Extending leniency remedy for mortgage loans and making modifications to mortgage loans

Wednesday January 27, 2021

The United States continues to experience regular and ongoing business closings and disruptions in response to the coronavirus (COVID-19) pandemic. The resulting economic hardship has affected borrowers, including businesses and individuals alike. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) included new and binding debt relief provisions that require leniency for some mortgage loans in light of the COVID-19 national emergency announced on March 13, 2020, which will last until 2021.

Many mortgage loans are held in REMICs (Real Estate Mortgage Investment Conduits) and Fixed Investment Trusts. These companies generally have organizational documents restricting or prohibiting certain types of loan modification to reflect loan modification restrictions that modify the collateral or regular interest rate terms of a REMIC, as enforced by various provisions of the Internal Revenue Code 1986, as amended (Code ) are imposed. Additionally, the Code prohibits a REMIC from foreclosing a mortgage loan that was known to be problematic when the REMIC acquired it.

Revenue Procedure 2020-26 outlined safe havens where forbearance and related changes to certain mortgage loans under the provisions of the CARES Act and other COVID-19-related programs, the federal income tax status of REMICs and “Fixed Investment Trusts” that hold the loans .

Revenue Revenue 2020-34 described safe havens that included changes to mortgage loans, changes to lease agreements, and certain cash deposits for Delaware Statutory Trusts (DSTs) used on 1031 exchanges of rental property.

Both 2020 revenue procedures contain Safe Harbor provisions (see below) that ended on December 31, 2020. In light of the ongoing COVID-19 pandemic, the 2021-12 Revenue Procedure has extended these relief provisions to September 30, 2021.

REVENUE PROCEDURES 2020-26 – SAFE HAVEN FOR BEHAVIORAL LOAN MODIFICATIONS

The Code generally prohibits mortgage loans held in a REMIC from being “significantly” modified (including many changes provided for in the CARES Act and other forbearance provisions) and prohibits the terms of REMIC’s regular interests after launch of the REMIC changed date. In addition, the Code generally prohibits a fixed investment trust from having the power to vary the investments of its investors.

The Revenue Process describes safe havens where changes to certain mortgage loans described in Section 2 of the Revenue Process (i.e., forbearance and changes under the provisions of the CARES Act and other forbearance programs) are not a substitute for the unmodified mortgage Treated (i) a loan obligation with a newly issued mortgage loan obligation, (ii) as a cause for prohibited transactions, or (iii) as an expression of authority to amend for the purpose of determining the federal income tax status of REMICs and Fixed Investment Trusts holding the loans. Under the safe havens, these indulgences and changes should be permitted in accordance with relevant documents from REMICs and Fixed Investment Trusts and should not have any adverse tax consequences.

Please see our prior notification here for more information on this revenue process.

REVENUE PROCEDURE 2020-26 – ACQUISITION OF LOANS WITH RESERVATION BY A REMIKER

The revenue process also includes a safe haven in which a REMIC will not be treated as being inappropriately informed of an anticipated default for having acquired a mortgage loan for which the borrower was in a CARES Act forbearance or other forbearance program Has. This safe haven would allow future REMICs to acquire mortgage loans that had previously received a CARES bill or other forbearance program to avoid change. Otherwise, a REMIC could be considered “improperly known” that a mortgage loan default would occur and it would then be prohibited to lock into that property in the future.

REVENUE PROCEDURE 2020-34 – DSTS FOR 1031 EXCHANGES

A daylight saving time established to hold properties that are the subject of a lease under an escrow arrangement described in Revenue Ruling 2004-86, 2004-2 CB 191 is an arrangement that is considered Fixed for Federal Tax purposes Investment Trust is classified. Every owner of this daylight saving time is treated as an owner of a proportionate part of the daylight saving time due to the code section 677. Since an owner of an undivided share of the summer time for purposes of federal income tax owns the assets of the summer time attributable to this share, it is assumed that each owner has an undivided share of the rental property held by the summer time. Accordingly, a taxpayer under Code Section 1031 may exchange an interest in real estate for an interest in a daylight saving time with no gain or loss if the other requirements of Code Section 1031 are met.

In light of Revenue Procedure 2020-26, the Treasury Department and Internal Revenue Service received comments on issues facing DSTs holding rental properties that are directly or indirectly suffering from financial difficulties due to the COVID-19 pandemic. DST’s trustees may need to respond to difficulties by amending the DST’s leases, applying for leniency relief on mortgage loans backed by DST’s real estate, or accepting cash deposits into the DST to avoid defaults on the DST’s loan obligations Avoid DST or related to a loan modification (among other reasons). Such cash contributions can come in part from owners of the summer time or from non-owner investors. Accordingly, this revenue process creates a safe haven for forbearance (and related changes) and forbearance under the CARES Act, which is described in Section 2.07 of Revenue Process 2020-26, Modifying Leases and Accepting Cash Contributions Due to COVID-19 Difficulties, provided that other conditions and requirements of the revenue process are met. It should be noted that the Revenue Procedure applies only to summer time and does not apply to trusts that carry out similar activities and with similar economic problems and are organized under the laws of other states or the District of Columbia.