Court rules certain Ocwen-serviced RMBS mortgages are plan assets

The pension fund’s investments came in two flavors. Three of the trusts were structured as Delaware statutory trusts that issued notes under indenture agreements. The other three were New York law trusts classified as real estate mortgage investment conduits – REMICs – for tax purposes, and they issued regular-interest certificates. That structural difference turned out to matter a great deal. 

The lower court had sided with Ocwen and Wells Fargo across the board, finding that none of the mortgages inside the trusts counted as pension plan assets. The Second Circuit saw it differently – at least in part. 

For the indenture notes, the appeals court agreed with the lower court. Those notes looked like plain debt. They carried fixed interest rates, had maturity dates, and gave holders scheduled payments of principal and interest. Noteholders had no ownership stake in the trusts or the mortgage pools backing them. The trusts had issued separate certificates for that purpose, and those certificates sat below the notes in the payment hierarchy. The court acknowledged that the trusts were thinly capitalized and that repayment depended on how the mortgage pool performed, but it said those features amounted to ordinary credit risk – the kind every lender takes on. That is not enough to turn debt into equity under the federal retirement law framework. 

The REMIC certificates told a different story. The court looked at the trust agreements and found that they were set up to benefit the certificateholders. The mortgage pools had been conveyed to a trustee to create a trust for the benefit of those holders. Collection accounts were maintained for their benefit. Under New York trust law, anyone with a right to receive a benefit from a trust holds a beneficial interest in it — and under the Department of Labor’s regulations, a beneficial interest in a trust is an equity interest. Once it is equity, the look-through rule kicks in, and the mortgages inside the trust become pension plan assets. 

That distinction between the two structures is the crux of the decision. Notes issued under indenture agreements did not trigger look-through treatment. Certificates issued by REMIC trusts did.