In a Revenue Procedure, the IRS has provided safe harbors under which modifications to certain mortgage loans, in connection with a CARES Act forbearance program, are not treated as replacing the unmodified obligation with a newly issued obligation, as giving rise to prohibited transactions, or as manifesting a power to vary for purposes of determining the federal income tax status of real estate mortgage investment conduits (REMICs) that hold the loans. The procedure also provides guidance for REMICs that acquire mortgage loans for which borrowers have participated in forbearance programs arising from the COVID-19 emergency.
Background.
On Mar. 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136). The CARES Act was enacted in response to the President’s national emergency declaration concerning the novel coronavirus pandemic (COVID-19 emergency) on Mar. 13, 2020.
The CARES Act provides, among other things, that during the covered period, borrowers with federally backed mortgage loans and multifamily borrowers with federally backed multifamily mortgage loans experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency may request and obtain forbearance on their loans. (Sections 4022 and 4023 of the CARES Act)
For federally backed multifamily mortgage loans, the “covered period” is the period beginning March 27, 2020 and ending on the earlier of the termination date of the COVID 19 emergency or December 31, 2020. (Section 4023(f)(5) of the CARES Act) There is no corresponding statutory definition of “covered period” for federally backed mortgage loans. (Section 4022 of the CARES Act)
At the request of a borrower with a federally backed mortgage loan, the borrower’s servicer shall provide the forbearance for up to 180 days, which may be extended for an additional period of up to 180 days at the request of the borrower. (Section 4022(b)(2) and (c)(1) of the CARES Act) During the period of forbearance, no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract accrue on the borrower’s account. (Section 4022(b)(3) and (c)(1) of the CARES Act)
A multifamily borrower with a federally backed multifamily mortgage loan that was current on its payments as of Feb. 1, 2020, and that is experiencing a financial hardship during the COVID-19 emergency, may request a forbearance of such loan. Upon such request, a servicer shall
- Document the financial hardship;
- Provide the forbearance for up to 30 days; and
- Subject to satisfying certain conditions, extend the forbearance for up to 2 additional 30-day periods.
(Section 4023(b) and (c)(1) of the CARES Act) A multifamily borrower may discontinue the forbearance at any time. (Section 4023(c)(2) of the CARES Act)
Many federally backed mortgage loans, federally backed multifamily mortgage loans, and non-federally backed mortgage loans are held in securitization vehicles such as investment trusts and real estate mortgage investment conduits (REMICs). (Code Sec. 860A through Code Sec. 860G)
Under Code Sec. 860D(a)(4), an entity qualifies as a REMIC only if, among other things, as of the close of the third month beginning after the startup day and at all times thereafter, substantially all of its assets consist of qualified mortgages and permitted investments.
With limited exceptions, a mortgage loan is not a qualified mortgage unless it is transferred to the REMIC on the startup day in exchange for regular or residual interests in the REMIC. In addition, status as a qualified mortgage depends in part on the collateral securing the obligation on its origination date. (Reg §1.860G-2(a)(1))
Generally, the principal amount of a regular interest in a REMIC may not be contingent (Reg §1.860G-1(a)(5)) Notwithstanding this general rule, Reg §1.860G-1(b)(3) lists certain contingencies affecting the payment of principal and interest, including defaults on qualified mortgages and permitted investments, unanticipated expenses incurred by the REMIC, or lower than expected returns on permitted investments, that do not prevent an interest in a REMIC from being a regular interest.
Except as specifically provided in Reg §1.860G-2(b)(3), if there is a significant modification of an obligation that is held by a REMIC, then the modified obligation is treated as one that was newly issued in exchange for the unmodified obligation that it replaced. (Reg §1.860G-2(b)(1))
A REMIC cannot treat property as foreclosure property if the loan with respect to which the default occurs (or is imminent) was acquired by the REMIC with an intent to evict or foreclose, or when the REMIC knew or had reason to know that default would occur (improper knowledge). (Reg §1.856-6(b)(3))
Reg §301.7701-4(a) provides that an arrangement is treated as a trust if the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries (certificate holders) who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit. Reg §301.7701-4(c) provides that an “investment” trust is not classified as a trust if there is a power under the trust agreement to vary the investment of the certificate holders.
Safe harbor for certain mortgage loans.
In Rev Proc 2020-26, the IRS has provided safe harbors under which modifications to certain mortgage loans, in connection with a CARES Act forbearance program, are not treated as replacing the unmodified obligation with a newly issued obligation, as giving rise to prohibited transactions, or as manifesting a power to vary for purposes of determining the federal income tax status of real estate mortgage investment conduits (REMICs) that hold the loans.
Rev Proc 2020-26 also provides guidance for certain REMICs that acquire mortgage loans for which borrowers have participated in forbearance programs arising from the COVID-19 emergency.
Scope. Rev Proc 2020-26 applies to REMICs or investment trusts providing forbearance of any federally backed mortgage loans or federally backed multifamily loans under sections 4022 or 4023 of the CARES act or other forbearance program for borrowers experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency that are provided between Mar. 27, 2020 and Dec. 31, 2020. (Rev Proc 2020-26, sec. 5.01)
Rev Proc 2020-26 also applies to the direct or indirect acquisition by a REMIC on or after Mar. 27, 2020 of federally backed mortgage loans or federally backed multifamily mortgage loans subject to a forbearance under the CARES Act or other forbearance program (forbearance loan) between Mar. 27, 2020 and Dec. 31, 2020 for borrowers experiencing a financial hardship due to the COVID-19 emergency that is identical or similar to the forbearance program described in section 2.07 of Rev Proc 2020-26. (Rev Proc 2020-26, sec. 5.02)
Application. For mortgage loans held by REMICs, forbearances are not treated as resulting in a newly issued mortgage loan for purposes of Reg §1.860G-2(b)(1); are not prohibited transactions under Code Sec. 860F(a)(2); and do not result in a deemed reissuance of the REMIC regular interests. (Rev Proc 2020-26, sec 6.01)
For mortgage loans held by investment trusts, forbearance does not manifest a power to vary the investment of the certificate holders if the forbearance is described in Rev Proc 2020-26, sec. 5.01 or sec. 2.07, and that relief was requested or agreed to between Mar. 27, 2020 and Dec. 31, 2020, and granted as a result of a borrower experiencing a financial hardship due to the COVID-19 emergency. (Rev Proc 2020-26, sec. 6.02)
If a REMIC acquires a forbearance loan, that forbearance
- Is not treated as evidence that the REMIC had improper knowledge of an anticipated default under Reg §1.865-6(b)(3) and
- Is not taken into account in the determination of the origination date of the mortgage loan for purposes of Reg §1.860G-2(a)(1). (Rev Proc 2020-26, sec. 6.03)
For mortgage loans held by REMICs, delays and shortfalls in payments associated with or caused by forbearance are contingencies under Reg §1.860G-1(b)(3) that can be disregarded. As a result, an interest in a REMIC does not fail to be a regular interest because of such contingencies. (Rev Proc 2020-26, sec. 6.04)
For this purpose, contingencies that can be disregarded include excess fees paid for specially serviced loans, an inability of a servicer to advance funds, or payments that are subject to forbearance not accruing compound interest.
To continue your reseach on real estate mortgage investment conduits, see FTC 2d/FIN ¶E-6900 United States Tax Reporter ¶860A4.
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