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.

Summary: Amends the Internal Revenue Code to permit certain amendments, waivers, or other modifications to mortgages held by a Real Estate Mortgage Investment Conduit (REMIC) or a Grantor Trust without disqualifying such mortgages as REMIC or Grantor Trust mortgages. Permits amendments, waivers, or modifications that do not: (1) extend the final maturity date of a mortgage; (2) increase the outstanding balance of the mortgage; (3) result in the release of an interest in real property securing the mortgage; or (4) result in an instrument or property right which is not debt for Federal income tax purposes. Exempts such amendments, waivers, or modifications from the penalty for prohibited transactions.

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

    (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.