losses, liabilities, damages, claims, or expenses of the
Trustee arising from any errors or miscalculations of the Trustee that result from any
failure of the Depositor to provide, or to cause to be provided, accurate information or
data to the Trustee on a timely basis. If any tax is imposed on "prohibited transactions"
of either the Lower Tier REMIC or the Upper Tier REMIC created hereunder as defined
in Section 860F(a)(2) of the Code, on the "net income from foreclosure property" of the
Lower Tier REMIC as defined in Section 860G(c) of the Code, on any contribution to
either the Lower Tier REMIC or Upper Tier REMIC after the Startup Day pursuant to
Section 860G(d) of the Code, or any other tax is imposed, including any minimum tax
imposed on either REMIC pursuant to Sections 23153 and 24874 of the California
Revenue and Taxation Code, if not paid as otherwise provided for herein, the tax shall be
paid by (i) the Trustee if such tax arises out of or results from negligence of the Trustee in
the performance of any of its obligations under this Agreement, (ii) the applicable
Responsible Party if such tax arises out of or results from the applicable Responsible
Party's obligation to repurchase a Mortgage Loan pursuant to Section 2.03, (iii) the
applicable Servicer, in the case of any such minimum tax, and otherwise if such tax arises
out of or results from a breach by the Servicer of any of its obligations under this
Agreement or (iv) in all other cases, or if the Trustee, the applicable Servicer or the
applicable Responsible Party fails to honor its obligations under the preceding clauses (i),
(ii) or (iii), any such tax will be paid with amounts otherwise to be distributed to the
Certificateholders, as provided in Section 4.02(a).
Internal Revenue Code §860 et seq. – Real Estate Mortgage Investment Conduits
(“REMICs”)

§ 860G Other definitions and special rules (excerpt)


[For full text see: http://www.law.cornell.edu/uscode/26/usc_sec_26_00000860---G000-
.html ]

*****

(3) Qualified mortgage.


The term “qualified mortgage” means—

(A) any obligation (including any participation or certificate of beneficial ownership


therein) which is principally secured by an interest In real property and which—

(i) is transferred to the REMIC on the startup day in exchange for regular or
residual interests in the REMIC,

(ii) is purchased by the REMIC within the 3-month period beginning on the startup
day if, except as provided in regulations, such purchase is pursuant to a fixed-price
contract in effect on the startup day, or

(iii) represents an increase in the principal amount under the original terms of an
obligation described in clause (i) or (ii) if such increase—

(I) is attributable to an advance made to the obligor pursuant to the


original terms of the obligation,

(II) occurs after the startup day, and


(III) is purchased by the REMIC pursuant to a fixed price contract in effect on
the startup day.

(A) any qualified replacement mortgage, and

(C) any regular interest in another REMIC transferred to the REMIC on the startup day in
exchange for regular or residual interests in the REMIC.
(D) Repealed.

For purposes of subparagraph (A) any obligation secured by stock held by a person as a tenant-
stockholder (as defined in section 216) in a cooperative housing corporation (as so defined) shall
be treated as secured by an interest in real property, and any reverse mortgage loan (and each
balance increase on such loan meeting the requirements of subparagraph (A)(iii) ) shall be
treated as an obligation secured by an interest in real property. For purposes of subparagraph
(A) , if more than 50 percent of the obligations transferred to, or purchased by, the REMIC are
originated by the United States or any State (or any political subdivision, agency, or
instrumentality of the United States or any State) and are principally secured by an interest in real
property, then each obligation transferred to, or purchased by, the REMIC shall be treated as
secured by an interest in real property.

(4) Qualified replacement mortgage.


The term “qualified replacement mortgage” means any obligation—

(A) which would be a qualified mortgage if transferred on the startup day in


exchange for regular or residual interests in the REMIC, and

(B) which is received for—

(I) another obligation within the 3-month period beginning on the


startup day, or
(ii) a defective obligation within the 2-year period beginning on the
startup day.

[End of Document]

*****

[New Document]

http://www.irs.gov/irb/2009-17_IRB/ar09.html

Internal Revenue Bulletin: 2009-17


April 27, 2009
Notice 2009-36
Payments made to a REMIC Pursuant to the Home Affordable Modification Program

Table of Contents

*
* BACKGROUND
* DISCUSSION
* DRAFTING INFORMATION

The Internal Revenue Service (Service) and the Department of the Treasury (Treasury) intend to issue
regulations regarding the application of section 860G(d) of the Internal Revenue Code to certain amounts
that may be paid to real estate mortgage investment conduits (REMICs) as part of the Home Affordable
Modification Program (HAMP). The HAMP was announced on February 18, 2009, and many details of its
operation were provided on March 4, 2009. See documents entitled “Home Affordable Modification
Program Guidelines” and “Making Home Affordable, Summary of Guidelines.”
BACKGROUND

.01 Section 860G(d)(1) states that, except as provided in section 860G(d)(2), “if any amount is contributed
to a REMIC after the startup day, there is hereby imposed a tax for the taxable year of the REMIC in which
the contribution is received equal to 100 percent of the amount of such contribution.”

.02 Section 860G(d)(2) provides that this tax does not apply to any cash contributions that are—

(A) Contributions made to facilitate a clean-up call or a qualified liquidation;

(B) Payments in the nature of a guarantee;

(C) Contributions made during the 3-month period beginning on the startup day;

(D) Contributions made to a qualified reserve fund by any holder of a residual interest in the REMIC; or

(E) Other contributions permitted in regulations.

.03 The question has arisen whether some of the payments that may be made to REMICs under the HAMP
are “contributions” that are described in section 860G(d)(1) and, if so, whether they are covered by the
exceptions in section 860G(d)(2).
DISCUSSION

If a payment is made to a REMIC under the HAMP, if the payment is described in section 860G(d)(1), and
if the payment is not covered by any of the exceptions in section 860G(d)(2), then regulations to be issued
by the Service and Treasury will provide an exception for that payment. The regulations are expected to be
effective for payments made on or after March 4, 2009. Pending the issuance of further guidance, taxpayers
may rely on this notice and, accordingly, any payment made to a REMIC under the HAMP will not be
subject to the 100 percent tax set forth in section 860G(d)(1).
DRAFTING INFORMATION

The principal author of this notice is Diana Imholtz of the Office of Associate Chief Counsel (Financial
Institutions and Products). For further information regarding this notice, contact Ms. Imholtz at 202-622-
3930 (not a toll-free call).
http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_Sec._1.860
G-2

Sec. 1.860G-2 Other rules

(a) Obligations principally secured by an interest in real property—(1) Tests for


determining whether an obligation is principally secured. For purposes of section
860G(a)(3)(A), an obligation is principally secured by an interest in real property only if
it satisfies either the test set out in paragraph (a)(1)(i) or the test set out in paragraph
(a)(1)(ii) of this section.

(i) The 80-percent test. An obligation is principally secured by an interest in real property
if the fair market value of the interest in real property securing the obligation—

(A) Was at least equal to 80 percent of the adjusted issue price of the obligation at the
time the obligation was originated (see paragraph (b)(1) of this section concerning the
origination date for obligations that have been significantly modified); or

(B) Is at least equal to 80 percent of the adjusted issue price of the obligation at the time
the sponsor contributes the obligation to the REMIC.

(ii) Alternative test. For purposes of section 860G(a)(3)(A), an obligation is principally


secured by an interest in real property if substantially all of the proceeds of the obligation
were 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. For purposes of this test, loan
guarantees made by the United States or any state (or any political subdivision, agency,
or instrumentality of the United States or of any state), or other third party credit
enhancement are not viewed as additional security for a loan. An obligation is not
considered to be secured by property other than real property solely because the obligor is
personally liable on the obligation.

(2) Treatment of liens. For purposes of paragraph (a)(1)(i) of this section, the fair market
value of the real property interest must be first reduced by the amount of any lien on the
real property interest that is senior to the obligation being tested, and must be further
reduced by a proportionate amount of any lien that is in parity with the obligation being
tested.

(3) Safe harbor—(i) Reasonable belief that an obligation is principally secured. If, at the
time the sponsor contributes an obligation to a REMIC, the sponsor reasonably believes
that the obligation is principally secured by an interest in real property within the
meaning of paragraph (a)(1) of this section, then the obligation is deemed to be so
secured for purposes of section 860G(a)(3). A sponsor cannot avail itself of this safe
harbor with respect to an obligation if the sponsor actually knows or has reason to know
that the obligation fails both of the tests set out in paragraph (a)(1) of this section.

(ii) Basis for reasonable belief. For purposes of paragraph (a)(3)(i) of this section, a
sponsor may base a reasonable belief concerning any obligation on—

(A) Representations and warranties made by the originator of the obligation; or

(B) Evidence indicating that the originator of the obligation typically made mortgage
loans in accordance with an established set of parameters, and that any mortgage loan
originated in accordance with those parameters would satisfy at least one of the tests set
out in paragraph (a)(1) of this section.

(iii) Later discovery that an obligation is not principally secured. If, despite the sponsor's
reasonable belief concerning an obligation at the time it contributed the obligation to the
REMIC, the REMIC later discovers that the obligation is not principally secured by an
interest in real property, the obligation is a defective obligation and loses its status as a
qualified mortgage 90 days after the date of discovery. See paragraph (f) of this section,
relating to defective obligations.

(4) Interests in real property; real property. The definition of “interests in real property”
set out in §1.856–3(c), and the definition of “real property” set out in §1.856–3(d), apply
to define those terms for purposes of section 860G(a)(3) and paragraph (a) of this section.

(5) Obligations secured by an interest in real property. Obligations secured by interests


in real property include the following: mortgages, deeds of trust, and installment land
contracts; mortgage pass-thru certificates guaranteed by GNMA, FNMA, FHLMC, or
CMHC (Canada Mortgage and Housing Corporation); other investment trust interests that
represent undivided beneficial ownership in a pool of obligations principally secured by
interests in real property and related assets that would be considered to be permitted
investments if the investment trust were a REMIC, and provided the investment trust is
classified as a trust under §301.7701–4(c) of this chapter; and obligations secured by
manufactured housing treated as single family residences under section 25(e)(10)
(without regard to the treatment of the obligations or the properties under state law).

(6) Obligations secured by other obligations; residual interests. Obligations (other than
regular interests in a REMIC) that are secured by other obligations are not principally
secured by interests in real property even if the underlying obligations are secured by
interests in real property. Thus, for example, a collateralized mortgage obligation issued
by an issuer that is not a REMIC is not an obligation principally secured by an interest in
real property. A residual interest (as defined in section 860G(a)(2)) is not an obligation
principally secured by an interest in real property.

(7) Certain instruments that call for contingent payments are obligations. For purposes of
section 860G(a)(3) and (4), the term “obligation” includes any instrument that provides
for total noncontingent principal payments that at least equal the instrument's issue price
even if that instrument also provides for contingent payments. Thus, for example, an
instrument that was issued for $100x and that provides for noncontingent principal
payments of $100x, interest payments at a fixed rate, and contingent payments based on a
percentage of the mortgagor's gross receipts, is an obligation.

(8) Defeasance. If a REMIC releases its lien on real property that secures a qualified
mortgage, that mortgage ceases to be a qualified mortgage on the date the lien is released
unless—

(i) The mortgagor pledges substitute collateral that consists solely of government
securities (as defined in section 2(a)(16) of the Investment Company Act of 1940 as
amended (15 U.S.C. 80a–1));

(ii) The mortgage documents allow such a substitution;

(iii) The lien is released to facilitate the disposition of the property or any other
customary commercial transaction, and not as part of an arrangement to collateralize a
REMIC offering with obligations that are not real estate mortgages; and

(iv) The release is not within 2 years of the startup day.

(9) Stripped bonds and coupons. The term “qualified mortgage” includes stripped bonds
and stripped coupons (as defined in section 1286(e) (2) and (3)) if the bonds (as defined
in section 1286(e)(1)) from which such stripped bonds or stripped coupons arose would
have been qualified mortgages.

(b) Assumptions and modifications—(1) Significant modifications are treated as


exchanges of obligations. If an obligation is significantly modified in a manner or under
circumstances other than those described in paragraph (b)(3) of this section, then the
modified obligation is treated as one that was newly issued in exchange for the
unmodified obligation that it replaced. Consequently—

(i) If such a significant modification occurs after the obligation has been contributed to
the REMIC and the modified obligation is not a qualified replacement mortgage, the
modified obligation will not be a qualified mortgage and the deemed disposition of the
unmodified obligation will be a prohibited transaction under section 860F(a)(2); and

(ii) If such a significant modification occurs before the obligation is contributed to the
REMIC, the modified obligation will be viewed as having been originated on the date the
modification occurs for purposes of the tests set out in paragraph (a)(1) of this section.

(2) Significant modification defined. For purposes of paragraph (b)(1) of this section, a
“significant modification” is any change in the terms of an obligation that would be
treated as an exchange of obligations under section 1001 and the related regulations.
(3) Exceptions. For purposes of paragraph (b)(1) of this section, the following changes in
the terms of an obligation are not significant modifications regardless of whether they
would be significant modifications under paragraph (b)(2) of this section—

(i) Changes in the terms of the obligation occasioned by default or a reasonably


foreseeable default;

(ii) Assumption of the obligation;

(iii) Waiver of a due-on-sale clause or a due on encumbrance clause; and

(iv) Conversion of an interest rate by a mortgagor pursuant to the terms of a convertible


mortgage.

(4) Modifications that are not significant modifications. If an obligation is modified and
the modification is not a significant modification for purposes of paragraph (b)(1) of this
section, then the modified obligation is not treated as one that was newly originated on
the date of modification.

(5) Assumption defined. For purposes of paragraph (b)(3) of this section, a mortgage has
been assumed if—

(i) The buyer of the mortgaged property acquires the property subject to the mortgage,
without assuming any personal liability;

(ii) The buyer becomes liable for the debt but the seller also remains liable; or

(iii) The buyer becomes liable for the debt and the seller is released by the lender.

(6) Pass-thru certificates. If a REMIC holds as a qualified mortgage a pass-thru


certificate or other investment trust interest of the type described in paragraph (a)(5) of
this section, the modification of a mortgage loan that backs the pass-thru certificate or
other interest is not a modification of the pass-thru certificate or other interest unless the
investment trust structure was created to avoid the prohibited transaction rules of section
860F(a).

(c) Treatment of certain credit enhancement contracts—(1) In general. A credit


enhancement contract (as defined in paragraph (c) (2) and (3) of this section) is not
treated as a separate asset of the REMIC for purposes of the asset test set out in section
860D(a)(4) and §1.860D–1(b)(3), but instead is treated as part of the mortgage or pool of
mortgages to which it relates. Furthermore, any collateral supporting a credit
enhancement contract is not treated as an asset of the REMIC solely because it supports
the guarantee represented by that contract. See paragraph (g)(1)(ii) of this section for the
treatment of payments made pursuant to credit enhancement contracts as payments
received under a qualified mortgage.
(2) Credit enhancement contracts. For purposes of this section, a credit enhancement
contract is any arrangement whereby a person agrees to guarantee full or partial payment
of the principal or interest payable on a qualified mortgage or on a pool of such
mortgages, or full or partial payment on one or more classes of regular interests or on the
class of residual interests, in the event of defaults or delinquencies on qualified
mortgages, unanticipated losses or expenses incurred by the REMIC, or lower than
expected returns on cash flow investments. Types of credit enhancement contracts may
include, but are not limited to, pool insurance contracts, certificate guarantee insurance
contracts, letters of credit, guarantees, or agreements whereby the REMIC sponsor, a
mortgage servicer, or other third party agrees to make advances described in paragraph
(c)(3) of this section.

(3) Arrangements to make certain advances. The arrangements described in this


paragraph (c)(3) are credit enhancement contracts regardless of whether, under the terms
of the arrangement, the payor is obligated, or merely permitted, to advance funds to the
REMIC.

(i) Advances of delinquent principal and interest. An arrangement by a REMIC sponsor,


mortgage servicer, or other third party to advance to the REMIC out of its own funds an
amount to make up for delinquent payments on qualified mortgages is a credit
enhancement contract.

(ii) Advances of taxes, insurance payments, and expenses. An arrangement by a REMIC


sponsor, mortgage servicer, or other third party to pay taxes and hazard insurance
premiums on, or other expenses incurred to protect the REMIC's security interest in,
property securing a qualified mortgage in the event that the mortgagor fails to pay such
taxes, insurance premiums, or other expenses is a credit enhancement contract.

(iii) Advances to ease REMIC administration. An agreement by a REMIC sponsor,


mortgage servicer, or other third party to advance temporarily to a REMIC amounts
payable on qualified mortgages before such amounts are actually due to level out the
stream of cash flows to the REMIC or to provide for orderly administration of the
REMIC is a credit enhancement contract. For example, if two mortgages in a pool have
payment due dates on the twentieth of the month, and all the other mortgages have
payment due dates on the first of each month, an agreement by the mortgage servicer to
advance to the REMIC on the fifteenth of each month the payments not yet received on
the two mortgages together with the amounts received on the other mortgages is a credit
enhancement contract.

(4) Deferred payment under a guarantee arrangement. A guarantee arrangement does not
fail to qualify as a credit enhancement contract solely because the guarantor, in the event
of a default on a qualified mortgage, has the option of immediately paying to the REMIC
the full amount of mortgage principal due on acceleration of the defaulted mortgage, or
paying principal and interest to the REMIC according to the original payment schedule
for the defaulted mortgage, or according to some other deferred payment schedule. Any
deferred payments are payments pursuant to a credit enhancement contract even if the
mortgage is foreclosed upon and the guarantor, pursuant to subrogation rights set out in
the guarantee arrangement, is entitled to receive immediately the proceeds of foreclosure.

(d) Treatment of certain purchase agreements with respect to convertible mortgages—(1)


In general. For purposes of sections 860D(a)(4) and 860G(a)(3), a purchase agreement
(as described in paragraph (d)(3) of this section) with respect to a convertible mortgage
(as described in paragraph (d)(5) of this section) is treated as incidental to the convertible
mortgage to which it relates. Consequently, the purchase agreement is part of the
mortgage or pool of mortgages and is not a separate asset of the REMIC.

(2) Treatment of amounts received under purchase agreements. For purposes of sections
860A through 860G and for purposes of determining the accrual of original issue
discount and market discount under sections 1272(a)(6) and 1276, respectively, a
payment under a purchase agreement described in paragraph (d)(3) of this section is
treated as a prepayment in full of the mortgage to which it relates. Thus, for example, a
payment under a purchase agreement with respect to a qualified mortgage is considered a
payment received under a qualified mortgage within the meaning of section 860G(a)(6)
and the transfer of the mortgage is not a disposition of the mortgage within the meaning
of section 860F(a)(2)(A).

(3) Purchase agreement. A purchase agreement is a contract between the holder of a


convertible mortgage and a third party under which the holder agrees to sell and the third
party agrees to buy the mortgage for an amount equal to its current principal balance plus
accrued but unpaid interest if and when the mortgagor elects to convert the terms of the
mortgage.

(4) Default by the person obligated to purchase a convertible mortgage. If the person
required to purchase a convertible mortgage defaults on its obligation to purchase the
mortgage upon conversion, the REMIC may sell the mortgage in a market transaction and
the proceeds of the sale will be treated as amounts paid pursuant to a purchase agreement.

(5) Convertible mortgage. A convertible mortgage is a mortgage that gives the obligor
the right at one or more times during the term of the mortgage to elect to convert from
one interest rate to another. The new rate of interest must be determined pursuant to the
terms of the instrument and must be intended to approximate a market rate of interest for
newly originated mortgages at the time of the conversion.

(e) Prepayment interest shortfalls. An agreement by a mortgage servicer or other third


party to make payments to the REMIC to make up prepayment interest shortfalls is not
treated as a separate asset of the REMIC and payments made pursuant to such an
agreement are treated as payments on the qualified mortgages. With respect to any
mortgage that prepays, the prepayment interest shortfall for the accrual period in which
the mortgage prepays is an amount equal to the excess of the interest that would have
accrued on the mortgage during that accrual period had it not prepaid, over the interest
that accrued from the beginning of that accrual period up to the date of the prepayment.
(f) Defective obligations—(1) Defective obligation defined. For purposes of sections
860G(a)(4)(B)(ii) and 860F(a)(2), a defective obligation is a mortgage subject to any of
the following defects.

(i) The mortgage is in default, or a default with respect to the mortgage is reasonably
foreseeable.

(ii) The mortgage was fraudulently procured by the mortgagor.

(iii) The mortgage was not in fact principally secured by an interest in real property
within the meaning of paragraph (a)(1) of this section.

(iv) The mortgage does not conform to a customary representation or warranty given by
the sponsor or prior owner of the mortgage regarding the characteristics of the mortgage,
or the characteristics of the pool of mortgages of which the mortgage is a part. A
representation that payments on a qualified mortgage will be received at a rate no less
than a specified minimum or no greater than a specified maximum is not customary for
this purpose.

(2) Effect of discovery of defect. If a REMIC discovers that an obligation is a defective


obligation, and if the defect is one that, had it been discovered before the startup day,
would have prevented the obligation from being a qualified mortgage, then, unless the
REMIC either causes the defect to be cured or disposes of the defective obligation within
90 days of discovering the defect, the obligation ceases to be a qualified mortgage at the
end of that 90 day period. Even if the defect is not cured, the defective obligation is,
nevertheless, a qualified mortgage from the startup day through the end of the 90 day
period. Moreover, even if the REMIC holds the defective obligation beyond the 90 day
period, the REMIC may, nevertheless, exchange the defective obligation for a qualified
replacement mortgage so long as the requirements of section 860G(a)(4)(B) are satisfied.
If the defect is one that does not affect the status of an obligation as a qualified mortgage,
then the obligation is always a qualified mortgage regardless of whether the defect is or
can be cured. For example, if a sponsor represented that all mortgages transferred to a
REMIC had a 10 percent interest rate, but it was later discovered that one mortgage had a
9 percent interest rate, the 9 percent mortgage is defective, but the defect does not affect
the status of that obligation as a qualified mortgage.

(g) Permitted investments—(1) Cash flow investment—(i) In general. For purposes of


section 860G(a)(6) and this section, a cash flow investment is an investment of payments
received on qualified mortgages for a temporary period between receipt of those
payments and the regularly scheduled date for distribution of those payments to REMIC
interest holders. Cash flow investments must be passive investments earning a return in
the nature of interest.

(ii) Payments received on qualified mortgages. For purposes of paragraph (g)(1) of this
section, the term “payments received on qualified mortgages” includes—
(A) Payments of interest and principal on qualified mortgages, including prepayments of
principal and payments under credit enhancement contracts described in paragraph (c)(2)
of this section;

(B) Proceeds from the disposition of qualified mortgages;

(C) Cash flows from foreclosure property and proceeds from the disposition of such
property;

(D) A payment by a sponsor or prior owner in lieu of the sponsor's or prior owner's
repurchase of a defective obligation, as defined in paragraph (f) of this section, that was
transferred to the REMIC in breach of a customary warranty; and

(E) Prepayment penalties required to be paid under the terms of a qualified mortgage
when the mortgagor prepays the obligation.

(iii) Temporary period. For purposes of section 860G(a)(6) and this paragraph (g)(1), a
temporary period generally is that period from the time a REMIC receives payments on
qualified mortgages and permitted investments to the time the REMIC distributes the
payments to interest holders. A temporary period may not exceed 13 months. Thus, an
investment held by a REMIC for more than 13 months is not a cash flow investment. In
determining the length of time that a REMIC has held an investment that is part of a
commingled fund or account, the REMIC may employ any reasonable method of
accounting. For example, if a REMIC holds mortgage cash flows in a commingled
account pending distribution, the first-in, first-out method of accounting is a reasonable
method for determining whether all or part of the account satisfies the 13 month
limitation.

(2) Qualified reserve funds. The term qualified reserve fund means any reasonably
required reserve to provide for full payment of expenses of the REMIC or amounts due
on regular or residual interests in the event of defaults on qualified mortgages,
prepayment interest shortfalls (as defined in paragraph (e) of this section), lower than
expected returns on cash flow investments, or any other contingency that could be
provided for under a credit enhancement contract (as defined in paragraph (c) (2) and (3)
of this section).

(3) Qualified reserve asset—(i) In general. The term “qualified reserve asset” means any
intangible property (other than a REMIC residual interest) that is held both for
investment and as part of a qualified reserve fund. An asset need not generate any income
to be a qualified reserve asset.

(ii) Reasonably required reserve—(A) In general. In determining whether the amount of


a reserve is reasonable, it is appropriate to consider the credit quality of the qualified
mortgages, the extent and nature of any guarantees relating to either the qualified
mortgages or the regular and residual interests, the expected amount of expenses of the
REMIC, and the expected availability of proceeds from qualified mortgages to pay the
expenses. To the extent that a reserve exceeds a reasonably required amount, the amount
of the reserve must be promptly and appropriately reduced. If at any time, however, the
amount of the reserve fund is less than is reasonably required, the amount of the reserve
fund may be increased by the addition of payments received on qualified mortgages or by
contributions from holders of residual interests.

(B) Presumption that a reserve is reasonably required. The amount of a reserve fund is
presumed to be reasonable (and an excessive reserve is presumed to have been promptly
and appropriately reduced) if it does not exceed—

(1) The amount required by a nationally recognized independent rating agency as a


condition of providing the rating for REMIC interests desired by the sponsor; or

(2) The amount required by a third party insurer or guarantor, who does not own directly
or indirectly (within the meaning of section 267(c)) an interest in the REMIC (as defined
in §1.860D–1(b)(1)), as a condition of providing credit enhancement.

(C) Presumption may be rebutted. The presumption in paragraph (g)(3)(ii)(B) of this


section may be rebutted if the amounts required by the rating agency or by the third party
insurer are not commercially reasonable considering the factors described in paragraph
(g)(3)(ii)(A) of this section.

(h) Outside reserve funds. A reserve fund that is maintained to pay expenses of the
REMIC, or to make payments to REMIC interest holders is an outside reserve fund and
not an asset of the REMIC only if the REMIC's organizational documents clearly and
expressly—

(1) Provide that the reserve fund is an outside reserve fund and not an asset of the
REMIC;

(2) Identify the owner(s) of the reserve fund, either by name, or by description of the
class (e.g., subordinated regular interest holders) whose membership comprises the
owners of the fund; and

(3) Provide that, for all Federal tax purposes, amounts transferred by the REMIC to the
fund are treated as amounts distributed by the REMIC to the designated owner(s) or
transferees of the designated owner(s).

(i) Contractual rights coupled with regular interests in tiered arrangements—(1) In


general. If a REMIC issues a regular interest to a trustee of an investment trust for the
benefit of the trust certificate holders and the trustee also holds for the benefit of those
certificate holders certain other contractual rights, those other rights are not treated as
assets of the REMIC even if the investment trust and the REMIC were created
contemporaneously pursuant to a single set of organizational documents. The
organizational documents must, however, require that the trustee account for the
contractual rights as property that the trustee holds separate and apart from the regular
interest.

(2) Example. The following example, which describes a tiered arrangement involving a
pass-thru trust that is intended to qualify as a REMIC and a pass-thru trust that is
intended to be classified as a trust under §301.7701–4(c) of this chapter, illustrates the
provisions of paragraph (i)(1) of this section.

Example. (i) A sponsor transferred a pool of mortgages to a trustee in exchange for two classes of
certificates. The pool of mortgages has an aggregate principal balance of $100x. Each mortgage in the pool
provides for interest payments based on the eleventh district cost of funds index (hereinafter COFI) plus a
margin. The trust (hereinafter REMIC trust) issued a Class N bond, which the sponsor designates as a
regular interest, that has a principal amount of $100x and that provides for interest payments at a rate equal
to One-Year LIBOR plus 100 basis points, subject to a cap equal to the weighted average pool rate. The
Class R interest, which the sponsor designated as the residual interest, entitles its holder to all funds left in
the trust after the Class N bond has been retired. The Class R interest holder is not entitled to current
distributions.<p> (ii) On the same day, and under the same set of documents, the sponsor also created an
investment trust. The sponsor contributed to the investment trust the Class N bond together with an interest
rate cap contract. Under the interest rate cap contract, the issuer of the cap contract agrees to pay to the
trustee for the benefit of the investment trust certificate holders the excess of One-Year LIBOR plus 100
basis points over the weighted average pool rate (COFI plus a margin) times the outstanding principal
balance of the Class N bond in the event One-Year LIBOR plus 100 basis points ever exceeds the weighted
average pool rate. The trustee (the same institution that serves as REMIC trust trustee), in exchange for the
contributed assets, gave the sponsor certificates representing undivided beneficial ownership interests in the
Class N bond and the interest rate cap contract. The organizational documents require the trustee to account
for the regular interest and the cap contract as discrete property rights.</p> <p> (iii) The separate existence
of the REMIC trust and the investment trust are respected for all Federal income tax purposes. Thus, the
interest rate cap contract is an asset beneficially owned by the several certificate holders and is not an asset
of the REMIC trust. Consequently, each certificate holder must allocate its purchase price for the certificate
between its undivided interest in the Class N bond and its undivided interest in the interest rate cap contract
in accordance with the relative fair market values of those two property rights.</p> <p> (j) Clean-up call—
(1) In general. For purposes of section 860F(a)(5)(B), a clean-up call is the redemption of a class of regular
interests when, by reason of prior payments with respect to those interests, the administrative costs
associated with servicing that class outweigh the benefits of maintaining the class. Factors to consider in
making this determination include—</p> <p> (i) The number of holders of that class of regular
interests;</p> <p> (ii) The frequency of payments to holders of that class;</p> <p> (iii) The effect the
redemption will have on the yield of that class of regular interests;</p> <p> (iv) The outstanding principal
balance of that class; and</p> <p> (v) The percentage of the original principal balance of that class still
outstanding.</p> <p> (2) Interest rate changes. The redemption of a class of regular interests undertaken to
profit from a change in interest rates is not a clean-up call.</p> <p> (3) Safe harbor. Although the
outstanding principal balance is only one factor to consider, the redemption of a class of regular interests
with an outstanding principal balance of no more than 10 percent of its original principal balance is always
a clean-up call.</p> <p> (k) Startup day. The term “startup day” means the day on which the REMIC
issues all of its regular and residual interests. A sponsor may, however, contribute property to a REMIC in
exchange for regular and residual interests over any period of 10 consecutive days and the REMIC may
designate any one of those 10 days as its startup day. The day so designated is then the startup day, and all
interests are treated as issued on that day.</p> <p>[T.D. 8458, 57 FR 61309, Dec. 24, 1992; 58 FR 8098,
Feb. 11, 1993]</p>
http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._860G._Other_defini
tions_and_special_rules

TITLE 26 - INTERNAL REVENUE CODE


Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter M - Regulated Investment Companies and Real Estate
Investment Trusts
PART IV - REAL ESTATE MORTGAGE INVESTMENT CONDUITS

Statute
Sec. 860G. Other definitions and special rules

(a) Definitions
For purposes of this part -
(1) Regular interest
The term ''regular interest'' means any interest in a REMIC
which is issued on the startup day with fixed terms and which is
designated as a regular interest if -
(A) such interest unconditionally entitles the holder to
receive a specified principal amount (or other similar amount),
and
(B) interest payments (or other similar amount), if any, with
respect to such interest at or before maturity -
(i) are payable based on a fixed rate (or to the extent
provided in regulations, at a variable rate), or
(ii) consist of a specified portion of the interest
payments on qualified mortgages and such portion does not
vary during the period such interest is outstanding.
The interest shall not fail to meet the requirements of
subparagraph (A) merely because the timing (but not the amount)
of the principal payments (or other similar amounts) may be
contingent on the extent of prepayments on qualified mortgages
and the amount of income from permitted investments.
An interest shall not fail to qualify as a regular interest
solely because the specified principal amount of the regular
interest (or the amount of interest accrued on the regular
interest) can be reduced as a result of the nonoccurrence
of 1 or more contingent payments with respect to any reverse
mortgage loan held by the REMIC if, on the startup day for
the REMIC, the sponsor reasonably believes that all principal
and interest due under the regular interest will be paid at
or prior to the liquidation of the REMIC.
(2) Residual interest
The term ''residual interest'' means an interest in a REMIC
which is issued on the startup day, which is not a regular
interest, and which is designated as a residual interest.
(3) Qualified mortgage
The term ''qualified mortgage'' means -
(A) any obligation (including any participation or
certificate of beneficial ownership therein) which is
principally secured by an interest in real property and which -
(i) is transferred to the REMIC on the startup day in
exchange for regular or residual interests in the REMIC,
(ii) is purchased by the REMIC within the 3-month period
beginning on the startup day if, except as provided in
regulations, such purchase is pursuant to a fixed-price
contract in effect on the startup day,or
(iii) represents an increase in the
principal amount under the original terms of an
obligation described in clause (i) or (ii) if such
increase--
(I) is attributable to an advance
made to the obligor pursuant to the
original terms of the obligation,
(II) occurs after the startup day,
and
(III) is purchased by the REMIC
pursuant to a fixed price contract in
effect on the startup day.
(B) any qualified replacement mortgage, and
(C) any regular interest in another REMIC transferred to the
REMIC on the startup day in exchange for regular or residual
interests in the REMIC. For
purposes of subparagraph (A), if more than 50 percent of the
obligations transferred to, or purchased by, the REMIC are
originated by the United States or any State (or any political
subdivision, agency, or instrumentality of the United States or
any State) and are principally secured by an interest in real
property, then each obligation transferred to, or purchased by,
the REMIC shall be treated as secured by an interest in real
property.

(4) Qualified replacement mortgage


The term ''qualified replacement mortgage'' means any
obligation -
(A) which would be a qualified mortgage if transferred on the
startup day in exchange for regular or residual interests in
the REMIC, and
(B) which is received for -
(i) another obligation within the 3-month period beginning
on the startup day, or
(ii) a defective obligation within the 2-year period
beginning on the startup day.
(5) Permitted investments
The term ''permitted investments'' means any -
(A) cash flow investment,
(B) qualified reserve asset, or
(C) foreclosure property.
(6) Cash flow investment
The term ''cash flow investment'' means any investment of
amounts received under qualified mortgages for a temporary period
before distribution to holders of interests in the REMIC.
(7) Qualified reserve asset
(A) In general
The term ''qualified reserve asset'' means any intangible
property which is held for investment and as part of a
qualified reserve fund.
(B) Qualified reserve fund.--For purposes of
subparagraph (A), the term `qualified reserve fund'
means any reasonably required reserve to--
(i) provide for full payment of expenses of
the REMIC or amounts due on regular interests in
the event of defaults on qualified mortgages or
lower than expected returns on cash flow
investments, or
(ii) provide a source of funds for the
purchase of obligations described in clause (ii)
or (iii) of paragraph (3)(A).
The aggregate fair market value of the assets held in
any such reserve shall not exceed 50 percent of the
aggregate fair market value of all of the assets of the
REMIC on the startup day, and the amount of any such
reserve shall be promptly and appropriately reduced to
the extent the amount held in such reserve is no longer
reasonably required for purposes specified in clause (i)
or (ii) of this subparagraph.
(C) Special rule
A reserve shall not be treated as a qualified reserve for any
taxable year (and all subsequent taxable years) if more than 30
percent of the gross income from the assets in such fund for
the taxable year is derived from the sale or other disposition
of property held for less than 3 months. For purposes of the
preceding sentence, gain on the disposition of a qualified
reserve asset shall not be taken into account if the
disposition giving rise to such gain is required to prevent
default on a regular interest where the threatened default
resulted from a default on 1 or more qualified mortgages.
(8) Foreclosure property
The term ''foreclosure property'' means property -
(A) which would be foreclosure property under section 856(e)
(without regard to paragraph (5) thereof) if acquired by a real
estate investment trust, and
(B) which is acquired in connection with the default or
imminent default of a qualified mortgage held by the REMIC.
Solely for purposes of section 860D(a), the determination of
whether any property is foreclosure property shall be made
without regard to section 856(e)(4).
(9) Startup day
The term ''startup day'' means the day on which the REMIC
issues all of its regular and residual interests. To the extent
provided in regulations, all interests issued (and all transfers
to the REMIC) during any period (not exceeding 10 days) permitted
in such regulations shall be treated as occurring on the day
during such period selected by the REMIC for purposes of this
paragraph.
(10) Issue price
The issue price of any regular or residual interest in a REMIC
shall be determined under section 1273(b) in the same manner as
if such interest were a debt instrument; except that if the
interest is issued for property, paragraph (3) of section 1273(b)
shall apply whether or not the requirements of such paragraph are
met.
(b) Treatment of nonresident aliens and foreign corporations
If the holder of a residual interest in a REMIC is a nonresident
alien individual or a foreign corporation, for purposes of sections
871(a), 881, 1441, and 1442 -
(1) amounts includible in the gross income of such holder under
this part shall be taken into account when paid or distributed
(or when the interest is disposed of), and
(2) no exemption from the taxes imposed by such sections (and
no reduction in the rates of such taxes) shall apply to any
excess inclusion.
The Secretary may by regulations provide that such amounts shall be
taken into account earlier than as provided in paragraph (1) where
necessary or appropriate to prevent the avoidance of tax imposed by
this chapter.
(c) Tax on income from foreclosure property
(1) In general
A tax is hereby imposed for each taxable year on the net income
from foreclosure property of each REMIC. Such tax shall be
computed by multiplying the net income from foreclosure property
by the highest rate of tax specified in section 11(b).
(2) Net income from foreclosure property
For purposes of this part, the term ''net income from
foreclosure property'' means the amount which would be the
REMIC's net income from foreclosure property under section
857(b)(4)(B) if the REMIC were a real estate investment trust.
(d) Tax on contributions after startup date
(1) In general
Except as provided in paragraph (2), if any amount is
contributed to a REMIC after the startup day, there is hereby
imposed a tax for the taxable year of the REMIC in which the
contribution is received equal to 100 percent of the amount of
such contribution.
(2) Exceptions
Paragraph (1) shall not apply to any contribution which is made
in cash and is described in any of the following subparagraphs:
(A) Any contribution to facilitate a clean-up call (as
defined in regulations) or a qualified liquidation.
(B) Any payment in the nature of a guarantee.
(C) Any contribution during the 3-month period beginning on
the startup day.
(D) Any contribution to a qualified reserve fund by any
holder of a residual interest in the REMIC.
(E) Any other contribution permitted in regulations.
(e) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of this part,
including regulations -
(1) to prevent unreasonable accumulations of assets in a REMIC,
(2) permitting determinations of the fair market value of
property transferred to a REMIC and issue price of interests in a
REMIC to be made earlier than otherwise provided,
(3) requiring reporting to holders of residual interests of
such information as frequently as is necessary or appropriate to
permit such holders to compute their taxable income accurately,
(4) providing appropriate rules for treatment of transfers of
qualified replacement mortgages to the REMIC where the transferor
holds any interest in the REMIC, and
(5) providing that a mortgage will be treated as a qualified
replacement mortgage only if it is part of a bona fide
replacement (and not part of a swap of mortgages).
Sources
(Added Pub. L. 99-514, title VI, Sec. 671(a), Oct. 22, 1986, 100
Stat. 2315; amended Pub. L. 100-647, title I, Sec.
1006(t)(5)(A)-(E), (6)-(8)(B), (9)(A), (10), Nov. 10, 1988, 102
Stat. 3420-3422; Pub. L. 101-239, title VII, Sec. 7811(c)(9), Dec.
19, 1989, 103 Stat. 2408; Pub. L. 101-508, title XI, Sec.
11704(a)(9), Nov. 5, 1990, 104 Stat. 1388-518; Pub. L. 104-188,
title I, Sec. 1621(b)(6), Aug. 20, 1996, 110 Stat. 1867.)

Miscellaneous
AMENDMENTS

2004 - Subsec.835(b)(5)(A),Pub.L.108-357, amended Sec.860G(a)


(1) by adding at the end the following new sentence:
"An interest shall not fail to
qualify as a regular interest solely because the specified
principal amount of the regular interest (or the amount of
interest accrued on the regular interest) can be reduced as a
result of the nonoccurrence of 1 or more contingent payments
with respect to any reverse mortgage loan held by the REMIC if,
on the startup day for the REMIC, the sponsor reasonably
believes that all principal and interest due under the regular
interest will be paid at or prior to the liquidation of the
REMIC".
2004 - Subsec.835(b)(5)(B),Pub.L.108-357, amended Sec.860G(a)
(3) by inserting ", and any reverse mortgage loan (and
each balance increase on such loan meeting the requirements
of subparagraph (A)(iii)) shall be treated as an obligation
secured by an interest in real property"
before the period at the end.
2004 - Subsec.835(b)(6),Pub.L.108-357, amended Sec.860G(a)(3)
by deleting (3)(D).
2004 - Subsec.835(b)(7),Pub.L.108-357, amended Sec.860G(a)(3)
by adding at the end the following new sentence: " For
purposes of subparagraph (A), if more than 50 percent of the
obligations transferred to, or purchased by, the REMIC are
originated by the United States or any State (or any political
subdivision, agency, or instrumentality of the United States or
any State) and are principally secured by an interest in real
property, then each obligation transferred to, or purchased by,
the REMIC shall be treated as secured by an interest in real
property."
2004 - Subsec.835(b)(8)(A),Pub.L.108-357, amended
Sec.860G(a)(3)(A)
by inserting a new clause (iii).
2004 - Subsec.835(b)(8)(B),Pub.L.108-357, amended
Sec.860G(a)(7)(B)
by amending and stating (B).

1996 - Subsec. (a)(3)(D). Pub. L. 104-188 added subpar. (D).


1990 - Subsec. (a)(3)(A). Pub. L. 101-508 struck out comma after
''secured'' in introductory provisions.
1989 - Subsec. (a)(3). Pub. L. 101-239 substituted ''subparagraph
(A)'' for ''this subparagraph'' in last sentence.
1988 - Subsec. (a)(1). Pub. L. 100-647, Sec. 1006(t)(5)(A),
amended par. (1) generally. Prior to amendment, par. (1) read as
follows: ''The term 'regular interest' means an interest in a REMIC
the terms of which are fixed on the startup day, and which -
''(A) unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and
''(B) provides that interest payments (or other similar
amounts), if any, at or before maturity are payable based on a
fixed rate (or to the extent provided in regulations, at a
variable rate).
An interest shall not fail to meet the requirements of subparagraph
(A) merely because the timing (but not the amount) of the principal
payments (or other similar amounts) may be contingent on the extent
of prepayments on qualified mortgages and the amount of income from
permitted investments.''
Subsec. (a)(2). Pub. L. 100-647, Sec. 1006(t)(5)(B), amended par.
(2) generally. Prior to amendment, par. (2) read as follows: ''The
term 'residual interest' means an interest in a REMIC which is not
a regular interest and is designated as a residual interest.''
Subsec. (a)(3). Pub. L. 100-647, Sec. 1006(t)(6)(B), inserted at
end ''For purposes of this subparagraph, any obligation secured by
stock held by a person as a tenant-stockholder (as defined in
section 216) in a cooperative housing corporation (as so defined)
shall be treated as secured by an interest in real property.''
Subsec. (a)(3)(A). Pub. L. 100-647, Sec. 1006(t)(6)(A), struck
out ''directly or indirectly,''.
Subsec. (a)(3)(A)(i). Pub. L. 100-647, Sec. 1006(t)(5)(C)(i),
substituted ''on the startup day in exchange for regular or
residual interests in the REMIC'' for ''on or before the startup
day''.
Subsec. (a)(3)(A)(ii). Pub. L. 100-647, Sec. 1006(t)(5)(C)(ii),
inserted before comma at end ''if, except as provided in
regulations, such purchase is pursuant to a fixed-price contract in
effect on the startup day''.
Subsec. (a)(3)(C). Pub. L. 100-647, Sec. 1006(t)(5)(C)(iii),
substituted ''on the startup day in exchange for regular or
residual interests in the REMIC'' for ''on or before the startup
day''.
Subsec. (a)(4)(A). Pub. L. 100-647, Sec. 1006(t)(5)(D), amended
subpar. (A) generally. Prior to amendment, subpar. (A) read as
follows: ''which would be described in paragraph (3)(A) if it were
transferred to the REMIC on or before the startup day, and''.
Subsec. (a)(7)(B). Pub. L. 100-647, Sec. 1006(t)(7), inserted
before period at end of first sentence ''or lower than expected
returns on cash flow investments''.
Subsec. (a)(8). Pub. L. 100-647, Sec. 1006(t)(8)(A), substituted
''section 856(e) (without regard to paragraph (5) thereof)'' for
''section 856(e)'' in subpar. (A) and amended last sentence
generally. Prior to amendment, last sentence read as follows:
''Property shall cease to be foreclosure property with respect to
the REMIC on the date which is 1 year after the date such real
estate mortgage pool acquired such property.''
Subsec. (a)(9). Pub. L. 100-647, Sec. 1006(t)(5)(E), amended par.
(9) generally. Prior to amendment, par. (9) read as follows: ''The
term 'startup day' means any day selected by a REMIC which is on or
before the 1st day on which interests in such REMIC are issued.''
Subsec. (c). Pub. L. 100-647, Sec. 1006(t)(8)(B), added subsec.
(c). Former subsec. (c) redesignated (d).
Subsec. (d). Pub. L. 100-647, Sec. 1006(t)(9)(A), added subsec.
(d). Former subsec. (d) redesignated (e).
Pub. L. 100-647, Sec. 1006(t)(8)(B), redesignated former subsec.
(c) as (d).
Subsec. (e). Pub. L. 100-647, Sec. 1006(t)(9)(A), redesignated
former subsec. (d) as (e).
Subsec. (e)(4), (5). Pub. L. 100-647, Sec. 1006(t)(10), added
pars. (4) and (5).
EFFECTIVE DATE OF 1996 AMENDMENT
Amendment by Pub. L. 104-188 effective Sept. 1, 1997, see section
1621(d) of Pub. L. 104-188, set out as a note under section 26 of
this title.
EFFECTIVE DATE OF 1989 AMENDMENT
Amendment by Pub. L. 101-239 effective, except as otherwise
provided, as if included in the provision of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such
amendment relates, see section 7817 of Pub. L. 101-239, set out as
a note under section 1 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Section 1006(t)(5)(F) of Pub. L. 100-647 provided that: ''The
amendments made by this paragraph (amending this section) shall not
apply to any REMIC where the startup day (as defined in section
860G(a)(9) of the 1986 Code as in effect on the day before the date
of the enactment of this Act (Nov. 10, 1988)) is before July 1,
1987.''
Section 1006(t)(9)(B) of Pub. L. 100-647 provided that: ''The
amendment made by subparagraph (A) (amending this section) shall
not apply to any REMIC where the startup day (as defined in section
860G(a)(9) of the 1986 Code as in effect on the day before the date
of the enactment of this Act (Nov. 10, 1988)) is before July 1,
1987.''
Amendment by section 1006(t)(6)-(8)(B), (10) of Pub. L. 100-647
effective, except as otherwise provided, as if included in the
provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which
such amendment relates, see section 1019(a) of Pub. L. 100-647, set
out as a note under section 1 of this title.

References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 860C, 860L, 1259 of this
title.