Rev. Rul. 74-221

Advice has been requested whether the conclusions of Rev. Rul. 71-399, 1971-2 C.B. 433, as amplified by Rev. Rul. 72-376, 1972-2 C.B. 647, relating to the purchase and sale of mortgage participation certificates by the Federal Home Loan Mortgage Corporation (FHLMC) are applicable under modified procedures now being used by FHLMC.

FHLMC purchases mortgage participation certificates (participation certificates) and sells participation sales certificates (sales certificates). In order to attract a broader range of investors, FHLMC recently adopted the procedure of combining participation certificates it purchased, and whole loans (or interests therein) owned by it, and issuing sales certificates representing undivided interests in each of the whole loans and in each of the mortgage loans represented by the participation certificates. The certificate yields at which such sales certificates are sold may differ from the certificate yields at which the underlying certificates were purchased by FHLMC and may differ from the mortgage interest rate on the whole loans owned by FHLMC. The sales certificates are guaranteed as to principal and interest in the same manner as the certificates described in Rev. Rul. 71-399.

Rev. Rul. 71-399, as amplified by Rev. Rul. 72-376, contemplates that FHLMC will sell sales certificates corresponding to, and representing undivided interests in, each of the mortgage loans covered by participation certificates which FHLMC purchased from a seller. FHLMC may sell one sales certificate representing the identical undivided interests covered by the participation certificate(s) which it purchased, or it may sell several sales certificates corresponding to one participation certificate which it purchased.

Rev. Rul. 71-399 holds that the use of a certificate yield computation amounts to a sale of each individual mortgage interest at a premium or discount depending upon the relationship of the certificate yield to the mortgage interest rate.

Under the procedures recently adopted by FHLMC, sales to the certificate holders are at certificate yields that may vary from the yields of the particular participation certificates purchased by FHLMC and from the yields of the underlying individual mortgages. Thus, the certificate holder's premium or discount will be measured by the relationship between his certificate yield and the individual mortgage interest rates.

Based on the foregoing facts, it is held that the modification in procedures used by FHLMC from that contemplated by Rev. Rul. 71-399, amplified by Rev. Rul. 72-376, as described herein, will not alter the Federal income tax consequences to FHLMC, the purchasers, and the sellers described in Rev. Rul. 71-399, provided that the sales certificates sold by FHLMC bear sufficient identification so as to permit tracing them to the participation certificates purchased by FHLMC and to the whole loans owned by FHLMC to which they relate and to the underlying mortgages represented by the purchased certificates and the whole loans.

Rev. Rul. 71-399 as amplified by Rev. Rul. 72-376 is further amplified.