--Cathy Cunningham
The Internal Revenue Service has released proposals that aim to make it easier for servicers to modify commercial loans securitized through real estate mortgage investment conduits (REMICs). Current rules regarding REMIC loan modifications were implemented in 1996 and contain only a few exceptions to a general prohibition against loan modifications. “The IRS recognized that the existing regulations are out of step with current market realities,” said Stephen Edwards, a partner at law firm Kilpatrick Stockton.
The IRS is proposing that servicers be allowed to release, substitute, add or alter a substantial amount of collateral. The IRS would also allow modifications that change the recourse or non-recourse nature of the loan. The modifications, however, come with the caveat that the loans have to continue to be principally secured by an interest in real property following the modification. “The reaction so far from servicers has been generally positive,” Edwards said.
The changes will benefit borrowers the most but will also improve servicing. “When fully implemented, the REMIC reform should make a number of transactions that are convoluted and difficult to approve today much easier,” one commercial servicing executive said. “Servicers are optimistic about the changes. The original regs basically prohibited doing anything to modify the loan with the exception of a few circumstances. The proposed additions will help us, but servicers are still pushing for more leeway regarding what they can do.”
The proposed regulations also appear to allow for more flexibility in modifying loans held by REMICs than currently permitted under the Financial Accounting Standards Board regulation 140. “Some are concerned that the FAS 140 will limit them even if the tax regulations are loosened. They’re concerned that they may end up trading the accountants for the IRS as their main adversary when it comes to loan modifications,” Edwards said. Investors are more cautious about the proposal, however. ““If too many modifications are allowed, investors could incur greater risk,” he added. “That said, servicers are unlikely to approve loan modifications that may harm investors.”
Servicers and other industry participants have until Feb. 7 next year to submit comments to the IRS.