[Congressional Record Volume 150, Number 67 (Thursday, May 13, 2004)]
[Senate]
[Pages S5480-S5481]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SMITH (for himself and Mr. Conrad):
  S. 2422. A bill to amend the Internal Revenue Code of 1986 to allow 
certain modifications to be made to qualified mortgages held by a REMIC 
or a grantor trust; to the Committee on Finance.
  Mr. SMITH. Mr. President, I rise today to introduce the Real Estate 
Mortgage Investment Conduit Modernization Act. I am pleased to join my 
colleague and friend, Senator Conrad, in introducing this legislation 
to accelerate economic growth for every American community.
  A Real Estate Mortgage Investment Conduit (REMIC) is a tax vehicle 
created by Congress in 1986 to support the housing market and 
investment in real estate by making it simpler to issue real estate-
backed securities.
  By pooling real estate loans into mortgage backed securities, REMICs 
offer residential and commercial real estate borrowers access to large 
pools of capital that would not otherwise be available. REMICs allow 
commercial banks and other lenders to sell their loans in the capital 
markets, thus freeing up assets for additional lending and investments. 
Because they contribute to the efficiency and liquidity of the U.S. 
real estate markets, REMICs help to minimize the costs of residential 
and commercial real estate borrowing and to spur real estate 
development and rehabilitation.
  REMICs play a critical role in providing capital for residential and 
commercial mortgages. As of September 30, 2003, the value of single-
family, multi-family and commercial-mortgage backed REMICs outstanding 
was over $1.2 trillion. While the current volume of REMIC transactions 
reflects their important role in this market, certain changes to the 
tax code will eliminate impediments and unleash even greater potential. 
Current rules that govern REMICs often prevent many common loan 
modifications that facilitate loan administration and ensure repayment 
of investors.
  The legislation that created REMICs has not been updated in nearly 20 
years. Our legislation will update the REMIC provisions of the tax 
code. These proposed changes are simple, non-controversial, and will 
greatly enhance the ability of commercial real estate interests to 
obtain capital for financing new construction projects.
  These changes would ultimately benefit the entire real estate 
community, including local real estate owners, builders, construction 
managers, the engineering, architectural and interior design firms that 
provide real estate services, as well as firms that offer services to 
support real estate sales. The changes would accelerate the creation of 
jobs and economic activity throughout the U.S., and would have a 
positive effect on federal and state tax revenues. By encouraging 
property renovations and expansions, these changes would strengthen the 
local property tax base in towns and cities across America.
  We urge our colleagues to work with us to enact this legislation to 
spur economic and employment growth in real

[[Page S5481]]

estate, the construction trades, and the building materials industry.
  I ask unanimous consent that the text of the legislation be printed 
in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2422

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. CERTAIN MODIFICATIONS PERMITTED TO QUALIFIED 
                   MORTGAGES HELD BY A REMIC OR A GRANTOR TRUSTS.

       (a) Qualified Mortgages Held by a REMIC.--
       (1) In general.--Paragraph (3) of section 860G(a) of the 
     Internal Revenue Code of 1986 is amended by adding at the end 
     the following new subparagraph:
       ``(C) Qualified modifications.--
       ``(i) In general.--An obligation shall not fail to be 
     treated as a qualified mortgage solely because of a qualified 
     modification of such obligation.
       ``(ii) Qualified modification.--For purposes of this 
     section, the term `qualified modification' means, with 
     respect to any obligation, any amendment, waiver, or other 
     modification which is treated as a disposition of such 
     obligation under section 1001 if such amendment, waiver or 
     other modification does not--

       ``(I) extend the final maturity date of the obligation,
       ``(II) increase the outstanding principal balance under the 
     obligation (other than the capitalization of accrued, unpaid 
     interest),
       ``(III) result in a release of an interest in real property 
     securing the obligation such that the obligation is not 
     principally secured by an interest in real property 
     (determined after giving effect to the release), or
       ``(IV) result in an instrument or property right which is 
     not debt for Federal income tax purposes.

       ``(iii) Defaults.--Under regulations prescribed by the 
     Secretary, any amendment, waiver, or other modification of an 
     obligation which is in default or with respect to which 
     default is reasonably foreseeable may be treated as a 
     qualified modification for purposes of this section.
       ``(iv) Defeasance with government securities.--The 
     requirements of clause (ii)(III) shall be treated as 
     satisfied if, after the release described in such clause, the 
     obligation is principally secured by Government securities 
     and the amendment, waiver, or other modification to such 
     obligation satisfies such requirements as the Secretary may 
     prescribe.''.
       (2) Exception from prohibited transaction rules.--
     Subparagraph (A) of section 860F(a)(2) of such Code is 
     amended by striking ``or'' at the end of clause (iii), by 
     striking the period at the end of clause (iv) and inserting 
     ``, or'', and by adding at the end the following new clause:
       ``(v) a qualified modification (as defined in section 
     860G(a)(3)(C)).''.
       (3) Conforming amendments.--
       (A) Section 860G(a)(3) of such Code is amended--
       (i) by redesignating clauses (i) and (ii) of subparagraph 
     (A) as subclauses (I) and (II), respectively,
       (ii) by redesignating subparagraphs (A) through (D) as 
     clauses (i) through (iv), respectively,
       (iii) by striking ``The term'' and inserting the following:
       ``(A) In general.--The term'', and
       (iv) by striking ``For purposes of subparagraph (A)'' and 
     inserting the following:
       ``(B) Tenant-stockholders of cooperative housing 
     corporations.--For purposes of subparagraph (A)(i)''.
       (B) Section 860G(a)(3)(A)(iv) of such Code (as redesignated 
     by subparagraph (A)) is amended--
       (i) by striking ``clauses (i) and (ii) of subparagraph 
     (A)'' and inserting ``subclauses (I) and (II) of clause 
     (i)'', and
       (ii) by striking ``subparagraph (A) (without regard to such 
     clauses)'' and inserting ``clause (i) (without regard to such 
     subclauses)''.
       (b) Qualified Mortgages Held by a Grantor Trust.--Section 
     672 of the Internal Revenue Code of 1986 is amended by adding 
     at the end the following new subsection:
       ``(g) Special Rule for Certain Investment Trusts.--A 
     grantor shall not fail to be treated as the owner of any 
     portion of a trust under this subpart solely because such 
     portion includes one or more obligations with respect to 
     which a qualified modification (within the meaning of section 
     860G(a)(3)(C)) has been, or may be, made under the terms of 
     such trust.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amendments, waivers, and other modifications 
     made after the date of the enactment of this Act.

  Mr. CONRAD. Mr. President, I am happy to join my friend and Finance 
Committee colleague, Mr. Smith, to introduce The Real Estate Mortgage 
Investment Conduit Modernization Act. This is a measure that will help 
expand access to capital for real estate investment across the nation 
and especially in rural areas like my home State of North Dakota.
  Growth in the commercial real estate market over the last decade has 
been fueled, in part, by a strong and growing secondary market for 
commercial mortgages. That market is structured through real estate 
mortgage investment conduits (REMICs). Created by Congress in 1986, 
REMICs are critically important to U.S. real estate finance, providing 
new capital and expanded access to that capital. They have proven to be 
a cost-effective method for the private sector to create pools of 
capital that are made available across the nation.
  It is time to modernize the REMIC law because many borrowers have 
been stymied in attempts to make improvements to the mortgaged 
properties. For example, if a property is in a REMIC, the property 
owner is effectively precluded from adding a parking garage to an 
existing building. That is because the 1986 tax rules treat that 
improvement as a collateral modification triggering a deemed exchange 
of a new loan for the old loan thereby violating REMIC regulations.
  Unlike home mortgages, which are rarely modified, commercial loans 
require flexibility in dealing with changing circumstances in order to 
support the borrower's ongoing business property. The bill we are 
introducing today will add this needed flexibility to the tax code, 
increasing the ability of property owners to invest in improvements.
  I urge our colleagues to help us harness the full potential of 
mortgage-backed securities to provide improved access to capital to 
America's businesses--big and small. Please join us in working to enact 
the Real Estate Mortgage Investment Conduit Modernization Act.

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