By Ryan J. Donmoyer — June 10, 2009 18:09 EDT

June 10 (Bloomberg) — The U.S. Treasury Department is considering issuing rules this summer to allow lenders to modify commercial real estate loans without triggering tax penalties on investors as the industry braces for an increase in defaults, a person familiar with the matter said.

The Real Estate Roundtable. a Washington trade group, began in December to urge Treasury and the Internal Revenue Service to waive tax penalties that would otherwise be assessed on investor pools known as Real Estate Mortgage Investment Conduits and Real Estate Investment Trusts.

Another person familiar with the matter said the Real Estate Roundtable’s requests were shelved by Treasury officials at the end of last year as the administration focused on other aspects of the financial crisis.

The default rate on commercial mortgages held by U.S. banks may rise to 4.1 percent, the highest in 17 years, by year-end as debt for refinancing remains scarce and the recession drags down rents, according to a report released yesterday by Real Estate Econometrics LLC. a New York-based property research firm.

“The worst is yet to come,” Steven Kandarian. chief investment officer of New York-based MetLife Inc. the biggest U.S. life insurer, said in an interview today.

Restructuring Mortgages

Tax relief for investors of commercial mortgage-backed securities is a necessary step to restructuring troubled mortgages, Jeffrey D. DeBoer. the Real Estate Roundtable’s president and chief executive, wrote in a letter to the Treasury Department on Dec. 18.

“The restructuring negotiations that are expected to occur will require maximum flexibility to ensure that all parties — borrowers, servicers and lenders — are treated fairly and to minimize the likelihood that litigation might ensue between servicers and lenders as a result of the efforts of servicers to restructure commercial mortgage loans,” DeBoer wrote.

“Providing this flexibility also will send a desperately needed positive signal to the CMBS market,” DeBoer continued. “Combined with any additional yield that actually could result from being able to change the terms of CMBS certificates, this positive market signal would bring welcome relief to the balance sheets of financial institutions and other CMBS investors.”

The pending guidance was reported earlier today by the Wall Street Journal. Treasury Department spokeswoman Nayyera Haq declined to comment.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.

To contact the editor responsible for this story: Jim Kirk at jkirk12@bloomberg.net.