This memorandum discusses certain tax considerations in connection with forbearances, waivers and other modifications with respect to a mortgage loan that is held by a REMIC or about to be contributed to a REMIC, in light of the fact that certain borrowers may be unable to make current or future payments on their mortgage loans due to the COVID-19 pandemic.
In general, a “real estate mortgage investment conduit” or “REMIC” is not required to pay tax on its income. Under the REMIC rules, in order for a securitization vehicle to qualify as a REMIC, among other requirements, its assets must consist of “qualified mortgages” and “permitted investments” (which include certain cash flow investments, qualified reserve assets and foreclosure property) (collectively, “qualifying assets”), and no more than a de minimis amount of other assets.
Operational Considerations: Because of the adverse tax consequences associated with failing the “improper knowledge” test, a REMIC generally should not acquire a severely delinquent mortgage loan (e.g., more than 30 days delinquent (or possibly more than 59 days delinquent depending on the facts and circumstances)).
However, it may be possible to contribute a severely delinquent mortgage loan to a REMIC if foreclosure is not anticipated by the REMIC sponsor because, for example:
Operational Considerations: If a mortgage loan is significantly modified after origination, a new appraisal may be required prior to inclusion of the modified mortgage loan in a REMIC to confirm that the REMIC LTV Test is met as of the modification date, unless the modification (i) is permitted under a specific REMIC exception (e.g. is occasioned by a default or reasonably foreseeable default), or (ii) satisfies a general safe harbor for modifications of debt instruments. (See Section 4)
FORBEARANCE AND RELATED MODIFICATIONS
Operational Considerations: In order to avoid the adverse tax consequences described above, a REMIC should not modify a mortgage loan it owns unless the modification (i) is permitted under a specific REMIC exception (e.g. is occasioned by a default or reasonably foreseeable default), (ii) satisfies a general safe harbor for modifications of debt instruments, or (iii) occurs within 3 months (or possibly 2 years if the REMIC qualified replacement mortgage rules are satisfied) of the REMIC’s startup day and the REMIC LTV Test is satisfied. (See Section 4)
FORBEARANCE AND RELATED MODIFICATIONS
Examples of modifications that are permitted under special REMIC rules, i.e. constitute a “specific REMIC exception,” include:
Examples of modifications that meet a safe harbor for modifications of debt instruments available under general tax law include:
IRS Safe Harbor for Commercial Mortgage Loans (Rev. Proc. 2009-45): Rev. Proc. 2009-45 provides that, in the case of a modification of a commercial mortgage loan, if the safe harbor requirements described below are satisfied, the IRS generally will not challenge a REMIC’s qualification as such on the grounds that a modification of a mortgage loan is not one of the types of modifications permitted under the REMIC rules or otherwise gives rise to a reissuance of the mortgage loan. The safe harbor applies to modifications of a commercial mortgage loan (a “pre-modification loan”) that is held by a REMIC, if all the following conditions are satisfied:
Background: The IRS recently issued Rev. Proc. 2020-26, which provides certain:
SCOPE and APPLICATION of Rev. Proc. 2020-26.Rev. Proc. 2020-26 applies to the following transactions:
 “New REMIC” refers to a REMIC that is to be set up upon the occurrence of a future securitization closing date.
 “Existing REMIC” refers to a REMIC already in existence.
 There is no maximum period of time after which default could not be reasonably foreseeable; in addition, default could be reasonably foreseeable even it a mortgage loan is performing.
 “Principally secured” for purposes of these 2 REMIC exceptions can can also be satisfied if the LTV ratio does not increase immediately after the modification.