Real Estate Mortgage Investment Conduit

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What Is A Real Estate Mortgage Investment Conduit A Guide For Real Estate Investors

Mortgage REMIC Conduits 1

If youve ever wondered what a REMIC is, heres your chance to find out.

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If you’ve been thinking of investing in mortgage-backed securities, you’ve probably seen the phrase “real estate mortgage investment conduit ” mentioned before. If you’re wondering what that phrase means, you are not alone.

We’ve created a guide below to answer that question once and for all. Keep reading to learn what a REMIC is, how it works, and what you need to know about these pass-through entities before adding mortgage-backed securities to your portfolio of real estate and mortgage assets.

Remics Vs Collateralized Mortgage Obligations

In truth, a REMIC is commonly considered to be a collateralized mortgage obligation . While ultimately these two financial instruments are both forms of a mortgage security, or mortgage loans that are bundled together and sold as investment instruments, there are some important differences between them.

In particular, CMOs were created to give investors a specific form of cash flow instead of just passing through the borrowers’ principal and interest payments in the same way as a REMIC.

In addition, a REMIC is exempt from federal tax on a corporate level while, on their own, CMOs are not. This is why, even though CMOs are a separate entity from REMICs, they often exist within REMICs for tax purposes. They do so to avoid double taxation during each taxable year.

Examples Of Remic: A In A Sentence

REMIC: A“real estate mortgage investment conduit” within the meaning of Section 860D of the Code.

REMIC: A real estate mortgage investment conduit within the meaning of Internal Revenue Code Section 860D.

REMIC: A real estate mortgage investment conduit within the meaning of Section 860D of the Code.

On each Distribution Date, the timing and amounts of principal distributions and allocations of Realized Losses on each Class of REMIC B Regular Interests shall be identical to the timing, amounts and allocations in respect of the corresponding Classes of REMIC A Regular Interests pursuant to Section 4.08.

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Understanding Real Estate Mortgage Investment Conduits

REMICs are complex investments that generate income for issuers and investors. Mortgage pools are generally broken up into tranches, repackaged, and marketed to investors as individual securities. REMICs can take on several different forms and are generally deemed pass-through entities. As such, they are exempt from being taxed directly.

Real estate mortgage investment conduits were first authorized by the enactment of the Tax Reform Act of 1986. They hold commercial and residential mortgages in trust and issue interests in these securitized mortgages to investors. They are considered to be a safe option for investors who are averse to risk.

REMICs piece together individual mortgages into pools based on risk and maturity, just like collateralized mortgage obligations . They are divided into bonds or other securities that are then sold to investors. These securities are traded on the secondary mortgage market.

Some of the industry’s most prominent issuers of real estate mortgage investment conduits include Fannie Mae and Freddie Mac. These companies are backed by the federal government. Although they don’t actually issue mortgages, they do guarantee home loans issued by other lenders in the secondary market. Other REMIC issuers include mortgage lenders and insurance companies, as well as savings institutions.

Fannie Mae and Freddie Mac are some of the more prominent issuers of REMICs.

Real Estate Mortgage Investment Conduit

Download Instructions for IRS Form 1066 U.S. Real Estate ...

A real estate mortgage investment conduit is “an entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors” under U.S. Federal income tax law and is “treated like a partnership for Federal income tax purposes with its income passed through to its interest holders”. REMICs are used for the pooling of mortgage loans and issuance of mortgage-backed securities and have been a key contributor to the success of the mortgage-backed securities market over the past several decades.

The federal income taxation of REMICs is governed primarily under 26 U.S.C. §§ 860A860G of Part IV of Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code . To qualify as a REMIC, an organization makes an “election” to do so by filing a Form 1066 with the Internal Revenue Service, and by meeting certain other requirements. They were introduced in 1987 as the typical vehicle for the securitization of residential mortgages in the United States.

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Real Estate Investment Trusts

The original federal REIT legislation was enacted in 1960 to give average investors a tax-advantageous vehicle for investment in a professionally managed, large-scale portfolio of real estate assets through the purchase of equity . REIT opportunities are numerous. The National Association of Real Estate Investment Trusts , states that as of August 31, 2015, there were 300 REITs registered with the SEC and trading on major stock exchanges, with a combined equity market capitalization of $900 billion. In addition, IRS data shows that approximately 1,100 U.S. REITs have filed tax returns, and 30 countries have enacted REIT provisions .

With regard to federal income tax, the advantageous tax treatment accorded to REITs is a deduction for dividends paid to shareholders, which eliminates the double taxation generally associated with corporate income. To qualify for REIT status, however, an entity must distribute at least 90% of its taxable income for the taxable year . This distribution requirement provides an investment advantage to REIT shareholders because it assures a steady stream of income. A REIT may also retain and pay corporate income tax on net capital gain. Under this scenario, REIT shareholders include the net capital gain in income, apply a credit for the tax paid by the REIT, and step up the basis of their REIT stock by the amount included in income .

REITs are also subject to substantial limitations as to the composition of their income and assets.

Recently Proposed Changes To Remic Rules

Although this type of securitization vehicle already has its own unique set of taxation rules, it’s worth noting that REMICs have been making headlines in recent years because of proposed changes to the existing REMIC rules. We’ve laid them out below so you have a better idea of what changes could be on the horizon.

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Examples Of Real Estate Mortgage Investment Conduit In A Sentence

SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A “REGULAR INTEREST” IN A “REAL ESTATE MORTGAGE INVESTMENT CONDUIT,” AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED .

FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS BENEFICIAL OWNERSHIP OF A “REGULAR INTEREST” IN A “REAL ESTATE MORTGAGE INVESTMENT CONDUIT,” AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED AND CERTAIN OTHER PROPERTY.

FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A “REGULAR INTEREST” IN A “REAL ESTATE MORTGAGE INVESTMENT CONDUIT,” AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED .

SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A “REGULAR INTEREST” IN A “REAL ESTATE MORTGAGE INVESTMENT CONDUIT,” AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986 .

THIS CERTIFICATE IS A “REGULAR INTEREST” IN A “REAL ESTATE MORTGAGE INVESTMENT CONDUIT” AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED).

Safer But Complex Alternatives

Real Estate Mortgage Investment Conduit (REMIC) Status: What It Means for Special Servicers

Although REITs and REMICs are a less risky alternative to direct investment in real property, they can still be quite complex, and their tax consequences are just as serious. CPA financial advisors whose clients elect to use these investments would be well served to study them thoroughly in order to properly guide individuals though the complexities.

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Remics Vs Real Estate Investment Trusts

While a REMIC and a real estate investment trust are both methods of investing in real estate without going through the hassle of buying and maintaining a property. In addition, REITs aren’t taxed on a corporate level their investors have to pay income tax on any dividends they receive. But the differences all but stop there. In truth, these two investment vehicles could not be more different.

As we have discussed, REMICs pool together various mortgage loan assets into a mortgage-backed security, break them down into bonds, and sell the investments to interested investors.

A real estate investment trust, on the other hand, will invest in a portfolio of real estate assets, such as apartment buildings, retail spaces, or office spaces. Companies will then lease these spaces, which will generate income for the REIT, and any income will be paid out as dividends to investors who own shares of the REIT.

What Is A Remic

At its core, a real estate mortgage investment conduit is a financial instrument known as a special purpose vehicle that is used to pool together mortgage loans and issue mortgage-backed securities to investors. Fannie Mae and Freddie Mac are perhaps the most famous REMIC issuers, but mortgage lenders and insurance companies can be one as well.

REMICs were first authorized by the Tax Reform Act of 1986. They pool together residential and commercial mortgage loans based on their risk and maturity, like a collateralized mortgage obligation . Then, the pool is broken up into bonds, which are sold to each individual investor. In contrast to other investment vehicles, these payments are usually made on a monthly basis rather than a semi-annual one.

Notably, REMICs can take many different forms, including a corporation, trust, or partnership. However, they are generally pass-through entities, which means they are not taxed directly. Instead, investors pay income tax on the principal and interest payments they receive from these investment vehicles.

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What Is A Real Estate Mortgage Investment Conduit

A Real Estate Mortgage Investment Conduit is a special purpose vehicle , authorized by the Tax Reform Act of 1986, that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors and is treated like a partnership for Federal income tax purposes with its income passed through to its interest holders”. It is used to pool mortgage loans and issue mortgage-backed securities.

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The Limitations Of Remics

Form N

Though REMICs provide relief from entity-level taxation, their allowable activities are quite limited “to holding a fixed pool of mortgages and distributing payments currently to investors”. A REMIC has some freedom to substitute qualified mortgages, declare bankruptcy, deal with foreclosures and defaults, dispose of and substitute defunct mortgages, prevent defaults on regular interests, prepay regular interests when the costs exceed the value of maintaining those interests, and undergo a qualified liquidation, in which the REMIC has 90 days to sell its assets and distribute cash to its holders. All other transactions are considered to be prohibited activities and are subject to a penalty tax of 100%, as are all nonqualifying contributions.

To avoid the 100% contributions tax, contributions to REMICs must be made on the startup day. However, cash contributions avoid this tax if they are given three months after the startup day, involve a clean-up call or qualified liquidation, are made as a guarantee, or are contributed by a residual interest holder to a qualified reserve fund. Additionally, states may tax REMICs under state tax laws. Many states have adopted whole or partial tax exemptions for entities that qualify as REMICs under federal law.

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The Advantages Of Remics

REMICs abolish many of the inefficiencies of collateralized mortgage obligations and offer issuers more options and greater flexibility. REMICs have no minimum equity requirements, so REMICs can sell all of their assets rather than retain some to meet collateralization requirements. Since regular interests automatically qualify as debt, REMICs also avoid the awkward reinvestment risk that CMO issuers bear to indicate debt. REMICs also may make monthly distributions to investors where CMOs make quarterly payments. REMIC residual interests enjoy more liquidity than owners trusts, which restrict equity interest and personal liability transfers. REMICs offer more flexibility than CMOs, as issuers can choose any legal entity and type of securities. The REMICs multiple-class capabilities also permit issuers to offer different servicing priorities along with varying maturity dates, lowering default risks and reducing the need for credit enhancement. REMICs are also fairly user-friendly, as the REMIC election is not difficult, and the extensive guidance in the Code and in the regulations offers “a high degree of certainty with respect to tax treatment that may not be available for other types of MBSs”.

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Concept Of Real Estate Mortgage Investment Conduit In The Context Of Real Property

A short definition of Real Estate Mortgage Investment Conduit : Created by the Tax Reform Act Of 1986, the Conduit is a vehicle through which mortgage backed securities can be issued.

This is an advance summary of a forthcoming entry in the Encyclopedia of Law. Please check back later for the full entry.

The Real Estate Mortgage Investment Conduit Improvement Act Of 2009

Understanding CMBS Loans / Conduit Mortgages

The REMIC Improvement Act of 2009 was first introduced by Congress in order to ease the restrictions on commercial mortgage loans that had been securitized by REMICs. As it stands, the borrower may not be allowed to make certain changes to their property, because any changes to the value of the underlying collateral would affect the REMIC.

The proposed law would allow borrowers to make improvements to their properties. It also includes a declaration that does not allow these improvements to be considered prohibited transactions by the IRS. In addition, any income generated by those improvements will be treated as though it was income received from qualified mortgages.

The bill has moved on to the Committee for Banking, Housing, and Urban Affairs, but it has not made any further progress as yet.

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Diversify With Reits And Real Estate Mutual Funds

With real estate becoming a firm part of the capital asset allocation matrix for both institutional and retail investors, real estate funds have seen steady growth recently. Due to the capital-intensive nature of real estate investing, its requirement for active management, as well as the rise in global real estate opportunities, institutions seeking efficient asset management are gradually moving to specialized real estate funds of funds .

The same is now true for retail investors, who can benefit from access to a much larger selection of real estate mutual funds than before, allowing for efficient capital allocation and diversification.

Like any other investment sector, real estate has its pros and cons. It should, however, be considered for most investment portfolios, with real estate investment trusts and real estate mutual funds seen as possibly the best methods of filling that allocation.

Real Estate Mutual Funds

Real estate mutual funds themselves invest primarily in REITs and real estate operating companies using professional portfolio managers and expert research. They provide the ability to gain diversified exposure to real estate using a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with a much broader asset selection than can be achieved by buying REIT stocks alone, and they also provide the flexibility of easily moving from one fund to another.

Flexibility is also advantageous to the mutual fund investor because of the comparative ease in acquiring and disposing of assets on a systematic and regulated exchange, as opposed to direct investing, which is arduous and expensive. More speculative investors can tactically overweight certain property or regional exposure in order to maximize return.

Creating exposure to a broad base of mutual funds can also reduce transaction costs and commissions relative to buying individual REIT stocks. Another significant advantage for retail investors is the analytical and research information provided by the funds on acquired assets, as well as management’s perspective on the viability and performance of real estate, both as specific investments and as an asset class.

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