CDOs, MBSs, CMBS, CMOs

CMBS and REMIC Trust Modifications

Posted on Tuesday, April 14, 2009

We knew all along there wuold be surprises as these vehicles played out their natural and unnatural lives. But even the surprises are surprising some commercial real estate borrowers who ha dno idea what they were egtting themselves into.

Most securitized commercial mortgages are owned by a trust that elects treatment, for tax purposes, as a pass through real estate mortgage investment conduit, or "REMIC" under IRS Code 860A through G. The Trusts typically hold a pool of commercial mortgages, a typically pool might be 100 different loans. The Code imposes a variety of restrictions on REMIC trusts which unknowingly borrowers are discovering as they approch their lenders for commercial loan work-outs. For example, unlike CDO's the REMIC mortgage pool has to be "static," in other words the trust cannot trade loans in and out of the pool. The loans must be in the pool within three months after the REMICS formation. And a significant loan modification (suh as one a borrower might ask for as part of a loan workout) could be considered a loan "substition" under the Code which would effectively terminate the REMIC status, causing the trust to be taxed as a corporation and a 100% "prohibited transaction" tax. Substantial modifications would be chnages in yield, timing for payment, obligors, c-obligors, security/credit enhancement or debt instrument priority, and would most certainly not be agreed to by the servicer.

An important exception may apply if the original loan documents contemplated such future modifications in anticipation of a borrower future actions and loan documents should be carefully reviewed for these provisions.

There are likewise certain modifications that typically fall under the REMIC radar and more flexibility of a loan is in default or at risk of default.


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