Reuters presents as interesting analysis of some of the potential fall out that may occur to bondholders and players in the securitization frenzy of the preceeding decade in an article by two New York Law Professors (see: Walls Street Rules Applied to REMIC Classification). Professors Bradley Bordon and David Reiss describe in detail the potential fall out on Wall Street should regulators from the IRS to the SEC actually enforce the laws that they are charged with enforcing.

A lot of their focus is on the requirement that assets be placed in REMIC Bond Trusts within 90 days of Start up. In cases we have litigated and in cases across the country there has been clear evidence that assets were not transferred pursuant to REMIC rules. The authors point to “draconian penalties” for violations of this basic REMIC requirement.

The Pooling and Servicing Agreements that are the rules governing the operation of these trusts require that assets be transferred within the 90 day IRS window. Time after time, after discovery is completed we have been able to prove that they have not be moved into the trust, therefore the trust lacks the ability to hold the asset transferred

Should the IRS begin enforcing these rules, the implications for theses trusts attempting to foreclose on mortgages in Ohio and throughout the Country are serious. Under Wells Fargo v. Jordan and other cases, Ohio courts require, under Article IV of the Ohio Constitution that there be a justiciable controversy before a Common Pleas Court can hear a case. If the Bond Trust filing suit cannot hold the asset under its own governing document, then there literally exists no dispute between the Bond Trust and the homeowner on whom they seek to foreclose, in the words of the constitution, no justiciable matter exists.

The Federal Government and the IRS need to understand that they have not just the option but the obligation to challenge Wall Street’s bold disregard for Federal Tax Law by ignoring the REMIC requirements and seeking tax treatment as if they complied. An effort by Federal enforcers would bolster our efforts to help Ohio Judges understand that even a note that is properly transferred under the UCC simply cannot be held by entity with no legal right to hold it.

Marc Dann Law