By Karen Hughes

Recently, the U.S. Department of Treasury issued several forms of guidance pertaining to the modification of mortgage loans held by a real estate mortgage investment conduit ("REMIC"). Treasury offers substantial and retroactive relief to the commercial real estate business. This relief enables a greater dialogue between the borrower and the REMIC lender to maximize the ability to modify the borrower's loans.

Rev. Proc. 2009-45

In an effort to address the current limited availability of financing and refinancing for commercial real estate, Revenue Procedure 2009-45 provides guidance for modifications of certain commercial mortgage loans so as not to trigger an IRS challenge to the REMIC’s tax status.  The law governing modifications of loans prior to the issuance of the Revenue Procedure required that a loan could be modified – without adversely affecting the REMIC’s tax status – only if a change in the terms of the obligation was "occasioned by default or a reasonably foreseeable default."

The new guidance provides that a modification may be made to a loan if, based on all facts and circumstances (and after meeting the threshold for a qualified loan) the holder or servicer reasonably believes that:

(1) there is a "significant risk of default" of the loan upon maturity or at an earlier date; and

(2) the loan, as modified, presents a "substantially reduced risk of default."

In determining the significance of the risk of a default, one relevant factor under the Revenue Procedure is how far in the future the possible default may be; there is no maximum period, though, after which default is per se not foreseeable.  Additionally, while past performance is another relevant factor for assessing default risk, in appropriate circumstances, a holder or servicer may reasonably believe that there is a significant risk of default even if the loan is currently performing.  The relaxed modification standard presented in Revenue Procedure 2009-45 applies to loan modifications effected on or after January 1, 2008.

Final REMIC Regulations

Treasury provided additional recent guidance by issuing final regulations that expand the list of loan changes that are not considered "significant modifications" of an obligation held by a REMIC.  A noteworthy addition to such list is a modification that releases, substitutes, adds or otherwise alters a substantial amount of the collateral so long as the obligation continues to be principally secured by an interest in real property.

For more information on these regulations, please contact any of the following:

Brian Dethrow at 214.953.5794 or bdethrow@jw.com
Susan Halsey at 817.334.7203 or shalsey@jw.com
Karen Hughes at 214.953.5789 or khughes@jw.com