Rev. Rul. 80-96

ISSUE

Do the holdings of Rev. Rul. 71-399, 1971-2 C.B. 433, as amplified by Rev. Rul. 72-376, 1972-2 C.B. 647; Rev. Rul. 74-221, 1974-1 C.B. 365; and Rev. Rul. 74-300, 1974-1 C.B. 169, involving the purchase by the Federal Home Loan Mortgage Corporation (FHLMC) of mortgage loans and interests therein from savings and loan associations and other eligible sellers and the sale of participation sales certificates to investors including other savings and loan associations, remain applicable under the circumstances described below?

FACTS

Rev. Rul. 71-399, as amplified by Rev. Rul. 72-376 and Rev. Rul. 74-221, set forth the tax consequences of the purchase of mortgage participation certificates and whole mortgage loans by FHLMC from savings and loan associations and the issuance by FHLMC of sales certificates to other savings and loan associations and exempt employees trusts. Rev. Rul. 74-300 holds that a real estate investment trust owning certificates issued by the FHLMC is considered as owning "real estate assets" within the meaning of section 856(c)(5)(A) of the Internal Revenue Code and its interest income from such certificates is "interest on obligations secured by mortgages on real property" under section 856(c)(3)(B).

Rev. Rul. 71-399, as amplified, states in part, that the arrangement whereby FHLMC purchases mortgage participation certificates and whole mortgage loans from savings and loan associations followed by FHLMC's sale of its own sales certificates to certain other organizations does not create an association taxable as a corporation, but constitutes a trust; the holders of FHLMC certificates discussed in Rev. Rul. 71-399, as amplified, are owners of the trust under Subpart E of subchapter J of the Code and each certificate holder is treated as the owner of an undivided interest in the entire trust (corpus as well as ordinary income), and that the sale of the FHLMC certificates to the holders transfers equitable ownership in the underlying mortgages to the holders of the certificates.

As decsribed in the above-mentioned rulings, FHLMC combines participation certificates and whole mortgage loans (or interests therein) purchased by it into a "pool" and sells its own participation sales certificates (PCs) representing undivided interests in each of the mortgage loans represented by the participation certificates purchased by FHLMC and undivided interests in each of the whole loans owned by FHLMC. The savings and loan associations and other mortgage originators ("seller/servicers") from whom FHLMC purchases either participation certificates or whole loans generally continue to service such loans.

Rev. Rul. 72-376 and Rev. Rul. 74-221 require that the PCs sold by FHLMC must 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 PCs relate and to the underlying mortgages represented by the participation certificates in FHLMC's hands. FHLMC uses a number of internal accounting systems between itself and the seller/servicers, including a fiscal reporting month by the seller/servicers, to insure not only the presence of an ability to trace required by those revenue rulings, but also the ability for FHLMC to verify that the payments received by FHLMC from the seller/servicers are correct.

Under FHLMC procedures PCs are sold by FHLMC representing undivided interests in a pool of mortgages and interests therein as constituted at that time. The ultimate size of a pool formed by FHLMC is adjusted to meet increased or decreased market demands of the purchasers of PCs, as well as to take into account information regarding specific mortgages that is not furnished to FHLMC by the seller/servicer until after the month the pool is formed, or to the extent furnished, has not yet been processed by FHLMC. The adjustments to the pool size by FHLMC are made no later than the date of the first remittance check to holders of its PCs in such pool.

FHLMC is obligated under an agreement with the PC holders to remit to each PC holder the PC holder's pro rata share of principal received by FHLMC and interest to the extent of the certificate rate. The agreement permits FHLMC to make regular monthly payments of principal and interest to PC holders on an estimated basis before actual mortgage loan payment data is processed by FHLMC. In arriving at the amount to be paid to a PC holder, FHLMC makes a calculation based in part on its own experience as to how much principal is due for the normal calendar month to its PC holders. Any minor variances in making this calculation of principal are adjusted by FHLMC in the payment for the following month to its PC holders. This process is repeated for the life of the PC and upon the final payment with respect to the PC all the principal acquired by the PC holder will have been remitted by FHLMC.

In making the calculation discussed in the preceding paragraph, FHLMC follows a set procedure to handle mortgage loans that are prepaid. FHLMC retains any interest remitted by the seller/servicer for the period from the first day of the calendar month to the date of prepayment if the mortgage loan is paid in full or in part on or before the 20th day of the month. FHLMC remits a full 30 days' interest to its PC holders with respect to mortgage loans which are prepaid after the 20th of the month. This FHLMC procedure is fully disclosed to prospective PC holders in FHLMC's PC Offering Circular, as an adjustment to FHLMC's guarantee and management fee.

Upon the sale of a PC, FHLMC retains the right to repurchase such PC from its holder for an amount equal to the then unpaid principal balance of the undivided interest in each mortgage loan represented by each PC. The right to repurchase can be exercised when the dollar size of the pool, and of each PC holder's interest therein, is 10 percent or less of the initial unpaid principal balance of the pool.

While PC holders may sell their PCs to third parties (when the certificates are transferable on the books of FHLMC), the agreement with PC holders does not authorize PC holders to use PCs as a basis for forming any more pools.

HOLDING

The holdings of Rev. Rul. 71-399, as amplified by Rev. Rul. 72-376, Rev. Rul. 74-221, and Rev. Rul. 74-300, are not altered by the above-described procedures under which FHLMC purchases and sells mortgage loans provided the PCs sold by FHLMC continue to bear sufficient identification so as to permit tracing them to the participation certificates purchased by FHLMC and to whole loans owned by FHLMC to which they relate and to the underlying mortgages.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 71-399, as amplified by Rev. Rul. 72-376, Rev. Rul. 74-221, and Rev. Rul. 74-300, is further amplified.