Crunched Credit’s own Rick Jones spoke with the Mortgage Bankers Association about both the threats and opportunities facing the CMBS market as the global pandemic rages on. Covering everything from the Biden Administration, and what it means for regulation in the banking industry, to the “hot mess” that is the LIBOR transition, the
Regulations
Playing with Broken Toys in Coronavirus Land
I’ve been offline for a bit. An amalgam of writer’s block caused by the enormity of the Coronavirus mess – what can be said that’s useful – and the consequence of being wildly busy as everyone across financial markets tries to pivot to the new reality. Unburdened by any knowledge of science, medicine or epidemiology, I have been marinating in the output of such intellectually distinguished journals as The Sun, The Daily Beast, The Onion, The Mirror, The New York Post and Drudge on the daily ups and downs of our plague, its cost in blood and treasure and the disruption it has caused across all aspects of our life. Consequently, I have opinions but I’ve concluded they’re pretty damn worthless. We’re in uncharted waters, akin to those bits on a medieval map where the cartographers had no clue and wrote: “Here be Dragons.”
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Ratings Agencies in the Crosshairs
Back in the febrile, hyperventilated times that birthed the Dodd-Frank Wall Street Reform and Consumer Protection Act (blessedly known simply as Dodd-Frank), one of the issues that energized the activists’ intent on “fixing” what was wrong was the notion that the ratings agencies were complicit in the overpricing of financial assets. In a “want for a nail, a shoe was lost” sort of way, overpricing of financial assets caused asset bubbles which led to or exacerbated the apocalypse. The culprit? The issuer pay model by which the issuers which retained the ratings agencies to rate their securities paid the ratings agencies’ fees from the proceeds of the related securitization. From a certain perspective, this was having the prisoners hire the guards.
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Proposed Tax Rules on LIBOR Replacements Answer Some (But Not All) Questions
Last week, the U.S. Department of the Treasury released proposed rules providing tax guidance around various LIBOR replacement issues. Long anticipated. The defenestration of LIBOR will leave considerable broken glass in its wake. Perhaps just so the tax professionals wouldn’t feel left out, the end of LIBOR will create a series of tax problems. Very briefly, changing the price index of a loan, and certainly a mortgage loan, might be a significant modification under the so-called 1001 Rules. The result of that? Without a fix from our friends at the IRS, that change may be deemed an exchange of an old financial asset for a new one, creating potential gain or loss, violating the REMIC requirement that pools be static and violating the provisions of the REMIC rules. Obviously, those adverse consequences under the tax code were not intended by anyone and it would seem that we ought to get a simple fix. Changing the index is not a significant modification and therefore none of the other follow-on bad things happen. The end.
While, as we’re sure everyone knows, it’s not that simple and the IRS, instead of saying, “you got it fellas, we’re good,” has given us 50 pages of new regulatory code speak. We suggest that you read our OnPoint and we certainly invite you to read the release, which is subject now to public comment, because it is critically important that we get this right. Here’s a spoiler alert, while the proposed rules basically work, they do create problems and issues which we urge the industry to address to see if we can get this right before the proposed rules go into effect.Continue Reading Proposed Tax Rules on LIBOR Replacements Answer Some (But Not All) Questions