Internal Revenue Bulletin: 2007-52
December 26, 2007
Table of Contents
This revenue procedure describes the conditions under which changes to certain subprime mortgage loans will not cause the Internal Revenue Service to challenge the tax status of certain securitization vehicles holding the loans.
The purpose of this revenue procedure is to provide certainty in the current economic environment with respect to certain potential tax issues that may be implicated by fast track loan modifications, as described below. No inference should be drawn about whether similar consequences would obtain if a transaction falls outside the limited scope of this revenue procedure. Furthermore, there should be no inference that this revenue procedure is necessary to prevent transactions within its scope from impacting the tax status of securitization vehicles.
.01 On December 6, 2007, the American Securitization Forum (“ASF”) released a document entitled, “Statement of Principles, Recommendations and Guidelines for a Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans” (the “Framework”). An Executive Summary of the Framework (entitled “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans”) was released simultaneously and is attached as an Appendix to this revenue procedure.
.02 The Framework has been broadly supported as an appropriate step in addressing certain risks in the current economic environment.
.03 The Framework applies to first-lien subprime residential adjustable rate mortgage (ARM) loans that—
(1) Have an initial fixed rate period of 36 months or less (including “2/28s” and “3/27s”);
(2) Were originated between January 1, 2005, and July 31, 2007;
(3) Are included in securitized pools; and
(4) Have an initial interest rate reset between January 1, 2008, and July 31, 2010.
This revenue procedure refers to these instruments as “Loans.”
.04 The Framework provides a “fast track” procedure for modifying Loans and details the criteria for determining which Loans are eligible for the procedure. Modifications pursuant to the procedure are referred to as “fast track modifications.”
.05 In a fast track modification, a borrower is offered a Loan modification under which the interest rate on the affected Loan will be kept at the existing rate, generally for five years following the date on which the rate would have reset in the absence of the modification.
.01 Real Estate Mortgage Investment Conduits (REMICs) are widely used securitization vehicles for mortgages. REMICs are governed by sections 860A through 860G of the Internal Revenue Code.
.02 For an organization to qualify as a REMIC, all of the interests in the organization must consist of one or more classes of regular interests and a single class of residual interests, see section 860D(a), and those interests must be issued on the startup day, within the meaning of § 1.860G-2(k) of the Income Tax Regulations.
.03 A regular interest is one that is designated as a regular interest and whose terms are fixed on the startup day. Section 860G(a)(1). In addition, a regular interest must (1) unconditionally entitle the holder to receive a specified principal amount (or other similar amount), and (2) provide that interest payments, if any, at or before maturity are based on a fixed rate (or to the extent provided in regulations, at a variable rate).
.04 An interest issued after the startup day does not qualify as a REMIC regular interest.
.05 An entity qualifies as a REMIC only if, among other things, as of the close of the third month beginning after the startup day and at all times thereafter, substantially all of its assets constitute qualified mortgages and permitted investments. See section 860D(a)(4). An entity that initially qualifies as a REMIC may cease to qualify, if a sufficiently large portion of its qualified mortgages are significantly modified and the modified obligations are not qualified mortgages. See § 1.860G-2(b)(1). For this purpose, a qualified mortgage is generally treated as having been significantly modified if the change in terms would be treated as an exchange of obligations under section 1001 and the regulations thereunder. See § 1.860G-2(b)(2).
.06 Certain changes in the terms of an obligation, however, are not significant modifications for this purpose, regardless of whether they are significant modifications under section 1001 and § 1.1001-3. See § 1.860G-2(b)(3). In particular, changes in the terms of an obligation “occasioned by default or a reasonably foreseeable default” are not significant modifications for this purpose. See § 1.860G-2(b)(3)(i).
.07 Section 860F(a)(1) imposes a tax on REMICs equal to 100 percent of the net income derived from “prohibited transactions.” The disposition of a qualified mortgage is a prohibited transaction unless the disposition is pursuant to (i) the substitution of a qualified replacement mortgage for a qualified mortgage; (ii) a disposition incident to the foreclosure, default, or imminent default of the mortgage; (iii) the bankruptcy or insolvency of the REMIC; or (iv) a qualified liquidation. Section 860F(a)(2)(A).
.01 Section 301.7701-2(a) of the Procedure and Administration Regulations defines a “business entity” as any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under § 301.7701-3) that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Code.
.02 Section 301.7701-4(a) provides that an arrangement is treated as a trust if the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.
.03 Section 301.7701-4(c) provides that an “investment” trust is not classified as a trust if there is a power under the trust agreement to vary the investment of the certificate holders.
.01 This revenue procedure applies to the following transactions occurring on or before July 31, 2010—
(1) A fast track modification of a Loan pursuant to the Framework; and
(2) A second-lien holder’s action of subordinating its lien to any new lien that may arise under a Loan as the result of a fast track modification.
.02 If the Framework is materially modified after December 6, 2007, this revenue procedure does not necessarily apply to fast track modifications under the revised Framework or to second-lien subordinations to accommodate those modifications.
In the case of one or more transactions to which this revenue procedure applies—
.01 The Internal Revenue Service will not challenge a securitization vehicle’s qualification as a REMIC on the grounds that the transactions are not among the exceptions listed in § 1.860G-2(b)(3);
.02 The Internal Revenue Service will not contend that the transactions are prohibited transactions under section 860F(a)(2) on the grounds that the transactions are not among the exceptions listed in section 860F(a)(2)(A)(i)-(iv);
.03 The Internal Revenue Service will not challenge a securitization vehicle’s classification as a trust on the grounds that the transactions manifest a power to vary the investment of the certificate holders; and
.04 The Internal Revenue Service will not challenge a securitization vehicle’s qualification as a REMIC on the grounds that the transactions resulted in a deemed reissuance of the REMIC regular interests.
The principal author of this revenue procedure is Diana Imholtz of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information, contact Ms. Imholtz at (202) 622-3930 (not a toll-free call).
|Appendix to Revenue Procedure 2007-72|
|American Securitization Forum|
|Streamlined Foreclosure and Loss Avoidance Framework forSecuritized Subprime Adjustable Rate Mortgage Loans|
|December 6, 2007|
|This streamlined framework applies to all first lien subprime residential adjustable rate mortgage (ARM) loans that have an initial fixed rate period of 36 months or less (including “2/28s” and “3/27s”), referred to below as “subprime ARM loans” that:|
|This streamlined framework would be applied to subprime ARM loans in advance of an initial reset date. Typically, servicer/borrower communication should begin 120 days prior to the initial reset date.|
|Under this framework, subprime ARM loans are divided into 3 segments.|
|Segment 1 includes current (as defined below) loans where the borrower is likely to be able to refinance into any available mortgage product, including FHA, FHA Secure or readily available mortgage industry products.|
|Segment 2 includes current loans where the borrower
is unlikely to be able to refinance into any readily available mortgage industry
|Segment 3 includes loans where the borrower is not current as defined above, demonstrating difficulty meeting the introductory rate.|
|Segment 1 — Refinance:|
|Segment 2 — Loan Modification:|
|Segment 3 — Loss Mitigation:|
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