Alert May 20, 2008

IRS Issues Guidance Concerning Modification of Mortgage Loans Held by REMICs and Trusts

The Internal Revenue Service (the “IRS”) issued Revenue Procedure 2008-28 on May 16, 2008 to provide guidance on the conditions under which modifications of certain mortgage loans will not cause the IRS to challenge the tax status of real estate mortgage investment conduits (“REMICs”) and investment trusts that hold the loans, or to assert that the modifications create a liability for tax on a prohibited transaction.  Under the new guidance, subject to the conditions noted below, the IRS will not challenge the qualification of a REMIC on the grounds that a modification is not within certain listed exceptions provided for in Treasury Regulation Section 1.860G-2(b)(3).  Additionally, the IRS will not assert that a modification is a prohibited transaction under Section 860F(a)(2) of the Internal Revenue Code, or challenge a REMIC’s qualification on the grounds that a modification resulted in a deemed reissuance of the REMIC’s regular interests.  With respect to investment trusts, subject to the conditions noted below, the IRS will not challenge the classification of such trust on the grounds that the modification manifests a power to vary the investment of the trust’s certificate holders.

Revenue Procedure 2008-28 applies to modifications of mortgage loans held by REMICs and investment trusts, if six conditions are satisfied.  First, the real property securing the mortgage must be a residence that contains fewer than five dwelling units.  Second, the real property securing the mortgage must be owner occupied.  Third, 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 ten percent of the stated principal of the REMIC’s total assets may be represented by loans the payments on which were then overdue by 30 days or more; or, if an investment trust holds the mortgage loan, then as of all dates when assets were contributed to the trust, no more than ten percent of the stated principal of all the debt instruments then held by the trust may be represented by instruments the payments on which were then overdue by 30 days or more.  Fourth, the holder or servicer of the mortgage must reasonably believe that there is a significant risk of foreclosure of the original loan.  Fifth, the terms of the loan, as modified, must be less favorable to the holder than were the unmodified terms of the original mortgage loan.  Lastly, the holder or servicer must reasonably believe that the modified loan presents a substantially reduced risk of foreclosure, as compared with the original loan.

Revenue Procedure 2008-28 is effective for determinations made by the IRS on or after May 16, 2008, with respect to loan modifications that are effected on or before December 31, 2010.  The IRS is seeking public comments on this revenue procedure.  Comments should be submitted no later than July 15, 2008.