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CMSA: REMIC Changes Raise Red Flag

NEW YORK CITY-The industry association says proposals to give servicers more latitude in modifying CMBS loans would leave investors out in the cold.

By Paul Bubny | Updated on July 14, 2009

NEW YORK CITY-The Commercial Mortgage Securities Association, based here, says some new proposals to reform the REMIC rules would essentially pull the rug out from under CMBS Investors. In a white paper issued Tuesday, the industry association says the proposed changes would give servicers too much latitude in modifying the terms of loans. “Some of these overly broad proposals, if adopted, would have a significantly negative effect on CMBS investors because any new laws that authorize servicers to prematurely modify the terms of mortgage contracts already in place can change the construct and dynamics of investor cash flows and liquidity,” says Patrick Sargent, CMSA president, in a release.

For the past several years, “the CMSA, individually and as part of a larger industry coalition, has been actively seeking additional servicer flexibility within the REMIC rules to improve the efficiency of the REMIC structure, enhance the protection of asset value for investors and eliminate certain constraints on borrowers,” according to the white paper. “However, some more recent reform proposals would go much further by seeking to change the terms of commercial real estate loans well in advance of what would be customary under the widely accepted servicing standard ['reasonably foreseeable or imminent default'], contrary to the expectations of and disclosure to investors in CMBS, and without a clear set of principles to govern servicers’ decision to modify the loans.”

At present, the rules governing REMICs, or real estate mortgage investment conduits, impose strict limitations on the circumstances under which loans can be modified without the IRS counting them as “new loans” and losing their tax-exempt status. REMICs were created by statute in the 1980s and provide the legal basis for CMBS.

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