SPE / QSPE
Special Purpose Entity (SPE) and Qualified Special Purpose Entity (QSPE) are corporate entities created for the purpose of securitization of mortgages and other financial debt instruments. The securitizations are created in a two step process. After Washington Mutual Bank (WMB) accumulated a significant volume of originated mortgages, they sold these bundled mortgages to a wholly- owned bankruptcy remote SPE, WMI Mortgage Inc., out of Vernon Hills, IL. WMI Mortgage would then transfer ownership of the mortgages to a securitization vehicle, typically a QSPE trust. The QSPE trusts would often have different levels of risk, called tranches, which they would market to institutional investors. WMI would retain the bottom highest risk tranche and would often invest in senior tranches along with other investors. The money received from the QSPE investors would then be paid back to WMB for the mortgages sold and the whole cycle would begin all over.
FASB Statement 140 and its Amendments described the qualifications for these remote securitizations.
“The transferred financial assets have been isolated from the transferor --- put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. Transferred financial assets are isolated in bankruptcy or other receivership only if the available evidence provides reasonable assurance that the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any consolidated affiliate (WMB) of the transferor that is not a special-purpose corporation or other entity designed to make remote the possibility that it would enter bankruptcy or other receivership (bankruptcy-remote entity).”
In 2005 Lawarence R Gee, Deputy Controller Washington Mutual wrote to the FASB commenting on an FASB 140 Amendment. Mr. Gee stated “In the event of its (WMB) insolvency, the FDIC would be appointed as receiver…. The FDIC would not reclaim, recover, or recharacterize as property of WMB the transferred assets that have been transferred by WMB to the transferee in connection with the specified securitization transaction pursuant to the FDIA, Federal Deposit Insurance Act.”
None of these QSPE trust assets are reflected anywhere in the bankruptcy Disclosure Statement for WMI or the receivership of WMB. The word QSPE or SPE is nowhere to be found. The designation of Bankruptcy Remote meant that the transferors (WMI, WMB, WMB/fsb etc) no longer owned the assets but the stockholders of WMI retained an interest in them, no longer as stockholders because of the bankruptcy, but as escrow holders.
Even more noteworthy, the “escrows” that we received as Preferred, Common, and REIT Preferred holders of WMI are nowhere identified in the WMI Disclosure Statement. While the word escrow is frequently used, it is not used in the context of the escrows we received, but rather in reference to the Disputed Equity Escrow, Tax Escrow, DIMEQ Escrow, Escrow Partners LP ( the FDIC ) etc.
The reason the HJMW prevented Joshua Hockberg from investigating and reporting on the QSPE mortgages was because of their status as bankruptcy remote. They were simply not part of the WMI bankruptcy. At that same court hearing, Rosen referred to them as the “retained assets” and there status was simply, that they were retained.
We can make several conjectures based on this information.
1) The WMILT will not handle any assets related to QSPEs because they are Bankruptcy Remote.
2) What the WMILT has disclosed is what we will get through LTIs, at best somewhere around $88 million.
3) Distributions from QSPEs to escrows will be made outside of bankruptcy, most likely from DTC directly to escrow holders.
4) The QSPE pool of trusts is quite large, having now been in existence for over 30 years. Of course as loans were refinanced, mortgages paid off, and homes sold, these pools would decline over time. WMI’s interest in these pools would be a fraction of the total value of the pools.
5) The function of WMIIC may have been to monitor the income flows from the QSPE assets. The QSPE assets would not be reflected on WMIIC’s balance sheet or WMI’s balance sheet because the QSPE’s were bankruptcy remote.
6) These assets will not come back to WMIH in an unliquidated form because they will remain in the QSPE trusts and only the cash distributions from the trusts are distributed to investors.
7) WMIH may regain servicing rights to the QSPE trusts, but not ownership of the actual trust assets.
8) There may be other assets outside of the QSPE trusts. The creditor stance that WMI holds against the FDIC may point to other assets.
9) The QSPE assets are not reflected on the WMB bankruptcy statements from the FDIC because the QSPEs are bankruptcy remote and WMB has no ownership interest in the assets. They bundled them and sold them to the SPE.
10) The Deutsche Bank trusts are QSPEs.
