2 Mortgage LoansMortgage loans 2
PROPOSAL EDUCATION RULES proposal education rules for changes to the mortgage loans owned by REMICS
The Internal Revenue Service (the "IRS") adopted on 9 November 2007 a bill (the "Proposed RMIC Regulations") which would allow certain kinds of changes to property mortgage loans for sale kept by a property mortgage origination channel ("REMIC") to be made without jeopardising the qualifications of the RMIC or creating a forbidden mortgage lending operation.
This would be allowed under the proposal for a Regulation on REMIC: ii ) a shift in the type of liability from subrogation /recovery (or substantially all subrogation/recovery) to non-recourse (or substantially all non-recourse); provided that the mortgage remains "principally secure by a security right over land " (i.e. the loan-to-value (LTV) relationship is not greater than 125%) after the corresponding shift.
Furthermore, the proposal for a Regulation on environmental protection requires that an external expert opinion be carried out independently at the date of the amendment in order to determine the value of the encumbered real estate. Furthermore, the foreword to the proposal for a regulation on remuneration states that, even if a change does not jeopardise REMIC's status or cause a forbidden operation, the change will enable the holders of REMIC's interest to report profits or losses subject to tax.
This proposal for a Regulation on remedies for industrial injuries (REMIC) is the first directive to be published as part of the IRS scheme to collect industrial inputs on fiscal technology. Although the declared aim of the proposal for Regulation is to dispel the concern expressed by the industrial property sector that the current Regulation does not properly meet the legal needs of the mortgage securitisation sector, it does not take into account all the questions addressed by the sector and indeed raises some new concern.
Moreover, the REMIC proposals seem to contain apparently technically incorrect elements which need to be corrected before the adoption of the definitive rules. REMIC's proposals entered into force only after their definitive publication and are applicable on a prospective basis to changes to mortgage loans made after that date.
REMIC rules of the Internal Revenue Code were adopted by Congress in 1986 to be the sole means of issuance of several security categories secured by a permanent pooled of property mortgage loans without the introduction of a corporate income taxation. Generally, a REMIC has three month to purchase its starting capital and two years to replace a new mortgage with a bad one.
An exchange after this date is not allowed and the sale of a mortgage is usually a "prohibited transaction" in which the RMIC is subject to a 100% punitive duty on each profit. Given that the securities for industrial mortgage loans are high-income real estate, purchasers of industrial mortgage loans owned by a remote maintenance facility (REMIC) may require the service provider to modify the conditions of their mortgage loans in the context of the normal management of their real estate, reserve assets, transfer, etc. The service provider may also require the borrower of industrial mortgage loans owned by a remote maintenance facility (REMIC) to modify the conditions of their mortgage loans in the context of the normal management of their real estate, reserve assets, transfer, etc.
Pursuant to the provisions of Treasury's policy for the amendment of all outstanding debts (including mortgage loans), if the amendment to the conditions of a principal is a " material amendment ", the initial commitment is considered to have been replaced by the amended commitment at the date of the amendment. Thus, if a REMIC would significantly alter a mortgage more than three month after the start date (two years for a representative loan) and the mortgage was not in arrears (or the arrears were not reasonably foreseeable), then the illicit replacement would be a illicit operation and would disable the mortgage and possibly REMIC itself.
Pursuant to the current rules of procedure of REMIC, certain changes to the conditions of a mortgage credit hold by the company are not considered as changes, even if these changes would otherwise represent a material change to the mortgage credit under the general rules for changing the amount of debts. Such changes are caused by (1) delay or reasonably predictable delay, (2) acceptance of the mortgage credit, (3) renunciation of a credit term due for disposal or payment, or (4) interest adjustments on a bond.
These exemptions were adopted in 1992 and took account of the most common home loan issuance at the relevant date, but preceded the expansion of the mortgage lending business and are therefore not sufficient to solve the complexity of the day-to-day management of mortgage lending business.
According to the current rules of procedure of REMIC, the fulfilment of the "in principle secured" need of a mortgage is checked either at the time of granting or on the balance sheet date of REMIC. Mortgage loans do not rule out a loss of value of the immovable object after the examination date. According to the suggested EMIC ordinances, however, a significant modification of securities, a warranty or other form of improvement of credit or a switch from subrogation/recovery to non-recourse is only permissible if a new "principally secured" test is fulfilled.
Whilst it would make sense for the rules to ban the disclosure or replacement of securities that would result in a mortgage not passing the mainly secure test, there should be no political concerns if, for example, (a) a disclosure is matched by a capital deduction that sustains or enhances the LTV rating of the encumbered object, (b) a real estate of the same or higher value is replaced by a remote real estate, or (c) a real estate is added that enhances the LTV rating.
Moreover, there is no need to re-examine the'principally secured' character of the mortgage when it is a guaranty or other type of improvement, since it does not influence the value of the encumbered land. A qualifying mortgage test at the beginning of a SEMIC does not necessarily mean that the LTV relationship is determined by a particular methodology.
Requiring an assessment by an impartial assessor to enable a change is a potentially burdensome new request. Estimating can be timeconsuming and costly, especially if the mortgage credit is backed by several real estate assets. Expenses for such an assessment shall be borne either by the Mortgagor, who may not be willing to pay for it, or by REMIC itself, resulting in unforeseen loss to subordinated Certificate Holders.
According to the current rules on remedies, service providers usually need a lawyer's statement to establish whether a'substantial' alteration of securities, a surety or a debt improvement leads to a discrediting'substantial' alteration of a mortgage lending. Furthermore, the proposal for a Regulation on Remittances in Individuals with Disabilities (REMIC) requires this juridical judgement or order in order to establish whether the "principally secure" test is applicable and whether an expert report needs to be obtained.
Introducing the provision that a mortgage will cease to be a qualifying mortgage unless its pledge is discharged in accordance with the above mentioned provisions modifying a "substantial amount" of security, the suggested RMIC rulings could be understood as prohibiting (a) a non-substantial discharge of security and (b) a one-sided amendment by the creditor that the creditor cannot avoid, which would not have been a "substantial change" under the general provisions on alteration of debts.
5. Changes from non-recourse to recovery. In its current form, the REMIC proposal covers a switch from recovery (or essentially all recovery) to recovery (or essentially all recovery), but not the other way round. Nevertheless, the foreword to the REMIC proposal seems to lead to the assumption that a switch from non-recourse (or essentially all non-recourse) to recovery (or essentially all recourse) would also be permissible.
It is appropriate to correct this disruption in the definitive schemes. Responding to the IRS Notice 2007-17, the comments suggest that all new rules should explicitly be applied to the following amendments: These changes are not included in the REMIC proposal. It is stated in the foreword to the proposal for a REMIC Regulation that these proposals have not been adopted either because the amendment is properly addressed by the general rules on changing indebtedness or because, in the event of rejection, no extension of the existing rules is justified.
Nor do the proposals for the sectoral exemption of the extension of exemptions from changes to remuneration to public procurement trustees holding mortgage loans, which may lead to different treatments according to whether a public procurement trustee or a public procurement trustee is used, take over the provisions of the suggested regulations. As a result of the suggested regulation on mortgage loans, EMIC extends the permitted modification of mortgage loans in such a way as to help real estate and credit management.
In their current form, however, the suggested EMIC ordinances do not significantly mitigate regulatory problems for service providers and fiduciaries in answering applications for changes to credit conditions or decrease the effort and amount of processing required for such applications. Lastly, the proposal for a Regulation on Remittances does not prevent the need to decide whether a change will lead to the recording of profits or losses for Remic and thus for the residue holders.
Copies of the REMIC Regulation are annexed to this document.