CLARIFICATIONSANDCHANGESTOTHEREMICRULES

ThechangestotheREMICRulesaddressingCMBSloanmodificationsissuedbytheIRShavegarnered
significantattentionandcommentaryfromCMBSindustryparticipantsandspectators,sparkinga
conversationamongborrowers,lenders,servicers,investors,andindustrygroupsaboutthepractical
effectthesechangeswillhaveontheirbusiness.WhiletheRevenueProcedureandRegulationsrelax
certainconstraintsonmodifyingmortgageloansheldinREMICs,itisnotclearhowsignificantanimpact
thesechangeswillhaveinpractice.
1.

TheflexibilityincorporatedintothechangesintheREMICRulesmayallowmodificationstobe
madeearlierwithoutincurringadversetaxconsequencesiftheservicerreasonablybelievesthat
thereisasignificantriskofdefault.Thesechangesdonot,however,acceleratethetimingof
transferstothespecialservicer,allowformodificationsnotinthebestinterestofthecertificate
holders,negatetheneedforspecialservicerorcontrollingclassholderapprovals,oramendany
termsoftheservicingagreementsgoverningservicingoftheloan.Therefore,theimpactofthe
newREMICguidelinesinexistingtransactionswillnotbesignificant.

2.

Ashasalwaysbeenthecase,borrowersshouldworkwiththeirservicerswhentheyhave
questionsorconcerns.
(a)

Theprimaryservicerremainstheinitialpointofcontactfortheborrower.Theborrower
mostlikelysendsloanpaymentsandfinancialstatementstotheprimaryservicerand
theprimaryserviceristhedaytodaycontactfortheborrower.Themosteffective
meansofcommunicationwiththeservicerisbyprovidingaspecificwrittenrequest
withsupportingdocumentationregardingthestatusoftheloan,collateralpropertyand
market.ThechangestotheREMICRulesdonotchangethis.

(b)

UnderthePoolingandServicingAgreement(PSA),itistheprimaryandmaster
servicerswhoareresponsiblefortheloanwhileitisperforming,andthespecialservicer
will,inmostcases,takeoverresponsibilityshouldtheloangointodefaultorbeatrisk
ofimminentdefault.ThechangestotheREMICRulesdonotchangethis.

(c)

TheprovisionsofthePSAdeterminewhetherthespecialormasterservicerwillwork
withtheborroweronaproposedamendmentorextension.Invirtuallyallcases,the
specialservicerisresponsibleforthesematters.Ingeneral,itisthemasterservicer,
governedbythetermsofthePSA,whichdeterminesifandwhenaloanshouldbe
transferredtothespecialservicer.ThechangestotheREMICRulesdonotchangethis.

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October2009
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3.

(d)

Aborrowersandlendersrightsandobligationswithrespecttotheloanaresetforthin
theloandocuments.Anychangeormodificationtotheloandocumentsmustbeagreed
tobythelenderandborrower.Oncealoanissecuritized,theservicerrepresentsthe
collectiveinterestsoftheTrust.ThechangestotheREMICRulesdonotmeanthata
lender/servicerisrequiredtoagreetoanymodification,amendmentorwaiverofthe
termsandconditionsoftheloandocuments.

(e)

Allservicersmustadheretotheservicingstandard(theServicingStandard)which
placesaresponsibilityontheservicertoactinthebestinterestsoftheinvestorsunder
thetrustandotherinterestholdersintheloan.Iftheloanbecomestroubled,andthe
servicerconcludesamodificationistheroutetothehighestrecoveryonanetpresent
valuebasisforthecollectiveinterestofthebondholdersandotherinterestholders,it
willbepursued.Ifaforeclosureisthebestroute,itwillbepursued.Thechangestothe
REMICRulesdonotchangethis.

WhiletheREMICRulesplayanimportantpartintheoverallstructureofthecommercial
mortgagebackedsecuritiesmarket,theREMICRulesandtherecentclarificationsandchanges
totheREMICdonotchange:
(a)

(b)

Thetermsof:
(i)

themortgageloandocumentsgoverningtheloan;

(ii)

thePSAthatspecifiestheresponsibilitiesanddutiesoftheloanservicers,the
rightsandprioritiesofinvestorsandthetimingoftransferstothespecial
servicer.Generallytransferscanonlyoccurinthecaseofadefaultorimminent
defaultwhichwillnotbecuredwithinaspecifiedperiodoftime.Thisisnotthe
sameasareasonablyforeseeabledefaultasdescribedintheRevenue
Procedure

TheServicingStandardisthecriteriaservicersmustusewhenevaluatingpotential
extensionsorotherloanmodifications.Itremainsthesameandservicersstillcannot
changethetermsofaloanunlessthechanges,takenasawhole,benefittheinvestors
andotherinterestholdersoftheLoan.

4.

TheREMICRulechangesloosensometaxrestrictionsandenhanceopportunitiesfordiscussion
ofloanextensionsorothermodificationswithoutconcernthatsuchactionswouldthreatenthe
REMICstatusofthetrust.Now,if,basedonallthefactsandcircumstances,theservicer
reasonablybelievesthatthereisasignificantriskofdefaultuponmaturityoftheloanoratan
earlierdate,thentheIRSwillnotchallengetheREMICstatusofthetrustiftheloanismodified,
providedthebalanceoftherequirementssetforthintheREMICRulesaremet.This,however,
doesnotmeanthatunderanyPSAaloancanbemodifiedsimplybecausethetaxrulespermit
modification.

5.

Ifaborrowerbelievesasignificantriskofdefaultexistsandwantstorequestaloanmodification
orextension,theborrowergenerallyshould:

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October2009
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(a)

Conductareviewoftheloandocumentstodeterminetheircontractualrightsand
obligations.

(b)

Carefullyanalyzetheirpropertycondition,performanceandoutlooktodeterminewhat
factorsindicateasignificantriskofdefault,andmakeanassessmentofthebestplanto
enabletheborrowertoperformitsobligationsundertheloan.

(c)

Prepareawrittenrequestoutliningtheresultsoftheassessment,togetherwitha
proposalforthelendertoconsider.Factorsgenerallyconsideredbyservicersin
reviewingsucharequestincludetheoriginaluseofthemortgageproceeds,thecurrent
conditionofthepropertyanditsincomestream,projectionsregardinghowthatincome
streamwillchangeoverthecourseoftheremainingloanterm,significantlease
nonrenewalsorterminations,thenumberandtimingofrefinanceapplicationsand
rejections,equityinfusionsorcontributionstheborrowerispreparedtomake,and
otherfactorsaffectingtherequestedloanmodificationorextension,including
guaranteesoradditionalcollateral.Itisimportanttoprovideevidentiarybackupto
supportforecasts,conditionsandassumptions.

(d)

Communicateinwritingwiththeservicertowhichtheborrowersubmitsitsmonthly
debtserviceandfinancialsreasonablyinadvanceoftheperceivedeventscreatingrisk
ofdefault.