CDOs, MBSs, CMBS, CMOs

REMIC Revisions...Good News

Posted on Sunday, October 11, 2009

In an effort to save the commercial real estate market from pending doom, the IRS has made some much anticipated changes to the REMIC trust rules. REMICs are governed by sections 860A and 860G of the IRC. For an entity to qualify as a REMIC, all interests in the entity have to consist of one or more classes of regular interests (terms fixed on start up day, unconditionally entitles holder to receive a specified principal or similar amount, provides interest at or prior to maturity based on fix – or if provided in regs, variable – interest rate) and a class of residual interests and those interests must be issued on the start up day. By the end of month three and all time thereafter all assets must consist of qualified mortgages and permitted instruments. Amount of other assets is de minimis if aggregate adjusted bases is less than 1% of aggregate adjusted bases of all assets. Mortgage loan more or less has to have been transferred to the REMIC as of the start up date in exchange for regular or residual interests in the REMIC. Congressional intent was that REMICS would hold a fixed pool of assets with no power to vary mortgage asst composition. If a change is occasioned by a default or reasonably foreseeable default (based on a diligent contemporaneous determination of the risk) before or upon maturity it is not a significant modification. One relevant factor is how far in the future the default is expected. Past performance is also relevant.
The new rules apply to modifications after Jan 1, 2008 and allows changes in collateral, guarantees, loan credit enhancement, recourse nature, all provided loan remains primarily secured by real estate. Require that the collateral value of the loan be retested after modification to determine whether it’s principally secured by real estate. The FMV of the real estate must be at least 80% LTV at the time the obligation is originated or contributed to the REMIC.


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