Press Release
Endorsement

Rev. Proc 2008-47 (replaces 2007-72) Overview:

1. IRS will not challenge ...REMIC...as not within exception for modifications made in
anticipations of default in IRS 1.860G-2(b)(3);
2. IRS will not assert ... disposition of qualified mortgage subject to 100% prohibited
transaction tax;
3. IRS will not challenge ... REMIC on grounds that modification caused reissuance of
REMIC regular interests;
4. If securitization is Grantor Trust, IRS will not assert ... modifications resulted in prohibited
power to vary investments.

Secondary Market Alert –
Modifications & Tax Exempt Trusts – Step One? ™
IRS Rev. Proc. 2007-72 | Loan Modifications | REMIC
Mortgage Backed Securities (“MBS”)

By Richard Ivar Rydstrom, Esq.
rrydstrom@gmail.com

Subprime Policy Group™
www.SubprimePolicyGroup.Com

Under the holiday radar, on December 26, 2007, the IRS released Internal Revenue Bulletin 2007-52 to help protect mortgage servicers and the mortgage backed securitization market itself from the threat of liability and litigation as it jumps into the “modification” waters under pressure from the industry and Secretary Paulson.

The IRS ruling says that the IRS will not challenge the tax status of real estate mortgage investment corporations (REMICs) for performing “fast tracked modifications” as outlined by the Bush Hope Now Alliance Plan and the American Securitization Forum (ASF). Simply said: loan modifications that freeze interest rates for five years will not threaten the tax status or tax treatment of the (assignee) trusts which hold these mortgage backed securities (as a “qualified special purpose entity”). Until now, modifications could have been seen as violations of the tax exempt status and tax accounting reporting treatment of the trust.

This is another step toward a solution to the mortgage meltdown. However, it does not serve its purpose without defects. It is imperfect at best. It will take a new and aggressive industry and government coalition with the defined purpose of resolving all of the self-interests of all market participants, including borrowers. See www.iomcc.org. The stated purpose of the Revenue Proc. 2007 72 is as follows:

“SECTION 1. PURPOSE

This revenue procedure describes the conditions under which changes to certain subprime mortgage loans will not cause the Internal Revenue Service to challenge the tax status of certain securitization vehicles holding the loans.

The purpose of this revenue procedure is to provide certainty in the current economic environment with respect to certain potential tax issues that may be implicated by fast track loan modifications, as described below. No inference should be drawn about whether similar consequences would obtain if a transaction falls outside the limited scope of this revenue procedure. Furthermore, there should be no inference that this revenue procedure is necessary to prevent transactions within its scope from impacting the tax status of securitization vehicles.”

Now the SEC must act. The mortgage servicing (and modification) industry is at a stand still as it stands in need of immediate clarification of modification accounting treatment and reporting rules. The Financial Accounting Standards Board will also need to update its guidance on these issues as well.

The scope and limitations to the application of Revenue Proc. 2007-72 will prove its own ineffectiveness. It is critical to note that Rev. Proc. 2007-72 does not amend or change existing law.This is a good first step, but it must be reviewed for permanency under a comprehensive microscope, very soon.

See Rev. Proc. 2007-72 for details attached hereto.

Secondary Market Alert –
Modifications & Tax Exempt Trusts – Step Two? ™
IRS Rev. Proc. 2008-28 follows Rev. Proc. 2007-72
re Loan Modifications & REMICS
Mortgage Backed Securities (“MBS”)
By Richard Ivar Rydstrom, Esq.
rrydstrom@gmail.com

 

Richard Ivar Rydstrom, Esq.

rrydstrom@gmail.com

949-678-2218

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