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Petitioner was established to purchase residential mortgages
and to develop and maintain a secondary market in conventional
mortgages.2 Since the time of its incorporation, petitioner has
facilitated investment by the capital markets in single-family
and multi-family residential mortgages. In the course of its
business, petitioner acquires mortgages from originators.
Petitioner either resells the acquired mortgages in
securitization transactions, principally by pooling the mortgages
and issuing participation certificates (PCs),3 or it holds them
to maturity in its retained mortgage portfolio, generally
financing this activity by the issuance of various debt
instruments. Petitioner is a profit-making business whose net
income (for book purposes) was approximately $208 million in
1985. In 1984, petitioner acquired 550,000 mortgage loans, sold
$20.5 billion in mortgage-related securities, and posted
corporate earnings of $267.4 million.
Petitioner claims that it held a certain intangible asset,
which it identifies as “favorable financing”, on January 1, 1985.
2A “conventional mortgage” is a mortgage that is not
guaranteed or insured by a Federal agency. The “primary mortgage
market” is composed of transactions between mortgage originators
(lenders) and homeowners or builders (borrowers). The “secondary
market” generally consists of sales of mortgages by originators
and purchases and sales of mortgages and mortgage-related
securities by institutional dealers and investors.
3PCs are securities representing beneficial ownership of the
principal and interest payments on a pool of mortgages.
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