On April 13, 2020, the U.S. Internal Revenue Service (IRS) issued guidance under Revenue Procedure 2020-26 (Revenue Procedure) regarding forbearance granted to mortgage loan borrowers experiencing financial hardship due to the COVID-19 emergency. The Revenue Procedure covers mortgage loans that are federally backed and those that are not; this client alert focuses primarily on the latter. Under the Revenue Procedure, real estate mortgage investment conduits (REMICs) and grantor trusts can grant forbearance relief to COVID-19-affected borrowers of mortgage loans they hold, and REMICs can acquire mortgage loans for which such forbearance is already in place, without suffering certain adverse tax consequences.
Set forth below is a summary of some key provisions of the Revenue Procedure. We expect to release a more detailed discussion of these provisions in a later Update.
- The relief applies to federally backed mortgage loans and federally backed multifamily mortgage loans. It also applies to any “non-federally backed mortgage loans,” with no explicit limits on the type of property financed. Thus, the Revenue Procedure applies to both residential and commercial mortgage loans.
- The relief generally applies to non-federally backed mortgage loans where forbearance (i) is put in place between March 27 and December 31, 2020, and (ii) lasts for a period of six months or less.
- Non-federally backed mortgage loans subject to forbearance prior to the transfer of such loans to a REMIC will not have to be retested under the REMIC loan-to-value test, and any real property acquired pursuant to a foreclosure of such loans will be treated as REMIC-qualified assets, provided that (i) the forbearance was for a period of six months or less and was agreed upon between March 27 and December 31, 2020, and (ii) the mortgage loans were otherwise performing as of the cut-off date of the REMIC transaction.
- A servicer can forbear on a non-federally backed mortgage loan already in a REMIC through the end of 2020 without (i) jeopardizing the status of the REMIC, (ii) jeopardizing the treatment of such mortgage loan as a “qualified mortgage” for tax purposes or (iii) causing the REMIC to be subject to a prohibited transaction tax provided that the servicer does not forbear for a period in excess of six months.
- A permitted forbearance on a mortgage loan held by a grantor trust will generally not jeopardize the tax status of the grantor trust.
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