An amendment (the “Amendment”) was introduced in the U.S. Senate yesterday to the American Recovery and Reinvestment Act of 2009 (the “Economic Stimulus Bill”) that requires your immediate attention. The Amendment, if enacted into law, would have a significant impact on existing mortgage securitization transactions by denying tax-free REMIC status to a securitization if any document governing the activities of the servicer or trustee in that securitization restricts the ability of the servicer or trustee to reasonably modify or dispose of a mortgage loan in order to participate in any program established under TARP. A copy of the Amendment and sponsors' explanation are attached to this memorandum.
The Amendment is not currently law and we understand that legislative efforts are underway to have the Amendment withdrawn from the Economic Stimulus Bill. Even if removed, the elements of the Amendment may be introduced into legislation in another form. We therefore provide you with a description of the Amendment now in order to allow you an opportunity to analyze its content and to provide any desired input into the legislative process. We are in contact with the American Securitization Forum (ASF) and the Commercial Mortgage Securities Association (CMSA) to provide input and to stay abreast of developments.
Finally, while the drafters of the Amendment expressed concern for homeowners and the need to allow for broader modification of residential loans, the Amendment (as currently drafted) speaks to REMICs generally and would therefore be equally applicable to commercial mortgage loan securitizations.
I. REMIC Status Preserved if Loans are Modified or Disposed of Pursuant to TARP
Many residential mortgage securitizations restrict or prevent the servicer or trustee from modifying or disposing of mortgage loans. In fact, consistent with a securitization vehicle’s treatment as a REMIC, the servicer and trustee are generally prohibited from modifying any mortgage loan, unless default has occurred or is reasonably foreseeable. Section 1(a) of the Amendment provides that a securitization would not lose its REMIC status if the servicer or trustee modifies or disposes of a mortgage loan that is a “troubled asset” under TARP or under rules pertaining to a home mortgage relief program established under Section 2 of the Amendment (see below). Specifically, any such modification or disposition would not subject the REMIC to a “prohibited transaction tax” nor would it cause any interest in the REMIC from failing to qualify as a regular interest, and any proceeds resulting from such modification or disposition would be treated as amounts received under “qualified mortgages” (which is what a REMIC must hold). Although perhaps it may be inferred, it would be helpful if the Amendment explicitly stated that any mortgage loan so amended would continue to be a “qualified mortgage.”
II. REMICs that Fail to Eliminate Restrictions on Loan Modifications Cease to Qualify as REMICs
Section 1(b) of the Amendment states that a mortgage securitization will cease to qualify as a REMIC if the documents governing the conduct of the servicer or trustee of such REMIC:
(1) prohibit or restrict (including restrictions on the type, number, percentage, or frequency of modification or dispositions) such servicers or trustees from reasonably modifying or disposing of any mortgage loan or foreclosure property in order to participate in a TARP program or any home mortgage relief program established under Section 2 of the Amendment,
(2) give to a person other than the servicer or trustee the authority to prevent the reasonable modification or disposition of any mortgage loan or foreclosure property (this might include, for example, a particular investor class (such as a controlling holder), an insurer or rating agency),
(3) require a servicer or trustee to purchase mortgage loans that are in default or as to which default is reasonably foreseeable for the purposes of reasonably modifying such mortgages or as a consequence of such reasonable modification, or
(4) fail to provide that any duty a servicer or trustee owes when modifying or disposing of qualified mortgages or foreclosure property shall be to the trust in the aggregate and not to any individual or class of investors.
The effect of this section of the Amendment is to essentially mandate that all REMIC transaction documents be amended to remove any provision containing any of the above restrictions or requirements. Although many pooling and servicing agreements (“PSAs”) in fact permit the trustee to amend the PSA in order to preserve REMIC status, many do not. Trustees in these deals likely would need to seek the consent of each affected investor (or obtain an opinion of counsel that no class is adversely affected), as well as, in some cases, the consent of an insurer or rating agency, in order to remove any offending provision, a task that may prove difficult if not impossible. Even if the PSA is permitted to be amended by the trustee without investor consent, servicers are often restricted in their activities, particularly in commercial mortgage loan securitizations, by documents outside the securitization (such as a participation or intercreditor agreement) entered into with parties who have little or no incentive to preserve a securitization's REMIC status.
The effective date of Section 1(b) is 3 months after the enactment of the Amendment unless the servicer seeks and obtains a waiver from the Secretary of the Treasury. This means that unless a waiver is obtained, governing documents would need to be amended within 3 months of the Amendment's enactment or the securitization risks being disqualified as a REMIC.
III. Treasury Authorized to Establish Residential Loan Relief Program
Section 2 of the Amendment authorizes the Secretary of the Treasury to establish a program within 30 days of enactment to achieve broad scale modifications or dispositions of “troubled” home mortgage loans and broad-scale dispositions of foreclosure property.
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