n-12-05.pdf

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Part III – Administrative, Procedural, and Miscellaneous

SAFE HARBOR REPORTING METHOD FOR ELIGIBLE REMICS REQUIRED TO
REPORT ON SCHEDULE Q INFORMATION WITH RESPECT TO REMIC ASSETS

Notice 2012-5

PURPOSE
This notice provides a safe harbor reporting method that an eligible real estate
mortgage investment conduit (REMIC) may use to satisfy its reporting obligations under
§ 1.860F-4(e)(1)(ii) of the Income Tax Regulations with respect to information regarding
REMIC assets that the REMIC must report to residual interest holders on a Schedule Q
(Form 1066), Quarterly Notice to Residual Interest Holder of REMIC Taxable Income or
Net Loss Allocation (Schedule Q).
THE HOME AFFORDABLE REFINANCE PROGRAM (HARP)
In April 2009, the Federal Housing Finance Agency (FHFA) and the United
States Department of the Treasury introduced the Home Affordable Refinance Program
(HARP) as part of the United States Government’s Making Home Affordable Program.
On October 24, 2011, FHFA, with Federal National Mortgage Association (Fannie Mae)
and Federal Home Loan Mortgage Corporation (Freddie Mac), announced an
expansion of HARP in an effort to serve additional eligible borrowers who can benefit

from refinancing their home mortgages. Details of the expansion were announced on
November 15, 2011.
HARP serves borrowers who may not otherwise qualify for refinancing, either
because the value of their homes has declined or because they cannot obtain mortgage
insurance. The program is available to borrowers who owe more on their mortgages
than the value of their homes. HARP provides these homeowners with the ability to
refinance their mortgages into more affordable and sustainable mortgages.
LAW
REMICs are widely used securitization vehicles for mortgages. REMICs are
governed by sections 860A through 860G of the Internal Revenue Code. 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).
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 permitted
investments. In general, the term “qualified mortgage” means an obligation that is
principally secured by an interest in real property. See
section 860G(a)(3)(A). That is,
an obligation secured by an “interest in real property” is not a qualified mortgage unless
the obligation is “principally secured” by such an interest.
An obligation is “principally secured” if the fair market value of the interest in real
property securing the obligation equals at least 80 percent of the adjusted issue price of

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the obligation (the 80-percent test). See § 1.860G-2(a)(1). The regulations require the
80-percent test to be satisfied either at the time the obligation was originated or at the
time the sponsor contributes the obligation to the REMIC. After the startup day, the
regulations generally do not require retesting of the value of the interest in real property
that secures the obligation.
The REMIC regulations cross-reference the real estate investment trust (REIT)
regulations to define the term “interest in real property.” Specifically, § 1.860G-2(a)(4)
provides that the definition of “interests in real property” in § 1.856–3(c) and the
definition of “real property” in § 1.856–3(d) apply for purposes of section 860G(a)(3) and
§ 1.860G-2(a). In addition, a mortgage pass-thru certificate that is guaranteed by
Fannie Mae or Freddie Mac is included as an obligation secured by an interest in real
property for purposes of section 860G(a)(3)(A). See
§ 1.860G-2(a)(5).
Section 1.860F-4(e) provides that, at the close of each calendar quarter, a
REMIC must provide to each person who held a residual interest in the REMIC during
that quarter notice on Schedule Q of certain information, including information with
respect to REMIC assets. Under § 1.860F-4(e)(1)(ii)(A), a REMIC must provide to each
of its residual interest holders the following information: (1) the percentage of REMIC
assets that are described in section 7701(a)(19) (Category 1); and (2) the percentage of
REMIC assets that are real estate assets defined in section 856(c)(5)(B) (Category 2),
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computed by reference to the average adjusted basis (as defined in section 1011) of the
REMIC assets during the calendar quarter.
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If the percentage of REMIC assets

1
The regulation refers to former section 856(c)(6)(B). Section 1255 of the Taxpayer Relief Act of 1997
(P.L. 105-34) redesignated former section 856(c)(6)(B) as current section 856(c)(5)(B).
2
Section 1.860F-4(e)(1)(ii)(A) also requires a REMIC to provide information with respect to the
percentage of REMIC assets that are qualifying real property loans under section 593. Section 1616(a) of

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represented by either Category 1 or Category 2 is at least 95 percent, then the REMIC
need only specify on Schedule Q that the percentage for that category was at least 95
percent (the 95-percent asset-reporting test).
Under § 1.860F-4(e)(1)(ii)(B), if, for any calendar quarter after 1988, the 95-
percent asset-reporting test is not met with respect to assets in Category 2 (that is, real
estate assets as defined in section 856(c)(5)(B)), then for that calendar quarter, the
REMIC must provide the following additional information to any REIT that holds a
residual interest:
(1) The percentage of REMIC assets described in section 856(c)(4)(A),
computed by reference to the average adjusted basis of the REMIC assets during the
calendar quarter (as described in § 1.860F-4(e)(1)(iii)),
(2) The percentage of REMIC gross income (other than gross income from
prohibited transactions defined in section 860F(a)(2)) described in section 856(c)(3)(A)
through (E), computed as of the close of the calendar quarter, and
(3) The percentage of REMIC gross income (other than gross income from
prohibited transactions defined in section 860F(a)(2)) that is described in
section 856(c)(3)(F) (which refers to income or gain from foreclosure property),
computed as of the close of the calendar quarter. For this purpose, the term
"foreclosure property" has the meaning specified in section 860G(a)(8) (which governs
REMICs), rather than the closely related definition of “foreclosure property” in

the Small Business Job Protection Act of 1996 (P. L. 104-188), however, repealed the section 593
reserve method of accounting for bad debts of thrift institutions for tax years beginning after December
31, 1995. Accordingly, whether assets are “qualifying real property loans under section 593” is no longer
relevant, and the reporting of this information to residual interest holders is unnecessary.

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section 856(e) (which otherwise would determine the income or gain that is described in
section 856(c)(3)(F)).
Section 1.860G–2(a)(1) generally treats a mortgage loan as an obligation
“principally secured by an interest in real property” for purposes of section 860G(a)(3) if
the loan is secured by an interest in real property that is worth at least 80 percent of the
outstanding stated principal of the loan (in other words, the loan-to-value ratio of the
loan—commonly referred to as “LTV”—is not greater than 125 percent).
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If, however, a
REMIC holds one or more qualified mortgages that are less than 95–percent secured by
an interest in real property, the REMIC may fail the 95-percent asset-reporting test and
may be required to report additional information to residual interest holders with respect
to the REMIC assets.
SAFE HARBOR REPORTING METHOD
As a safe harbor for purposes of a REMIC’s reporting obligation to residual
interest holders under § 1.860F-4(e)(1)(ii), if a REMIC is an “eligible REMIC” as defined
below and if the percentage of its assets represented by either Category 1 or
Category 2 is less than 95 percent but at least 80 percent, then the REMIC need only
specify on Schedule Q that the percentage for that category was at least 80 percent.
To qualify as an “eligible REMIC” under this notice—
(1) The REMIC must have a guarantee from Fannie Mae or Freddie Mac
that will supplement amounts received by the REMIC as required to

3
In general, the adjusted issue price of a home mortgage loan is equal to or slightly less than the
outstanding stated principal of the loan. Thus, although LTV is based on stated principal rather than on
adjusted issue price, if LTV is not greater than 125 percent, then the criterion for “principally secured” will
generally be satisfied (that is, the value of the real property collateral will be at least 80 percent of the
adjusted issue price).

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permit the payment of principal and interest, as applicable, on both
the regular interests and residual interests issued by the REMIC; and
(2) All of the qualified mortgages (including mortgage pass-thru
certificates) that are held by the REMIC must be secured by interests
in single-family (one-to-four unit) dwellings.
See also Rev. Proc. 2012-14, this bulletin, for guidance to REITs that hold a regular or
residual interest in an eligible REMIC.
EFFECTIVE DATE
The safe harbor reporting method described in this notice applies to reporting for
calendar quarters ending on or after December 31, 2011.
DRAFTING INFORMATION
The principal author of this notice is Diana Imholtz of the Office of Associate
Chief Counsel (Financial Institutions and Products). For further information regarding
this notice, contact Ms. Imholtz at 202-622-3920 (not a toll-free call).