What Is Real Estate Mortgage Investment Conduit (REMIC)?
- A real estate mortgage investment conduit (REMIC) is a special purpose vehicle (SPV) that is used to pool mortgage loans and issue mortgage-backed securities (MBS).
- REMICs were first authorized by the enactment of the Tax Reform Act of 1986.
- A real estate mortgage investment conduit (REMIC) may be organized as a partnership, a trust, a corporation, or an association and is exempt from federal taxes.
Understanding Real Estate Mortgage Investment Conduit (REMIC)
Real estate mortgage investment conduits hold commercial and residential mortgages in trust and issue interests in these securitized mortgages to investors. Similar to collateralized mortgage obligations (CMOs), REMICs piece together a variety of individual mortgages into pools based on risk and maturity, subsequently issuing bonds or other securities to investors. These securities then trade on the secondary mortgage market.
REMICs were first authorized by the enactment of the Tax Reform Act of 1986. A real estate mortgage investment conduit may be organized as a partnership, a trust, a corporation, or an association. REMICs are federally tax-exempt entities, though investors are still subject to individual income taxation. The tax-exempt status of an REMIC can be lost if a loan within its pool is exchanged for another loan. Federal regulations require that the loans in a given pool be constant. In other words, the loans cannot be significantly modified or exchanged for different loans with new terms.
Fannie Mae and Freddie Mac are some of the more prominent issuers of REMICs.
Issues with Real Estate Mortgage Investment Conduit (REMIC)
Restrictions can be put in place on commercial real estate loans that have been securitized by REMICs. If a property owner was interested in making improvements to a property that is covered by such a loan, they could face limitations that prevent them from taking action. The planned renovations might substantially change the value of the collateral that secured the loan, which would not be allowed. Proposals were introduced to alter the regulations that limit and constrain such renovations. The intent was to let property owners with commercial loans securitized by REMICs make improvements and enhancements to make their properties more attractive to the market.
For example, the Real Estate Mortgage Investment Conduit Improvement Act of 2009 was proposed legislation introduced in Congress. The intended aim was to update REMIC rules to allow property owners of troubled real estate assets modify their property. It was specifically focused on qualified mortgages and foreclosure property in the Troubled Asset Relief Program (TARP).
The proposed legislation included a declaration that property modifications under such terms would not be regarded as prohibited transactions as outlined by the Internal Revenue Service. The interest in the REMIC would continue to be treated as regular interest and proceeds that were generated by modifications to the property would be handled the same as if received through qualified mortgages.