rp-08-47.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, 860G, 1001; 1.860G–2, 1.1001–3, 301.7701–2, 301.7701-3,
301.7701-4)

Rev. Proc. 2008-47

SECTION 1. PURPOSE
This revenue procedure describes the conditions under which modifications to
certain subprime 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 create a liability for tax on a prohibited transaction.
The purpose of this revenue procedure is to provide certainty in the current
economic environment with respect to certain potential tax issues that may be
implicated by fast track loan modifications, as 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

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that, in the absence of this revenue procedure, transactions within its scope would have
impaired the tax status of securitization vehicles or would have created liability for tax
on a prohibited transaction.
Rev. Proc. 2007–72, 2007–52 I.R.B. 1257, provided similar guidance regarding
fast-track loan modifications that were effected in a manner consistent with certain
principles, recommendations, and guidelines (the “Original Framework”), which the
American Securitization Forum (“ASF”) released on December 6, 2007. In July 2008,
the ASF released an updated Framework, which covers additional fast-track loan
modifications.
This revenue procedure amplifies and supersedes Rev. Proc. 2007–72 by
extending its provisions to these additional loan modifications.
SECTION 2. BACKGROUND—THE ASF “JULY 2008 FRAMEWORK”
.01 On July 8, 2008, the American Securitization Forum (“ASF”) released a
document entitled, “Statement of Principles, Recommendations and Guidelines for a
Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime
Adjustable Rate Mortgage Loans” (the “July 2008 Framework”). An Executive Summary
of the July 2008 Framework (entitled “Streamlined Foreclosure and Loss Avoidance
Framework for Securitized Subprime Adjustable Rate Mortgage Loans”) was released
simultaneously and is attached as an Appendix to this revenue procedure.
.02 Both the Original Framework and the July 2008 Framework have been
broadly supported as appropriate steps in addressing certain risks in the current
economic environment.

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.03 The July 2008 Framework applies to first-lien subprime residential adjustable
rate mortgage (ARM) loans that—
(1) Have an initial fixed rate period of 36 months or less (including “2/28s”
and “3/27s”);
(2) Were originated between January 1, 2005, and July 31, 2007;
(3) Are included in securitized pools; and
(4) Have an initial interest rate reset date between January 1, 2008, and
July 31, 2010.
This revenue procedure refers to these instruments as “Loans.”
.04 The July 2008 Framework provides a “fast track” procedure for modifying
Loans in advance of an initial, or any subsequent, interest rate reset date and details
the criteria for determining which Loans are eligible for the procedure. Modifications
pursuant to the procedure are referred to as “fast track modifications.”
.05 A fast track modification affects the interest rate on the Loan, generally for
five years following the date on which the rate would have reset in the absence of the
modification. During the period affected by the modification, the interest rate on the
modified Loan is generally fixed at the rate in effect prior to the upcoming reset date.
SECTION 3. BACKGROUND—REMICS
.01 Real Estate Mortgage Investment Conduits (REMICs) are widely used
securitization vehicles for mortgages. REMICs are governed by sections 860A through
860G of the Internal Revenue Code.

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.02 For an organization to qualify as a REMIC, all of the interests in the
organization 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
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).

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.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
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

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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).
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.

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.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
.01 This revenue procedure applies to the following transactions occurring on or
before July 31, 2010—
(1) A fast track modification of a Loan pursuant to the July 2008
Framework; and
(2) A second-lien holder’s action of subordinating its lien to any new lien
that may arise under a Loan as the result of such a fast track modification.
.02 If the July 2008 Framework is materially modified after July 8, 2008, this
revenue procedure does not necessarily apply to fast track modifications under the
modified Framework or to second-lien subordinations to accommodate those
modifications.
SECTION 6. APPLICATION
In the case of one or more transactions to which this revenue procedure
applies—

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.01 The Service will not challenge a securitization vehicle’s qualification as a
REMIC on the grounds that the transactions are not among the exceptions listed in
§ 1.860G-2(b)(3);
.02 The Service will not contend that the transactions are prohibited transactions
under section 860F(a)(2) on the grounds that the transactions resulted 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 transactions 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 transactions resulted 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. 2008-28, 2008-23 I.R.B. 1054.
SECTION 8. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2007-72 is amplified and, as amplified, is superseded.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective on July 8, 2008.

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SECTION 10. 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).

Appendix to Revenue Procedure 2008-47

American Securitization Forum

Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans

Executive Summary

July 8, 2008

Scope:

This streamlined framework applies to all first lien subprime residential adjustable rate
mortgage (ARM) loans that have an initial fixed rate period of 36 months or less
(including “2/28s” and “3/27s”), referred to below as “subprime ARM loans” that:

• were originated between January 1, 2005 and July 31, 2007;

• are included in securitized pools; and

• have an initial interest rate reset between January 1, 2008 and July 31,
2010.

This streamlined framework may be applied to subprime ARM loans in advance of an
initial, or any subsequent, reset date. Typically, servicer/borrower communication should
begin 120 days prior to the initial reset date.

As a general overview, under this streamlined framework, if the loan is current and is
eligible for refinance, then it should be refinanced. If the loan is current but is not
eligible for a refinance, then it would be eligible for a streamlined modification if: the
property is occupied as the borrower's primary residence; the borrower meets the “FICO
test”; and the payment amount would go up by more than 10% over the current payment
amount at the upcoming reset.

Overarching Principles:

• The servicer will not take any action that is prohibited by the pooling and servicing
agreement (“PSA”) or other applicable securitization governing document, or that
would violate applicable laws, regulations, or accounting standards. ASF’s Statement
of Principles, Recommendations and Guidelines for a Streamlined Foreclosure and

American Securitization Forum
Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans: Executive Summary
July 8, 2008

2
Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage
Loans, published concurrently with this document, analyzes how the framework
described in the Executive Summary is consistent with typical PSA provisions. The
ASF urges readers of this Executive Summary to review the full Statement.

• The ASF believes that this framework is consistent with the authority granted to a
servicer to modify subprime mortgage loans in typical PSAs. The ASF expects that
the procedures in this framework will constitute standard and customary servicing
procedures for subprime loans.

• The servicer will expeditiously implement the ASF Investor Reporting Guidelines for
the Modification of Subprime ARM Loans recommended by the ASF, which is
simultaneously released with this framework.

• LTV and CLTV will be determined based on information at origination. If an
origination LTV is below 97%, a servicer may obtain an updated home value by
obtaining an AVM, BPO or other means.

• All servicers of second liens to subprime borrowers should cooperate fully with this
framework by providing information needed by first lien servicers and by agreeing to
subordinate the second lien to any new first lien resulting from a refinance (with no
cash out) under this framework.

• All existing contractual obligations and remedies related to fraudulent mortgage
origination activity should be strictly enforced.

• The streamlined framework outlined in this framework represents the consensus view
of the membership of the ASF, acting through its Board of Directors, as to the
parameters used to determine the segmentation of subprime ARM loans, including the
numeric values included in those parameters. It is understood by the ASF's members
that the numeric values included in the parameters are not based on historic data, but
rather simply represent a consensus view as to appropriate numeric values for use
within this framework for the purpose of supporting a streamlined approach to loan
modifications that complies with typical securitization governing documents. The
ASF, acting through its Board of Directors, may in the future change these numeric
values or further refine these parameters as experience is gained and market
conditions evolve.

Borrower Segmentation:

Under this framework, subprime ARM loans are divided into 3 segments.

American Securitization Forum
Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans: Executive Summary
July 8, 2008

3
Segment 1
includes current (as defined below) loans where the borrower is likely to be
able to refinance into any available mortgage product, including FHA, FHA Secure or
readily available mortgage industry products.

• Generally, the servicer will determine whether loans may be eligible for refinancing
into readily available mortgage industry products based on ascertainable data not
requiring direct communication with the borrower, such as LTV, loan amount, FICO
and payment history. Servicers will generally not determine current income or DTI to
determine initial eligibility for refinancing.

• If the borrower also has a second lien on the property, this framework contemplates
that the borrower is able to refinance the first lien only, on a no cash out basis. In
order for the loan to fall into this segment, the second lien does not have to be
refinanced; however, any second lien holder will need to agree to subordinate their
interest to the refinanced first lien.

Segment 2
includes current loans where the borrower is unlikely to be able to refinance
into any readily available mortgage industry product.

• Current: For purposes of this framework “current” means the loan must be not more
than 30 days delinquent, and must not have been more than 1 x 60 days delinquent in
the last 12 months, both under the OTS method. Corresponding tests would apply
under the MBA method if the servicer uses that standard.

• Not eligible for refinance: All current loans that do not satisfy FHA Secure
requirements, including delinquency history, DTI at origination, LTV (97% is the
maximum LTV allowed under FHA Secure) and loan amount standards for this
program, are within Segment 2; unless the servicer can determine whether they may
meet eligibility criteria for another product, by reviewing eligibility criteria without
performing an underwriting analysis.

Segment 3
includes loans where the borrower is not current as defined above,
demonstrating difficulty meeting the introductory rate.

Segment 1 – Refinance:

• It is expected that borrowers in this category should refinance their loans, if they are
unable or unwilling to meet their reset payment. However, a servicer may evaluate
each borrower in this category on a case by case basis or apply any framework
consistent with the applicable servicing standard in the transaction documents for a
loan modification or other loss mitigation outcome.

American Securitization Forum
Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans: Executive Summary
July 8, 2008

4
• The servicer will facilitate a refinance in a manner that avoids the imposition of
prepayment penalties wherever feasible. This may be accomplished by timing the
refinance to occur after the upcoming reset date.

• Servicers should take all reasonable steps permitted under the PSA and other
governing documents to encourage or facilitate refinancing for borrowers in Segment
1, or to borrowers in Segment 2 who become eligible for a refinance, including,
where permitted, providing borrowers with information about FHA, FHA Secure and
other readily available mortgage industry products, even if that servicer is not able to
provide those products through any affiliated originator.

Segment 2 – Loan Modification:

• The servicer will determine the following for each Segment 2 borrower: current
owner occupancy status (based on information known to the servicer, including
billing and property address), current FICO score and the FICO score at origination of
the loan.
• FICO test:

o If the current FICO score is less than 660 and is less than a score 10% higher
than the FICO score at origination, the borrower is considered to have met the
“FICO test.” If the borrower meets the FICO test, the servicer will generally
not determine the borrower’s current income.

o If either a) the current FICO score is 660 or higher, or b) the current FICO is
at least 10% higher than the FICO score at origination, the borrower is
considered to not meet the “FICO test.” If the borrower does not meet the
FICO test, the servicer will use an alternate analysis to determine if the
borrower is eligible for a loan modification.

• Segment 2 loans will only be eligible for a fast track loan modification if:

o The borrower currently occupies the property as his or her primary residence;

o The borrower meets the FICO test; and

o The servicer determines that, at the upcoming reset, the payment amount
would go up by more than 10% over the current payment amount.

• Borrowers in this segment and eligible for a fast track loan modification as described
above may be offered a loan modification under which the interest rate will be kept at
the existing rate in effect prior to the upcoming reset, generally for 5 years following
the upcoming reset.

American Securitization Forum
Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans: Executive Summary
July 8, 2008

5

• As to Segment 2 loans eligible for a fast track loan modification, the servicer may
make the following presumptions:

o The borrower is able and willing to pay under the loan modification based on
his or her current payment history prior to the reset date.

o The borrower is unable to pay (and default is reasonably foreseeable) after the
upcoming reset under the original loan terms, based on the size of the payment
increase that would otherwise apply.

o The modification maximizes the net present value of recoveries to the
securitization trust and is in the best interests of investors in the aggregate,
because refinancing opportunities are likely not available and the borrower is
able and willing to pay under the modified terms.

o The terms of the loan modification shall be binding on the servicer and the
borrower, if there is no signed modification agreement, so long as a) the terms
of such loan modification are more favorable to the borrower than the existing
terms, and b) the servicer sends a written notice to the borrower describing the
terms of the modification.

• For borrowers that do not meet the FICO test, the servicer will use an alternate
analysis to determine if the borrower is eligible for a loan modification, as well as the
terms of the modification (which may vary). This may include a) conducting an
individual review of current income and debt obligations, debt-to-income analysis,
and considering a tailored modification for a borrower, or b) applying any other
framework consistent with the applicable servicing standard in the transaction
documents to determine if a borrower is eligible for a loan modification.

• For borrowers that are eligible for a fast track modification, the fast track option is
non-exclusive and does not preclude a servicer from using an alternate analysis to
determine if a borrower is eligible for a loan modification, as well as the terms of the
modification.

Segment 3 – Loss Mitigation:

• For loans in this category, the servicer will determine the appropriate loss mitigation
approach in a manner consistent with the applicable servicing standard in the
transaction documents, but without employing the fast tracking procedures described
under Segment 2. The approach chosen should maximize the net present value of the
recoveries to the securitization trust. The available approaches may include loan
modification (including rate reduction and/or principal forgiveness), forbearance,
short sale, short payoff, or foreclosure.

American Securitization Forum
Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans: Executive Summary
July 8, 2008

6

• These borrowers will require a more intensive analysis, including where appropriate
current debt and income analysis, to determine the appropriate loss mitigation
approach.