Industry Says Regulations Put CMBS at Disadvantage.

A preliminary step forward towards possible changes to real estate mortgage investment conduit provisions has been made, with some industry groups responding to the Internal Revenue Service's request for input on what possible amendments could be made to REMIC regulations.

The REMIC provisions have put the commercial mortgage-backed securities industry at a disadvantage, compared to other commercial mortgage funding sources, since they impede the flexibility of CMBS servicers and lenders to heed borrower requests to modify loans after they are closed. This lack of post-closing flexibility has been a sore point for borrowers on CMBS loans. And servicers of securitized loans are also bound by the real estate mortgage investment conduit provisions in terms of what sorts of activity can be undertaken without jeopardizing REMIC status. If the loans are significantly modified, they may be treated as newly originated.

The Mortgage Bankers Association and a number of other commercial real estate-related trade groups have responded to the IRS call for comment on this subject. Their comment letter states that the current REMIC regulations were adopted back in 1992, 15 years ago, and don't address situations that arise currently in terms of securitized commercial mortgage loans. Also the REMIC format was originally set up with residential mortgages in mind, whereas commercial mortgages oftentimes require more active management.

With the current REMIC framework, only four specific types of amendments to a securitized loan can be made without a REMIC losing its status, according to the groups. They are urging the IRS to "amend the REMIC regulations to include additional types of permitted loan modifications that are responsive to situations that now arise regularly in the context of commercial loans."

The groups are looking for six additional modifications to be permitted to a securitized loan. These are additional flexibility in terms of changes in loan collateral, changes in the time a loan can be prepaid, changes in the recourse/non-recourse nature of a loan, ...