Rev. Rul. 81-203

ISSUES

1) Does a pledged account mortgage loan (PAM) or an undivided interest in a PAM included in a mortgage pool constitute a loan secured by an interest in real property within the meaning of section 7701(a)(19)(C)(v) of the Internal Revenue Code under the circumstances described below?

2) Will the Internal Revenue Service treat the full face amount of participation certificates (PCs) in a mortgage pool containing PAMs as a qualifying real property loan within the meaning of section 593(d)(1) of the Code under the circumstances described below?

FACTS

The federal income tax consequences of the issuance and sale of PCs by the Federal Home Loan Mortgage Corporation (FHLMC) are the subject 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, Rev. Rul. 74-300, 1974-1 C.B. 169, and Rev. Rul. 80-96, 1980-1 C.B. 317.

FHLMC purchases whole conventional residential mortgage loans and undivided interests in such loans from savings and loan associations and other mortgage loan originators. FHLMC combines the whole loans and the undivided interests in such loans in mortgage pools and issues PCs representing undivided interests in such mortgage pools.

FHLMC will include in certain of its mortgage pools whole PAMs and undivided interests in PAMs that it has purchased from savings and loan associations and other mortgage loan originators. These PCs are sold by FHLMC as described in the Revenue Rulings cited above.

A PAM is a type of residential mortgage loan secured by an interest in real property. At the origination of a PAM, all or a portion of the borrower's cash otherwise available for down payment is placed in a savings account which is pledged as additional collateral for the mortgage loan. The principal amount of the loan may be increased by the amount of the pledged account. The depository for such account may, but need not, be the lender. In accordance with an established schedule, monthly withdrawals are made from the savings account for a fixed period at the beginning of the loan term in order to supplement the out-of-pocket mortgage payments made by the borrower.

When the savings and loan associations or other mortgage loan originators sell PAMs to FHLMC, these lenders must also assign their security interests in the pledged savings accounts to FHLMC. In the case of the sale of an undivided fractional interest in a PAM, such sale must convey a proportionate security interest in the pledged account.

PC's sold by FHLMC represent an undivided interest in mortgage pools that may include PAMs. Under the standards prescribed by FHLMC, the gross mortgage amount of a PAM can never exceed the fair market value of the property securing such loan. However, the percentage of PAMs included in the mortgage pool is limited to no more than 5 percent of the total value of the pool. In addition, none of the pledged accounts may exceed 20 percent of the total principal amount of the loan. Thus, with respect to any PC whose underlying mortgage pool includes PAMSs, the maximum portion of the face value of such PC that can be attributed to pledged accounts is 1 percent.

LAW

Section 7701(a)(19)(C)(v) of the Code defines a domestic building and loan association as an institution at least 60 percent of the amount of the total assets of which (at the close of the taxable year) consists of loans secured by an interest in real property which is (or, from the proceeds of the loan, will become) residential real property.

Section 593(d)(1) of the Code provides that the term "qualifying real property loan" means any loan secured by an interest in improved real property or secured by an interest in real property which is to be improved out of the proceeds of the loan.

Section 593(d)(1) of the Code and section 1.593-11(b)(5) of the Income Tax Regulations state that the term "qualifying real property loan" does not include any loan to the extent such loan is secured by a deposit in or share of the taxpayer.

HOLDINGS

1.) A PAM included in a FHLMC mortgage pool constitutes a loan secured by an interest in residential real property within the meaning of section 7701(a)(19)(C)(v) of the Code.

2.) Based on the circumstances set forth above, the Service will permit the full face amounts of the PAMs that are included in mortgage pools underlying PCs purchased by a savings and loan association to be treated as qualifying real property loans for purposes of section 593(d)(1) of the Code provided the PAMs included in the mortgage pool constitute no more than 5 percent of the total value of the pool and none of the pledged accounts exceed 20 percent of the total principal amount of the loan.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 71-399, as amplified by Rev. Rul. 72-376, Rev. Rul. 74-221, Rev. Rul. 74-300, and Rev. Rul. 80-96, is further amplified.

¹ Also released in News Release IR-81-92, dated August 10, 1981.