Relief for Securitization Vehicles: Mortgage Modification under Foreclosure Prevention Programs
In a recently-issued Revenue Procedure (Rev. Proc. 2008-28), the IRS states that the modification of certain mortgage loans under foreclosure prevention programs involving, for example, interest rate reductions, principal forgiveness, extensions of maturity and alterations in the timing of changes in an interest rate generally will not cause the IRS either to challenge the tax status of certain securitization vehicles that hold the loans or to assert that those modifications create a liability for tax on a prohibited transaction. This relief is granted to real estate mortgage investment conduits (REMICs) and investment trusts where the mortgage loan meets all of the following conditions:
(1) The real property securing the mortgage loan is a residence that contains fewer than 5 dwelling units.
(2) The real property securing the mortgage loan is owner-occupied.
(3) If a REMIC holds the mortgage loan, then as of either the startup day or the end of the 3-month period beginning on the startup day, no more than 10% of the stated principal of the total assets of the REMIC was represented by loans the payments on which were then overdue by 30 days or more; and if an investment trust holds the mortgage loan, then as of all dates when assets were contributed to the trust, no more than 10% of the stated principal of all the debt instruments then held by the trust was represented by instruments the payments on which were then overdue by 30 days or more.
(4) The holder or servicer reasonably believes that there is a significant risk of foreclosure of the original loan based on guidelines developed as part of a foreclosure prevention program similar to that described in the Revenue Procedure or may be based on any other credible systematic determination.
(5) The terms of the modified loan are less favorable to the holder than were the unmodified terms of the original mortgage loan.
(6) The holder or servicer reasonably believes that the modified loan presents a substantially reduced risk of foreclosure, as compared with the original loan.
The Revenue Procedure applies generally to loan modifications that are effected on or before December 31, 2010.
For more information please contact D. Matthew Richardson. D. Matthew Richardson is a partner in the Los Angeles office, a member of the Tax and Estate Planning Practice Group.
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