Expansion of processing of mortgage suspensions and modifications for mortgage loans


Across the United States, periodic and ongoing business closures and disruptions continue to occur in response to the coronavirus (COVID-19) pandemic. The resulting economic distress affected borrowers, including businesses and individuals. The Coronavirus Aid, Relief and Economic Security Act 2020 (the CARES Act) has new mandatory debt relief provisions requiring forbearances for certain mortgages in light of the national emergency COVID-19 declared on March 13, 2020, which continued into 2021..

Many mortgages are held in real estate mortgage investment conduits (REMICs) and “closed-end funds”. These entities typically have organizational documents that restrict or prohibit certain types of loan modifications to reflect constraints on loan modifications amending a REMIC’s collateral or regular interest terms imposed by various provisions of the Internal Revenue Code. of 1986, as amended (the Code). In addition, the Code prohibits a REMIC from seizing a mortgage loan that was known to be in difficulty when the REMIC acquired it.

Tax Proceedings 2020-26 outlined the safety rules under which forbearances and related modifications of certain mortgages under the provisions of the CARES Act and other COVID-19 related programs will not jeopardize the status federal tax of REMICs and “closed-end funds” that hold the loan.

Tax Proceedings 2020-34 outlined security rules involving mortgage loan modifications, lease modifications, and certain cash contributions for Delaware Statutory Trusts (DSTs) used for 1,031 exchanges involving rental real estate.

Both 2020 tax proceedings contain safe harbor provisions (described below) which expired on December 31, 2020. In view of the continuing COVID-19 pandemic, the 2021-12 tax process extended these provisions relief until September 30, 2021.


The Code generally prohibits mortgages held in a REMIC from being modified “significantly” (including many of the modifications contemplated by the CARES Act and other forbearance provisions) and prohibits the regular interest terms of REMIC from being modified. changed after starting the REMIC. Dated. In addition, the Code generally prohibits a “closed-end investment company” from having the power to modify the investment of its investors.

The tax procedure describes the security rules under which changes to certain mortgages which are described in section 2 of the tax procedure (c. A loan bond with a newly issued mortgage bond, (ii) as giving take place in prohibited transactions, or (iii) as manifesting a power of modification for the purposes of determining the federal tax status of the REMICs and of the “closed-end funds” which hold the loans. Under the security rules, these abstentions and modifications should be authorized under the constitutive documents of REMICs and “closed-end funds” and not have adverse tax consequences.

For more information on this Income Procedure, please see our advance warning, here.


The tax process also contains a safe harbor under which a REMIC is not treated as having poor knowledge of a prepayment default on the grounds that it has acquired a mortgage loan for which the borrower had participated in. forbearance from the CARES Act or other forbearance program. This safe harbor would allow future REMICs to acquire mortgages that have already received forbearance from modification of the CARES Act or other forbearance program. Otherwise, a REMIC could be deemed to have “mistaken knowledge” that a mortgage default would occur and would then be prohibited from foreclosing on such property in the future.


A DST formed to hold real estate leased under a trust agreement described in Revenue Ruling 2004-86, 2004-2 CB 191, is an arrangement that is classified as an investment trust. closed-end for federal tax purposes. Each of these owners of DST is treated, by virtue of section 677 of the Code, as the owner of a pro-rated portion of the DST. Since an owner of an undivided fractional interest in DST owns for federal income tax purposes the DST assets attributable to that interest, each owner is considered to own an undivided fractional interest in the DST. rental building owned by the DST. Accordingly, under Article 1031 of the Code, a taxpayer may exchange an interest in real estate for an interest in a DST without the recognition of a gain or loss, if the other requirements of Article 1031 of the Code are met.

In light of the 2020-26 Tax Proceedings, the Treasury Department and the Internal Revenue Service have received comments regarding the problems faced by DSTs holding rental real estate that are in financial difficulty due, directly or indirectly, to the COVID-19 pandemic. DST Trustees may need to respond to difficulties by amending DST leases, seeking relief from the forbearance program for mortgages secured by DST real estate, or accepting contributions in cash to DST to avoid defaults on DST loan obligations or in connection with a loan modification (among other reasons). These cash contributions could be made on a pro rata basis by the owners of the DST or by non-owner investors. As a result, this tax procedure creates a safe haven for abstentions from the CARES Act (and associated modifications) and abstentions described in section 2.07 of tax procedure 2020-26, modification of leases and acceptance of cash contributions. as a result of COVID-19. difficulties, provided that the other conditions and requirements of the tax procedure are met. It should be noted that the Tax Procedure only applies to DST and not to trusts with similar activities and with similar economic hardship that are organized under the laws of other states or the District of Columbia.


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