Industry Says Regulations Put CMBS at Disadvantage
A preliminary step forward towards possible changes to real estate mortgage investment conduit provisions has been made, with some industry groups responding to the Internal Revenue Service's request for input on what possible amendments could be made to REMIC regulations.
The REMIC provisions have put the commercial mortgage-backed securities industry at a disadvantage, compared to other commercial mortgage funding sources, since they impede the flexibility of CMBS servicers and lenders to heed borrower requests to modify loans after they are closed. This lack of post-closing flexibility has been a sore point for borrowers on CMBS loans. And servicers of securitized loans are also bound by the real estate mortgage investment conduit provisions in terms of what sorts of activity can be undertaken without jeopardizing REMIC status. If the loans are significantly modified, they may be treated as newly originated.
The Mortgage Bankers Association and a number of other commercial real estate-related trade groups have responded to the IRS call for comment on this subject. Their comment letter states that the current REMIC regulations were adopted back in 1992, 15 years ago, and don't address situations that arise currently in terms of securitized commercial mortgage loans. Also the REMIC format was originally set up with residential mortgages in mind, whereas commercial mortgages oftentimes require more active management.
With the current REMIC framework, only four specific types of amendments to a securitized loan can be made without a REMIC losing its status, according to the groups. They are urging the IRS to "amend the REMIC regulations to include additional types of permitted loan modifications that are responsive to situations that now arise regularly in the context of commercial loans."
The groups are looking for six additional modifications to be permitted to a securitized loan. These are additional flexibility in terms of changes in loan collateral, changes in the time a loan can be prepaid, changes in the recourse/non-recourse nature of a loan, changes in the loan obligors, changes pertaining to prepayment penalties and changes relating to the payment schedule on the loan principal.
"The proposed modifications do not implicate corporate activities in originating loans. That is, because the proposed modifications do not include an increase in the principal balance of a mortgage loan, extension of loan maturity, or a change in interest rate, they should not cause a REMIC to be seen as engaging in mortgage loan refinancing or origination activity," according to the letter.
Currently, it is considered all right for modifications to be made to securitized mortgage loans without incurring any REMIC penalty under four exceptions. One exception allows for changes in case of a default of a "reasonably foreseeable default." And a "change in obligor" is allowed without considering it a significant modification. One more exception relates to a "waiver of a due-on-sale-clause or a due-on-encumbrance clause." Also, conversion of a mortgage interest rate as might occur with a floating-rate mortgage is not considered a material change. Other than in these defined situations, borrowers on securitized loans today need to get an attorney's opinion about materiality.
Separately, in another development that servicers need to watch, there is also some deliberation going on by the Financial Accounting Standards Board about what sort of activities can be undertaken by a servicer of loans that have been securitized without the securitization vehicle losing qualified special purpose entity status. QSPE status is necessary for transfer of loans in a securitization situation to qualify as a true sale. If QSPE status is denied, a number of lenders and servicers might end up having to consolidate securitized mortgage loans on their books and this would have the effect of rendering commercial mortgage securitizations uneconomical. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com