The changes to the REMIC rules (PDF) were intended, at least in part, to ease restrictions on servicers of securitized mortgage loans. However, while expanding the scope of permitted modifications, the new REMIC regulations also impose a requirement that the modified loan be re-tested to ensure the mortgage loan continues to be principally secured by real estate. This generally makes sense REMICs are intended to hold mortgage loans, and this new requirement presumably prevents a servicer from modifying the mortgage loan so as to be secured by other assets, such as credit-card receivables, cash or other non-real estate collateral.

The problem, however, is that the new regulations also require mortgage loans to be re-tested any time real property collateral is released (even if the release is explicitly contemplated by the loan documents). On troubled multi-property loans (with an LTV of less than 80%), this re-testing requirement potentially puts servicers between a rock and a hard place, forcing them to choose between entering into a prohibited modification (resulting in the imposition of potentially severe tax penalties) and incurring liability to borrower (and potentially, junior lenders) for failing to meet the obligations of the loan documents.

The immediate problem could be fixed in any number of ways (many of which have been suggested in writing by industry groups such as the American Securitization Forum and the CRE Finance Council (formerly CMSA)). Proposed solutions include clarifying that the release of collateral in exchange for the payment of a release price would not be deemed a modification under the REMIC rules, or replacing the existing principally secured by real estate test with a before-and-after LTV test.

Until resolved, this issue will continue to frustrate the already stalled CMBS lending industry.

Photo:  Flickr user kalleboo