IRS Extends REMIC and Trust Relief Guidelines for Mortgage Forbearances and Changes Linked to COVID-19 Emergency

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The Internal Revenue Service (IRS) released the 2021-12 tax process on January 14, extending the safe zones in the 2020-26 and 2020-34 tax proceedings to September 30, 2021. This LawFlash deals with the part of the 2021-12 tax procedure relating to the 2020-26 tax procedure. Safety rules were previously scheduled to expire and would not apply to abstentions and related changes concluded after December 31, 2020. As the coronavirus (COVID-19) emergency persists, the extension of the 2021-12 tax procedure offers a welcome relief from securitization. the industry, which faced uncertainties about the tax consequences such an expiration could have on securitization vehicles such as real estate mortgage investment conduits (REMICs) and investment trusts.

to summarize

As reported in our previous LawFlash, on April 13, 2020, the IRS issued Tax Proceedings 2020-26, which provided useful havens for REMICs and investment trusts holding mortgages for which borrowers had applied for and received. abstentions or related changes in response to the COVID-19 Emergency.

Under the CARES Act (Coronavirus Aid, Relief and Economic Security), borrowers with federally guaranteed mortgages and multi-family borrowers with federally guaranteed mortgages can apply for and get forbearances on these mortgages. if the borrower is in direct financial difficulty. or indirectly due to COVID-19. Although the CARES Act does not cover mortgages that are not federally guaranteed mortgages, many lenders and managers of federally unsecured mortgages have also allowed borrowers facing financial hardship related to the COVID-19 from entering into forbearance or similar modification agreements. .

Prior to the publication of Tax Procedure 2020-26 on April 13, 2020, these related forbearance and modification programs raised a host of tax issues and uncertainties for securitization vehicles, which are explained in detail in our previous LawFlash. To address these concerns, the IRS issued Tax Procedure 2020-26, which generally provides that:

  • For mortgages already held by an existing REMIC, such forbearances and related modifications of such mortgages: (i) will not be treated as giving rise to a new mortgage for the purposes of the REMIC rules; (ii) will not be treated as a “prohibited transaction” under the REMIC rules; and (iii) will not result in a deemed reissue of the regular interest of REMIC.
  • If a REMIC acquires a mortgage loan on or after March 27, 2020, and that loan has been the subject of such forbearance and related amendment, then such forbearance and related amendment: (i) will not be considered evidence that a REMIC had improper knowledge of an anticipated default and (ii) will not be taken into account in determining the original date of the mortgage for the purposes of REMIC.
  • For mortgages held by an investment trust, such forbearances and related modifications will not result in the trust being considered to have the power to modify the investment of the certificate holders of the trust.

In particular, these safe havens generally apply to abstentions and related modifications of mortgage loans that fall under the CARES Act, as well as to abstentions and related modifications that occurred between March 27, 2020 and December 31, 2020 (including December 31, 2020). ) for mortgages that are not federally guaranteed mortgages and federally guaranteed multi-family mortgages.

Extension of relief

Due to the continuing financial difficulties posed by the COVID-19 emergency and the limitation of the relief provided by the 2020-26 tax procedure to abstentions and related modifications of certain mortgages entered into before January 1, 2021, there was a Growing uncertainty as to whether forbearances and related changes concluded after December 31, 2020 would receive the same relief. Based on these concerns, the Structured Finance Association has issued a letter to the US Treasury and the IRS, requesting an extension of the tax relief for forbearances and related changes.

In response, on January 14, 2021, the IRS issued Tax Procedure 2021-12, which extends the expiration date for the application of safety rules in Tax Procedure 2020-26 to September 30, 2021.

Additional considerations

Although the 2021-12 tax procedure provides much needed relief by extending the security rules of the 2020-26 tax procedure to abstentions and related changes concluded by September 30, 2021, the relief offered by the guidelines remains limited. within its reach. In particular, the guidelines still do not clarify whether investment trusts that hold non-mortgage loan assets would be required to treat COVID-19-related forbearances and related changes as resulting in a “power to modify” the holders’ investment. certificates from the trust, or whether the forbearance period for a mortgage loan is included in the default period of that loan, which would clarify whether such a loan would be treated as “seriously impaired” under the Block Rules. ‘taxable mortgage.

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