On April 10, 2009, the Internal Revenue Service (IRS) published Revenue Procedure 2009-23, which addresses the consequences of certain modifications of residential mortgage loans owned by real estate mortgage investment conduits (REMICs) or investment trusts made pursuant to the Home Affordable Modification Program ("HAMP"), as described below. The Revenue Procedure (Rev. Proc.) relaxes the circumstances in which such mortgage loans may be modified without the IRS challenging the status of the REMIC as a REMIC under the Internal Revenue Code (Code) or the investment trust as a trust under Section 301.7701-4(c), or imposing a tax on "prohibited transactions" (Prohibited Transactions Tax) on the REMIC, as described below.

On March 4, 2009, the Treasury released details of HAMP in which the Treasury will partner with financial institutions and investors to reduce homeowners' monthly mortgage payments. Under the terms of HAMP, the lender will have to first reduce monthly payments on mortgages to a specified affordability level (specifically, the lender must bring down monthly payments so that the borrower's monthly mortgage payment is no greater than 38% of his or her monthly gross income). Next, the program will match further reductions in monthly payments dollar-for-dollar, from 38% down to 31% debt-to-income ratio for the borrower.

To ensure long-term affordability, the modified payments will be kept in place for five years and the loan rate will be capped for the life of the loan. After five years, the interest rate can be gradually stepped-up by 1% per year to the conforming loan interest rate in place at the time of the modification. To reach the target affordability level of 31%, interest payments will first be reduced to as low as 2%. If at that interest rate the debt to income level is still over 31%, lenders then extend the term or amortization period up to 40 years, and finally forbear principal at no interest, until the monthly payment is reduced to the 31% target. The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner's association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security pensions, and all other income. Treasury will share the costs of reducing the payment from 38% debt-to-income ratio to 31% debt-to-income ratio dollar for dollar.

The Rev. Proc. is specifically targeted to mortgage loans modified under HAMP. The HAMP is available to borrowers who are current in their mortgage payments if the loan was originated on or before January 1, 2009, and the loan is a first-lien loan on an owner-occupied property with unpaid principal balance up to $729,750 (higher limits allowed for owner-occupied property with 2-4 units). Prior to the issuance of the Rev. Proc., such modifications effectively were prohibited under the REMIC and investment trust rules until a default with respect to a mortgage loan had occurred or was reasonably foreseeable or the modification was made pursuant to a Servicer's Foreclosure Prevention Plan pursuant to Rev. Proc. 2008-28.

The Rev. Proc. addresses this situation by permitting any modification to a mortgage pursuant to HAMP. Specifically, if one or more mortgage loans held by a REMIC or investment trust is modified in accordance with all of the conditions set forth in the Rev. Proc., the IRS will not (i) challenge a securitization vehicle's qualification as a REMIC on the grounds that the modifications are not among the exceptions listed in § 1.860G-2(b)(3); (ii) contend that the modifications are prohibited transactions under section 860F(a)(2) on the grounds that the modifications result in one or more dispositions of qualified mortgages and that the dispositions are not among the exceptions listed in section 860F(a)(2)(A)(i)–(iv); (iii) challenge a securitization vehicle's classification as a trust under § 301.7701–4(c) on the grounds that the modifications manifest a power to vary the investment of the certificate holders; and (iv) challenge a securitization vehicle's qualification as a REMIC on the grounds that the modifications result in a deemed reissuance of the REMIC regular interests.

Also on April 10, 2009, the IRS published Notice 2009-36 in which it announced that the IRS and the Department of the Treasury intend to issue regulations regarding the application of section 860G(d) of the Code to certain amounts that may be paid to REMICs as part of the HAMP. This Notice specifies that pending the issuance of such regulations, taxpayers may rely on this Notice and, accordingly, any payment made to a REMIC under the HAMP will not be subject to the 100 percent tax on prohibited contributions set forth in section 860G(d)(i).


The Rev. Proc. is effective for modifications to mortgage loans made on or after March 4, 2009. The regulations are expected to be effective for payments made on or after March 4, 2009.