Saving Loans for REMICs

Under the REMIC rules, a mortgage loan ceases to be a good REMIC asset if the borrower replaces the real property collateral with government securities (known as defeasance) less than two years after the REMIC’s startup date. This typically is not problematic in a normal economic environment: most commercial mortgage loans prohibit defeasance for long enough to allow a lender to contribute the loan to a REMIC with more than two years to spare.

But as the pace of securitizations slows, lenders run a risk that they will not be able to securitize loans in time. For example, what if a mortgage loan allows the borrower to defease beginning three years after the mortgage closing date, and the loan has not yet been contributed to a REMIC near the end of the first year?

In this situation, the lender could (1) get borrower consent to amend the loan and extend the defeasance date or (2) contribute the loan to the securitization vehicle in the future without amending it, but be subject to a repurchase requirement if the borrower defeases earlier than two years after the REMIC's startup date. The first option may not be feasible if the borrower isn’t amenable and the second option is less than desirable.

Instead, lenders might want to consider making a REMIC election around the loan now, before securitizing it, so that any subsequent defeasance is effected more than two years after the REMIC’s startup date (even if less than two years from the time the loan is securitized). That REMIC’s regular interest(s) can later be contributed to another REMIC and securitized with other assets.

 

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