The IRS on April 13 issued rules that will help facilitate mortgage modifications and debt work-outs between borrowers and lenders when a loan is held in a mortgage-backed security.  The IRS guidance is consistent with the Roundtable’s request on March 20 that Treasury and the IRS take steps to protect private parties from the tax consequences of restructuring debt during the extraordinary and unanticipated COVID-19 pandemic.  

• The new safe harbors extend to real estate mortgage investment conduits (REMICs) and investment trusts affected by loan forbearances and workouts due to the Covid-19 pandemic.  (IRS Rev Proc 2020-26)
  
  
• REMICs are widely used vehicles for pooling mortgage loans and issuing residential and commercial mortgage-backed securities.  A REMIC is generally required to hold a substantially fixed pool of real estate mortgages and related assets and must not have the power to vary the composition of its mortgage assets. 
  
  
• Even if an entity initially qualifies as a REMIC, one or more significant modifications of mortgages held by the entity may terminate its REMIC status.  Certain loan modifications are permitted if the change is “occasioned by default or a reasonably foreseeable default.”  A prohibited transaction by a REMIC, however, can result in a tax equal to 100 percent of the income from the transaction. 
  
  
• The new IRS rules provide that REMICs and investment trusts can grant forbearance relief to COVID-19-affected borrowers – and REMICs can acquire mortgage loans for which such forbearance is already in place – without adverse tax consequences or threatening their tax status.  (Sidley Austin, April 15)
  
  
• These safe harbors apply to mortgage loan forbearance that is provided voluntarily by the mortgage holder or servicer, forbearance that is State-mandated, and forbearance that is mandated in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 
  
  
• The CARES Act generally provides temporary forbearance relief for borrowers with certain federally backed mortgage loans who are experiencing a financial hardship due directly or indirectly to the COVID-19 emergency. (JD Supra, April 16)

The rules extend to both residential and commercial mortgage loans, including federally backed mortgage, multifamily and any “non-federally backed mortgage loans,” with no explicit limits on the type of property financed. The specific safe harbors are profiled in Alston & Bird’s April 15 Advisory.