Real Estate Mortgage Investment Conduit (REMIC)
Candlefocus EditorREMICs enable lenders to issue securities backed by hundreds or even thousands of mortgage loans without the need to administer them individually. Such securities are often sold to investors as pass-through certificates that provide regular payments of taxable interest or dividends. These payments include not only the interest earned on the underlying mortgage loans, but also payments for administrative costs associated with the REMIC.
REMICs are required to comply with certain guidelines set forth by the IRS, such as having a pool of mortgages with certain characteristics, such as a minimum balance, a certain maturity, and only mortgages with the same interest rate. The REMIC must also restrict the ability of the sponsor to change the terms of the mortgages in the pool.
The pool of mortgages must remain unchanged for an initial period of time, which is typically two to three years. The certificates issued by the REMIC must also meet certain requirements in order to qualify as exempt from federal income taxes. This allows investors to receive their returns without having to pay federal or state income taxes on them.
REMICs provide a number of benefits to mortgage borrowers, mortgage lenders, and investors. For mortgage borrowers, they offer the opportunity to have a portion of their loan backed by the asset pool of several lenders, providing them with greater stability. For mortgage lenders, REMICs offer the ability to leverage the loan pool with greater efficiency and cost effectiveness than if it administered each loan individually.
For investors, REMICs offer an attractive investment opportunity, since they provide a higher degree of liquidity than direct ownership of mortgage loans. This enables investors to more easily manage the duration of their investments and move their funds more quickly if conditions change. The ability to diversify one’s portfolio by investing in REMICs can also be attractive to investors.
REMICs are an important component of the mortgage-backed securities market, and provide a number of benefits for all parties involved. The collective pooling of mortgage loans gives lenders greater efficiency, borrowers greater stability, and investors greater liquidity, all of which can contribute to a more robust mortgage market.