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Recent REMIC Case in Washington

October 17, 2014

This is a Sept 25, 2014, Washington State supreme court ruling on REMIC taxes not exempt because Cashmere did not receive any interest in mortgages or deeds of trust to back its investment.

Cashmere v. Dept of Revenue (PDF)

Michael Gamsky testified that REMIC investments are not secured transactions because issuers do not pledge any property as security for the investments. He explained that investors who purchase REMIC certificates are beneficiaries of a trust and they have contractual rights under the pooling and servicing agreement, but they are not secured investors.

After reviewing the evidence, the superior court granted summary judgment to DOR. The Court of Appeals affirmed, holding that Cashmere's investments were not primarily secured by first mortgages or deeds of trust because Cashmere had no power to institute foreclosure proceedings. Cashmere Valley Bank, 175 Wn. App. at 418. Thus, the bank's investments were not secured and the deduction did not apply. /d. at 418-19. Cashmere petitioned for review, and the Washington Bankers Association filed an amicus curiae memorandum in support of review. We granted review. 179 Wn.2d 1008, 316 P.3d 494 (2014).

Cashmere Valley Bank v. State Department Of Revenue

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7 REMICs and CMOs are investment instruments of pooled mortgage loans that have been broken down into the individual principal payments and interest payments associated with each mortgage. The issuer repackages the principal and interest payments according to their payout and risk characteristics into “tranches” or slices of the mortgage pool. A bank invests in REMICs and CMOs by purchasing bonds that correspond to the different classes that the various tranches represent and that have stated payment terms.

8 If a payment default occurs on a bond, the bank's recourse is against the issuer and, to some extent, the class collateral or tranche for the bond. But the bank has no recourse against the original mortgages or trust deeds underlying the tranches—the bank cannot, for example, foreclose any of those mortgages. The bank's investments are not secured by these mortgages or trust deeds. Accordingly, Cashmere's investments in REMICs and CMOs are not primarily secured by first mortgages or deeds of trust, and Cashmere cannot take the deduction for interest income received from these investments.

32 We accept that homeowners' payments on their mortgages and trust deeds are the source of the REMIC and CMO trustees' payments to Cashmere for the bonds it has purchased. And we acknowledge that in an overall economic sense the homeowners' payments may be considered the primary underlying security for the return Cashmere receives on its investments. But our analysis and review are legal, not economic. From this legal position, Cashmere's investments—and Cashmere itself—are not secured at all, much less primarily secured, by the mortgages and trust deeds underlying those investments because Cashmere has no recourse against those mortgages and trust deeds. Cashmere has no right to proceed directly against homeowners who fail to make payments under the mortgages or trust deeds. And Cashmere does not have a right to require the respective trustees of its investments to proceed against homeowners to satisfy the trustees' financial obligations to Cashmere.

33 Cashmere has rights against the trustees that issued bonds to Cashmere, but these rights do not extend to actions on the underlying mortgages or trust deeds. In the event of a trustee's default (perhaps because of homeowners' defaults under their mortgages or trust deeds), Cashmere may be able to replace the trustee, but the successor trustee still takes legal title to the underlying mortgages and trust deeds. And, as the Department observed in a 1990 ruling, Cashmere may have the right to require a trustee to sell tranches or classes to satisfy its obligation to Cashmere, but Cashmere does not have the right to require the sale of the underlying mortgages or trust deeds:

This link (PDF) is to one of the briefs in Cashmere v Washington Department of Revenue.

 

Back to October 2014 Archive

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