Revenue Procedure 2020-26: IRS Issues Guidance on COVID-19 Related Forbearances Related to Securitization Issuers

On April 13, 2020, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2020-26  (the “Revenue Procedure”), quickly providing broad and helpful relief concerning the tax impact to real estate mortgage investment conduits (“REMICs”) and fixed investment trusts (“Grantor Trusts”) of certain mortgage loan forbearances and related modifications resulting from the COVID-19 pandemic.  The covered forbearances and modifications are those occurring under recent public and private programs for borrowers experiencing financial hardship due to the pandemic.  The safe harbors outlined in the Revenue Procedure provide comfort that granting requesting borrowers relief in connection with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), state-mandated loan forbearance programs and, importantly, also voluntary relief in response to requesting borrowers indicating hardship due to the pandemic will not result in qualification issues for REMICs or Grantor Trusts that may hold such loans. 

Covered Forbearances

The Revenue Procedure applies to forbearances and related modifications on certain federally backed residential and multifamily mortgages pursuant to the CARES Act.  It also covers three to six month forbearances and related modifications on all types of residential and multifamily mortgages if (i) the borrower is suffering financial hardship due to the pandemic and (ii) the forbearance is requested or agreed to during the period beginning March 27, 2020 and ending December 31, 2020.  An example of a related modification would be the deferral of skipped monthly payments to the end of the loan term.  The forbearances and related modifications described in this paragraph are referred to below as “COVID Forbearance Relief.”    

Existing REMICs

The Revenue Procedure provides that, even if COVID Forbearance Relief results in a loan held by a REMIC being treated as a new loan for federal income tax purposes, the loan will still be a qualifying asset under the REMIC tax rules.  In addition, COVID Forbearance Relief will not cause a deemed reissuance of the regular interests in the REMIC or cause the regular interests to have contingent principal amounts.  As a result, the Revenue Procedure establishes that COVID Forbearance Relief will not jeopardize the REMIC status of a securitization.  The Revenue Procedure also provides that COVID Forbearance Relief will not trigger a prohibited transaction tax for a REMIC. 

New REMICs

In order to be a qualifying asset for a REMIC, a mortgage loan must meet a loan-to-value (“LTV”) ratio test.  A loan’s LTV ratio generally is tested as of the origination date unless the loan has been significantly modified since origination.  The Revenue Procedure states that COVID Forbearance Relief will not result in a new testing date for a loan’s LTV ratio, which generally makes it easier for loans to qualify for REMIC inclusion. 

Severely delinquent loans often cannot be included in a REMIC because of concern that REO produced by a subsequent foreclosure will not be a qualifying REMIC asset.  The Revenue Procedure provides that COVID Forbearance Relief with respect to a loan prior to inclusion in a REMIC will not cause REO produced by a subsequent foreclosure while the loan is held by the REMIC to be a non-qualifying REMIC asset.  Consequently, this safe harbor also makes it easier for loans to qualify for REMIC inclusion. 

Grantor Trusts

The Revenue Procedure establishes that COVID Forbearance Relief with respect to a mortgage loan held by a Grantor Trust will not result in an impermissible power to vary the investment of the trust that could otherwise cause the trust to lose it status as a Grantor Trust.

The Revenue Procedure provides welcome and swift relief concerning many U.S. federal income tax issues related to REMICs and Grantor Trusts as industry participants seek to remedy the impact of the COVID-19 pandemic on mortgage borrowers.  While some technical issues remain and each taxpayer and its activities require individual guidance, the Revenue Procedure provides needed tax certainty for the impacted securitization vehicles. 

If you would like to request additional information about the Revenue Procedure, please contact one of the lawyers listed on this alert.