Tax Analysts provides news, analysis, and commentary on tax-related topics, including securitizations. Subscribers to Tax Notes Federal and Tax Notes Today Federal have free access to the leading treatise on securitizations, which is James M. Peaslee and David Z. Nirenberg, Federal Income Taxation of Securitization Transactions and Related Topics (Fifth Edition).

A securitization transaction uses the capital markets to finance consumer loans or other illiquid receivables. The receivables may include residential mortgages, commercial mortgages, commercial loans, car loans, student loans, credit card receivables, power production payments, 12b-1 fees, utility stranded cost recoveries, and mortgage servicing rights (MSRs).

The receivables are transferred by a sponsor to a special purpose entity or special purpose vehicle (SPE or SPV), which issues classes of securities. The securities are referred to broadly as asset-backed securities (ABS), or, where the underlying receivables are mortgages, mortgage-backed securities (MBS), which may be residential (RMBS) or commercial (CMBS).

Typical categories of ABS include passthrough certificates; pay-through bonds, including collateralized loan obligations (CLOs); REMIC regular interests; REMIC residual interests; asset-backed commercial paper (ABCP) issued by structured investment vehicles (SIVs); net interest margin securities (NIMS); tender option bonds (TOBs); catastrophe bonds; and FASIT interests. Securities may be divided into fast-pay classes and slow-pay classes. REMIC regular interests may be re-securitized in re-REMIC structures.

Noneconomic REMIC residual interests (NERDs) produce no cash flows but still generate excess inclusion income, a type of phantom income. The transferee of these interests receives an inducement fee to accept the transfer.

Passthrough certificates issued by a fixed investment trust usually are taxed under the grantor trust rules. The certificates may be stripped coupons or stripped bonds under code section 1286 entitled to different shares of interest and principal, including interest-only interests (IO strips) or principal-only interests (PO strips). Fannie Mae, Freddie Mac, and Ginnie Mae (also FNMA, FHLMC, and GNMA) have programs to issue guaranteed passthrough certificates and REMIC interests. Fannie Mae and Freddie Mac also issue credit risk transfer securities (Connecticut Avenue Securities and Structured Agency Credit Risk Notes (STACR Notes)).

ABS issuers are generally either tax-transparent entities, often trusts, or foreign corporations that operate in a way that avoids U.S. net income and withholding taxes. Issuers may be cells or series within a cell company, series company, or segregated portfolio company. CLO issuers often are subject to trade or business guidelines to minimize the risk of U.S. tax, particularly as a result of loan origination activities.

Code sections 860A through 860G provide special rules for taxing an issuer of MBS that holds qualified mortgages and otherwise is a real estate mortgage investment conduit, or REMIC, and interests in the REMIC (regular interests or residual interests). REMICs themselves are taxable only on prohibited transactions, prohibited contributions, and certain income from foreclosure property.

Two special entity-classification rules that are important for securitizations are: (1) Treasury reg. section 301.7701-4(c), generally known as the Sears regulations, relating to multiple-class trusts, and (2) code section 7701(i), relating to taxable mortgage pools (TMPs).

Tax Analysts consistently and promptly publishes all relevant developments regarding securitization process, including receivables and loans. To stay up to date on all tax-related topics, subscribe to Tax Notes Today Federal.