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Last month, the IRS provided two pieces of guidance that will have a dramatic effect on how servicers deal with commercial mortgage loans. The first addresses requests from industry associations for the modernization of the REMIC rules. The second set of amendments responds to a proposal made by the Real Estate Roundtable to address liquidity concerns. The former guidance expands the list of permitted REMIC loan modifications to include ones that are often made to commercial mortgages outside of a REMIC structure. As it stands, significant changes are treated as a new mortgage issuance unless an exemption is available. Under the old regulations, exemptions included modifications due to a default or a reasonably foreseeable default, assumptions, waiver of due on-sale provisions, and interest-rate conversions as the result of a borrower’s exercise of a unilateral option to convert Modifications outside of these exceptions by a REMIC could lead to its disqualification as a pass-through vehicle, resulting in taxation. For this reason, servicers have been very careful to limit modifications. But under the new regulations, additional changes would be permissible without the loan being treated as new debt under two conditions: changes in collateral, guarantees and credit enhancement of an obligation, as well as changes to the recourse nature of an obligation.

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