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 mortgage loans together and issues mortgage-backed securities (MBSs).

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.1 REMICs can take on several different forms and are generally deemed pass-through entities. As such, they are exempt from being taxed directly.2

Key Takeaways

  • A real estate mortgage investment conduit is a special purpose vehicle that is used to pool mortgage loans and issue mortgage-backed securities.
  • 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 and is exempt from federal taxes.

Understanding Real Estate Mortgage Investment Conduit (REMIC)

Real estate mortgage investment conduits (REMICs) 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.3

REMICs piece together individual mortgages into pools based on risk and maturity just like collateralized mortgage obligations (CMOs). They are then divided into bonds or other securities that are then sold to investors.1 These securities then trade 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.4 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.4

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

REMICs may be organized as partnerships, trusts, corporations, or associations and are federally tax-exempt entities. Investors who own these securities, though, are still subject to individual income taxation.2 Tax laws prevented REMICs from making modifications to their mortgage loans. As such, the entity could lose its tax-exempt status if a loan within its pool is exchanged for another loan. That’s because federal regulations required loans in a given pool be constant. In other words, the loans cannot be significantly modified or exchanged for different loans with new terms.5

Special Considerations

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

Real Estate Mortgage Investment Conduit Improvement Act

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 commercial loans weren’t able to make changes to their assets because their plans would change the value of the collateral that secured the loan.6

The proposed law would allow property owners with commercial loans securitized by REMICs make improvements and enhancements to make their properties more attractive to the market. The legislation included a declaration that property modifications under such terms would not be regarded as prohibited transactions as outlined by the Internal Revenue Service (IRS).6

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.6

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The Act was referred to the Committee on Banking, Housing, and Urban Affairs, but hasn’t moved any further.6

The COVID-19 Pandemic

The federal government provided some relief for people with commercial and residential loans suffering from hardships due to the COVID-19 pandemic. Homeowners unable to make payments were granted forbearance, first under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed by former President Donald Trump in 2020, and then again when the Biden administration extended the provisions.78

Because the relief would ultimately change the structure of these loans, it would have an effect on how REMICs are structured, too. That’s why the IRS ensured that these investments and their issuers would remain safe from any tax implications if borrowers take advantage of these emergency measures.5

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

The industry commonly considers REMICs to be CMOS. These are a series of mortgages that are bundled together and sold to investors as investments. But there are some distinctions between the two.

CMOs exist within REMICs, although CMOs are a separate legal entity for tax and legal purposes. A REMIC, on the other hand, is exempt from federal tax. But that’s only on the income investors collect from the underlying mortgages at the corporate level. Any income generated and paid out to the investors is taxable, using Form 1066 when filing a REMIC.9

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

Both REMICs and real estate investment trusts (REITs) invest in real estate in some form or another but they are different. While REMICs pool mortgage loans and sell them off as investments to investors, REITs are a whole different ball game.

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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 purchase shares in REITs that are traded on exchanges just like stocks. Companies lease or rent out their properties and that income is then paid out to investors as dividends.10

Just like REMICs, though, REITs aren’t taxed. But investors must report any earnings from these investments on their annual tax returns, which means they are taxed at their own tax rate.