The Internal Revenue Service (IRS) issued Revenue Procedure 2021-12 on January 14, extending the safe harbors in Revenue Procedures 2020-26 and 2020-34 to September 30, 2021. This LawFlash discusses the portion of Revenue Procedure 2021-12 relating to Revenue Procedure 2020-26. The safe harbors were previously set to expire and would not apply to forbearances and related modifications entered into after December 31, 2020. As the coronavirus (COVID-19) emergency persists, the extension in Revenue Procedure 2021-12 provides welcome relief to the securitization industry, which faced uncertainties over the tax consequences that such an expiration could have on securitization vehicles such as real estate mortgage investment conduits (REMICs) and investment trusts.
As reported in our prior LawFlash, on April 13, 2020, the IRS issued Revenue Procedure 2020-26, which provided helpful safe harbors for REMICs and investment trusts holding mortgage loans for which borrowers had requested and received forbearances or related modifications in response to the COVID-19 emergency.
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, borrowers with Federally-backed mortgage loans and multifamily borrowers with Federally-backed mortgage loans are able to request and obtain forbearances on such mortgage loans if the borrower is experiencing a financial hardship directly or indirectly due to COVID-19. While the CARES Act does not cover mortgage loans that are not Federally-backed mortgage loans, many lenders and servicers of non-Federally-backed mortgage loans have also allowed borrowers experiencing COVID-19-related financial hardships to enter into similar forbearance or modification agreements.
Prior to the issuance of Revenue Procedure 2020-26 on April 13, 2020, these forbearance and related modification programs raised a multitude of tax questions and uncertainties for securitization vehicles, which are explained in depth in our prior LawFlash. To address these concerns, the IRS released Revenue Procedure 2020-26, which generally provides that:
- For mortgage loans already held by an existing REMIC, such forbearances and related modifications of such mortgage loans: (i) will not be treated as resulting in a newly issued mortgage loan for purposes of the REMIC rules; (ii) will not be treated as a “prohibited transaction” under the REMIC rules; and (iii) will not result in a deemed reissuance of the regular interests of the REMIC.
- If a REMIC acquires a mortgage loan on or after March 27, 2020, and that loan was subject to such a forbearance and related modification, then such forbearance and related modification: (i) will not be treated as evidence that a REMIC had improper knowledge of an anticipated default and (ii) will not be taken into account in determining the origination date of the mortgage loan for REMIC purposes.
- For mortgage loans held by an investment trust, such forbearances and related modifications will not cause the trust to be treated as having a power to vary the investment of the certificate holders of the trust.
Notably, these safe harbors generally apply to forbearances and related modifications of mortgage loans that fall under the CARES Act, as well as forbearances and related modifications that occurred between March 27, 2020 and December 31, 2020 (inclusive of December 31, 2020) for mortgage loans that are not Federally-backed mortgage loans and not Federally-backed multifamily mortgage loans.
EXTENSION OF RELIEF
Due to the ongoing financial hardships posed by the COVID-19 emergency and the limitation of the relief provided by Revenue Procedure 2020-26 to forbearances and related modifications of certain mortgage loans entered into prior to January 1, 2021, there was growing uncertainty as to whether forbearances and related modifications entered into after December 31, 2020 would be afforded the same relief. Based on these concerns, the Structured Finance Association submitted a letter to the United States Treasury and the IRS, requesting an extension of tax relief relating to forbearances and related modifications.
In response, on January 14, 2021, the IRS released Revenue Procedure 2021-12, which extends the expiration date relevant to the application of the safe harbors in Revenue Procedure 2020-26 to September 30, 2021.
While Revenue Procedure 2021-12 provides much-needed relief by extending the safe harbors in Revenue Procedure 2020-26 to forbearances and related modifications entered into by September 30, 2021, the relief afforded by the guidance remains limited in scope. In particular, the guidance still does not address whether investment trusts that hold non-mortgage loan assets would be required to treat COVID-19-related forbearances and related modifications as resulting in a “power to vary” the investment of certificate holders of the trust, nor whether the forbearance period of a mortgage loan is included in that loan's delinquency period, which would clarify whether such a loan would be treated as “seriously impaired” under the taxable mortgage pool rules.
We will continue to monitor these developments and update our clients and readers as new information becomes available.