rp-09-23.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also Part I, §§ 860D, 860F, 860G, 1001; 1.860G–2, 1.1001–3, 301.7701–2,
301.7701-3, 301.7701-4.)

Rev. Proc. 2009-23

SECTION 1. PURPOSE
This revenue procedure describes the conditions under which modifications to
certain mortgage loans will not cause the Internal Revenue Service (Service) to
challenge the tax status of certain securitization vehicles that hold the loans or to assert
that those modifications give rise to prohibited transactions.
This revenue procedure provides certainty in the current economic environment
with respect to certain potential tax issues that may be implicated by loan modifications
made pursuant to the Home Affordable Modification Program (“HAMP”), 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, in the absence of this revenue

procedure, transactions within its scope would have impaired the tax status of
securitization vehicles or would have given rise to prohibited transactions.
SECTION 2. BACKGROUND—THE HAMP
.01 The deep contraction in the economy and in the housing market has created
distress for homeowners and communities throughout the country. Large numbers of
homeowners are unable to afford their current monthly mortgage payments and are at
risk of losing their homes. In response, on February 18, 2009, the United States
Government announced the Homeowner Affordability and Stability Plan (the “Plan”).
The Plan is intended to help at-risk homeowners to modify their mortgages to avoid
foreclosure. On March 4, 2009, as a key component of the Plan, the United States
Government released further details about the HAMP. See
documents entitled “Home
Affordable Modification Program Guidelines” and “Making Home Affordable, Summary
of Guidelines.”
.02 The HAMP includes detailed protocols for identifying borrowers at risk of
default. As is more fully set forth in the program documents, the HAMP is intended to
reach borrowers with high mortgage debt service compared to income and other
indications of being at risk of default. Delinquency is not a requirement for eligibility.
Rather, because loan modifications are more likely to succeed if they are made before a
borrower misses a payment, the HAMP is also intended to reach borrowers for whom
default is imminent despite the fact that those borrowers are current on their mortgage
payments. In determining whether default is imminent for a particular borrower, the
HAMP takes into account a broad range of information, including whether the borrower
has had a change in circumstances that causes financial hardship, or is facing a recent

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or imminent increase in the monthly mortgage payment that would likely create a
financial hardship.
.03 The HAMP applies both to loans that investors hold directly and to those that
are held through securitization vehicles such as investment trusts and real estate
mortgage investment conduits (REMICs).
SECTION 3. BACKGROUND—REMICS
.01 REMICs are widely used securitization vehicles for mortgages. REMICs are
governed by sections 860A through 860G of the Internal Revenue Code.
.02 For an entity to qualify as a REMIC, all of the interests in the entity must
consist of one or more classes of regular interests and a single class of residual
interests, see
section 860D(a), and those interests must be issued on the startup day,
within the meaning of § 1.860G–2(k) of the Income Tax Regulations.
.03 A regular interest is one that is designated as a regular interest and whose
terms are fixed on the startup day. Section 860G(a)(1). In addition, a regular interest
must (1) unconditionally entitle the holder to receive a specified principal amount (or
other similar amount), and (2) provide that interest payments, if any, at or before
maturity are based on a fixed rate (or to the extent provided in regulations, at a variable
rate).
.04 An interest issued after the startup day does not qualify as a REMIC regular
interest.
.05 Under section 860D(a)(4), an entity qualifies as a REMIC only if, among
other things, as of the close of the third month beginning after the startup day and at all
times thereafter, substantially all of its assets consist of qualified mortgages and

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permitted investments. This asset test is satisfied if the entity owns no more than a de
minimis amount of other assets. See § 1.860D–1(b)(3)(i). As a safe harbor, the amount
of assets other than qualified mortgages and permitted investments is de minimis if the
aggregate of the adjusted bases of those assets is less than one percent of the
aggregate of the adjusted bases of all of the entity’s assets. § 1.860D–1(b)(3)(ii).
.06 With limited exceptions, a mortgage loan is not a qualified mortgage unless it
is transferred to the REMIC on the startup day in exchange for regular or residual
interests in the REMIC. See
section 860G(a)(3)(A)(i).
.07 The legislative history of the REMIC provisions indicates that Congress
intended the provisions to apply only to an entity that holds a substantially fixed pool of
real estate mortgages and related assets and that “has no powers to vary the
composition of its mortgage assets.” S. Rep. No. 99–313, 99
th
Cong., 2
d
Sess. 791–92,
1986–3 (Vol. 3) C.B. 791–92.
.08 Section 1.1001–3(c)(1)(i) defines a “modification” of a debt instrument as any
alteration, including any deletion or addition, in whole or in part, of a legal right or
obligation of the issuer or holder of a debt instrument, whether the alteration is
evidenced by an express agreement (oral or written), conduct of the parties, or
otherwise. Section 1.1001–3(e) governs which modifications of debt instruments are
“significant.” Under § 1.1001–3(b), for most federal income tax purposes, a significant
modification produces a deemed exchange of the original debt instrument for a new
debt instrument.
.09 Under § 1.860G–2(b), related rules apply to determine REMIC qualification.
Except as specifically provided in § 1.860G–2(b)(3), if there is a significant modification

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of an obligation that is held by a REMIC, then the modified obligation is treated as one
that was newly issued in exchange for the unmodified obligation that it replaced.
See
§ 1.860G-2(b)(1). For this purpose, the rules in § 1.1001–3(e) determine whether a
modification is “significant.” See
§ 1.860G-2(b)(2). Thus, even if an entity initially
qualifies as a REMIC, one or more significant modifications of loans held by the entity
may terminate the qualification if the modifications cause less than substantially all of
the entity’s assets to be qualified mortgages.
.10 Certain loan modifications, however, are not significant for purposes of
§ 1.860G–2(b)(1), even if the modifications are significant under the rules in § 1.1001-3.
In particular, under § 1.860G-2(b)(3)(i), if a change in the terms of an obligation is
“occasioned by default or a reasonably foreseeable default,” the change is not a
significant modification for purposes of § 1.860G-2(b)(1), regardless of the
modification’s status under § 1.1001–3.
.11 Section 860F(a)(1) imposes a tax on REMICs equal to 100 percent of the net
income derived from “prohibited transactions.” The disposition of a qualified mortgage
is a prohibited transaction unless the “disposition [is] pursuant to—(i) the substitution of
a qualified replacement mortgage for a qualified mortgage . . . , (ii) a disposition incident
to the foreclosure, default, or imminent default of the mortgage, (iii) the bankruptcy or
insolvency of the REMIC, or (iv) a qualified liquidation.” Section 860F(a)(2)(A).
.12 Under section 860C(b)(1), “The taxable income of a REMIC shall be
determined under an accrual method of accounting . . . except that— . . . (C) there shall
not be taken into account any item of income, gain, loss, or deduction allocable to a
prohibited transaction, . . .”

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SECTION 4. BACKGROUND—TRUSTS
.01 Section 301.7701-2(a) of the Procedure and Administration Regulations
defines a “business entity” as any entity recognized for federal tax purposes (including
an entity with a single owner that may be disregarded as an entity separate from its
owner under § 301.7701-3) that is not properly classified as a trust under § 301.7701-4
or otherwise subject to special treatment under the Code.
.02 Section 301.7701-4(a) provides that an arrangement is treated as a trust if
the purpose of the arrangement is to vest in trustees responsibility for the protection and
conservation of property for beneficiaries who cannot share in the discharge of this
responsibility and, therefore, are not associates in a joint enterprise for the conduct of
business for profit.
.03 Section 301.7701-4(c) provides that an “investment” trust is not classified as
a trust if there is a power under the trust agreement to vary the investment of the
certificate holders.
SECTION 5. SCOPE
This revenue procedure applies to a modification made pursuant to the HAMP of
a mortgage loan that is held by a REMIC or by an investment trust.
SECTION 6. APPLICATION
If one or more modifications of mortgage loans are described in Section 5 of this
revenue procedure—
.01 The Service will not 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);

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.02 The Service will not 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);
.03 The Service will not 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
.04 The Service will not 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.
SECTION 7. OTHER GUIDANCE
For the treatment of mortgage loans modified pursuant to certain foreclosure
prevention programs, see Rev. Proc. 2008-47, 2008-31 I.R.B. 272, and Rev. Proc.
2008-28, 2008-23 I.R.B. 1054.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for loan modifications on or after March 4,
2009.
SECTION 9. DRAFTING INFORMATION
The principal author of this revenue procedure is Diana Imholtz of the Office of
Associate Chief Counsel (Financial Institutions and Products). For further information,
contact Ms. Imholtz on (202) 622–3930 (not a toll-free call).