Definition of the real estate mortgage investment conduit (REMIC)

What is a Real Estate Mortgage Investment Conduit (REMIC)?

The term “real estate mortgage investment conduit” (REMIC) refers to a special purpose vehicle (SPV) or debt instrument that pools mortgages and issues mortgage backed securities (MBS).

Key points to remember

  • A Real Estate Mortgage Investment Conduit (REMIC) is a special purpose vehicle that is used to consolidate mortgages and issue mortgage backed securities.
  • REMICs were first authorized by the enactment of the Tax Reform Act 1986.
  • A mortgage investment conduit can be organized as a partnership, trust, partnership or association and is exempt from federal tax.

Understanding real estate mortgage investment conduits (REMIC)

REMICs are complex investments that generate income for issuers and investors. Mortgage pools are typically divided into tranches, repackaged, and marketed to investors as individual securities. REMICs can take many different forms and are generally considered to be intermediary entities. As such, they are exempt from direct taxes.

Real Estate Mortgage Investment Conduits (REMICs) were first authorized by the enactment of the Tax Reform Act 1986. They hold commercial and residential mortgages in trust and issue interest in those securitized mortgages to investors. They are considered a safe option for risk-averse investors.

REMICs group individual mortgages into pools based on risk and maturity, just like Guaranteed Mortgage Bonds (CMOs). They are divided into bonds or other securities which are then sold to investors. These securities are traded in the secondary mortgage market.

Fannie Mae and Freddie Mac are among the largest issuers in the mortgage investment conduits industry. These companies are supported by the federal government. While they don’t actually issue mortgages, they do guarantee home loans issued by other lenders in the secondary market. Other issuers of REMIC include mortgage lenders and insurance companies, as well as savings institutions.

Fannie Mae and Freddie Mac are among the most important issuers of REMIC.

REMICs can be organized as partnerships, trusts, corporations or associations and are tax-exempt entities at the federal level. However, investors who own these securities are still subject to personal income tax. Tax laws prevented REMICs from making changes to their mortgages. As such, the entity could lose its tax exempt status if a loan from its pool is swapped for another loan. This is because federal regulations require that the loans in a given pool be constant. In other words, loans cannot be significantly changed or swapped for different loans with new terms.

Modifications to REMICs

Several changes have been proposed or made to protect the structure and tax-exempt status of REMICs.

Congress introduced the Real Estate Mortgage Investment Conduit Improvement Act in 2009 to ease restrictions on commercial real estate loans securitized by REMICs. Owners of troubled properties with business loans were unable to make changes to their assets as their plans would alter the value of the collateral that secured the loan.

The proposed law would allow real estate owners with commercial loans securitized by REMICs to make improvements and improvements that would make their properties more attractive to the market. The legislation included a statement that changes in ownership under such conditions would not be considered prohibited transactions, as stated by the Internal Revenue Service (IRS).

Interest in REMIC would continue to be treated as regular interest and proceeds generated from changes in ownership would be treated the same as if received through qualified mortgages.

The law was referred to the Banking, Housing and Urban Affairs Committee, but did not move forward.

The federal government has given some relief to people with business and residential loans struggling due to the COVID-19 pandemic. Homeowners unable to make payments were granted forbearance, first under the CARES (Coronavirus Aid, Relief, and Economic Security) Act, which was signed by former President Donald Trump in 2020, and then again when the Biden administration extended the arrangements.

Since the relief would ultimately change the structure of these loans, it would also have an effect on the way REMICs are structured. The IRS has ensured that these investments and their issuers remain tax-free if borrowers take advantage of these emergency measures.

Real Estate Mortgage Investment Conduit (REMIC) vs. Secured Mortgage Obligation (CMO)

The industry generally views REMICs as CMOSs, which are a series of mortgages bundled together and sold to investors as investments. But there are some distinctions between the two.

CMOs exist within REMICs, although CMOs are separate legal entities for tax and legal purposes. A REMIC, on the other hand, is exempt from federal tax. But it is only on income that investors perceive underlying mortgages at the corporate level. Any income generated and paid to investors is taxable, using Form 1066 when filing a REMIC.

Real Estate Mortgage Investment Conduit (REMIC) vs Real Estate Investment Trust (REIT)

REMICs and Real Estate Investment Trusts (REITs) invest in real estate in one form or another, but while REMICs pool mortgages and sell them as investments to investors, REITs are a any other ball game.

REITs are companies that own and operate a portfolio of income-generating properties, such as office and retail space, condominiums and mixed-use properties. Investors can buy stocks of REITs that are traded on a stock exchange just like stocks. Companies rent or lease their properties and this income is then paid out to investors in the form of dividends.

Like REMICs, however, REITs are not taxed. But investors must report all income from these investments on their annual tax returns, which means they are taxed at their own tax rate.

Alma M. Buchanan