Proposed amendments to the regulations governing the modification of commercial mortgage loans held by REMICs were published today. The proposed regulations would expand the types of modifications that can be made to mortgages held by a REMIC without negative tax implications to the REMIC. Specifically, the proposed regulations would permit the release, substitution, addition or other change in the collateral or credit enhancement for, or guarantee on, a mortgage held by a REMIC. A change to the recourse nature of a mortgage held by a REMIC also would be permitted. In either case, the exception applies only if the mortgage continues to be "principally secured" by an interest in real estate property after giving effect to such modification. A mortgage generally would be considered to be principally secured by an interest in real property if the value of the real property that secures the loan equals at least 80 percent of the outstanding principal balance of the loan at the time of the modification. The value of the interest in real property is required to be determined by an appraisal performed by an independent appraiser.
The proposed amendments are intended to address concerns raised by the commercial real estate industry that the existing REMIC regulations do not adequately accommodate current business practices in the commercial mortgage securitization industry and take into account industry comments solicited by the IRS and Treasury Department earlier this year. The IRS declined to expand the regulations to permit certain other modifications requested by commentators, generally on the basis that the modifications are adequately addressed by the current rules. Notably, the IRS declined to add an exception for changes to the date on which defeasance is allowed under a loan and to permit the addition of a defeasance provision if the original terms of the loan do not otherwise provide one. It was determined that such an expansion of the existing defeasance exception "is not warranted given Congress’ intent that REMICs consist of a substantially fixed pool of real estate mortgages and related assets."
The amendments to the regulations are proposed to be effective for modifications to the terms of an obligation taking place on or after the date the regulations are finalized. Comments on the proposed regulations are requested by February 7, 2008.
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This article is for informational purposes and is not intended to constitute legal advice.