WASHINGTON - Commercial mortgage backed securities got a lift on Wednesday from new U.S. Internal Revenue Service rules that make it easier to modify securitized mortgages without tax penalties.
The rules allow distressed property owners and servicers of mortgage-backed securities to negotiate over modifying the property's loan at any time. The mortgage no longer needs to be in default or imminent default to procure a modification under the rules.
The rule change, one of several actions the Treasury has considered to ease financing pressures in the recession-hit commercial real estate sector, applies mainly to borrowers, servicers and investors in loans that are part of trusts called real estate mortgage investment conduits (REMICs).
We think the primary impact from this change will be a reduction of, and delay, in the ultimate loss realization to a trust, JP Morgan analysts Alan Todd, Michael Reilly and Meghan Kelleher wrote in a research report issued on Wednesday.
Allowing a more proactive dialogue between borrowers and special servicers likely takes the most severe loss scenarios, in which properties are sold via forced liquidations into the trough of the market, off the table, they wrote.
CMBS indexes rallied on Wednesday, especially portions tied to riskier classes of bonds. The CMBX-5 AJ index jumped nearly 5 points to a mid-market price of 53.75, according to one dealer. The price has climbed about 15 points in the past month.
The rules, which take effect on Wednesday, allow modifications to include changes in collateral, guarantees, credit enhancements and changes to recourses associated with a loan, as long as the loan continues to be principally secured by real property.
The guidance comes as the industry is facing hundreds of billions of real estate loans that mature and need refinancing in the next three years. Financing is difficult to find as the value of commercial property, hit hard by the recession, continues to fall. (Reporting by David Lawder and Al Yoon; Editing by Andrea Ricci)