Business Glossary

process of distributing risk by aggregating debt instruments in a pool, then issuing new securities backed by the pool.

bonds or notes backed by loan paper or accounts receivable originated by banks, credit card companies, or other providers of credit and often "enhanced" by a bank Letter of Credit or by insurance coverage provided by an institution other than the issuer. Typically, the originator of the loan or accounts receivable paper sells it to a specially created trust, which repackages it as securities with a minimum denomination of $1,000 and a term of five years or less. The securities are then underwritten by brokerage firms who reoffer them to the public. Examples are Certificate for Automobile Receivables (CARs) and so-called plastic bonds, backed by credit card receivables. Because the institution that originated the underlying loans or receivables is neither the obligor nor the guarantor, investors should evaluate the quality of the original paper, the worth of the guarantor or insurer, and the extent of the protection.

sale of securities by the issuing company directly to an investor (generally a large institutional investor) rather than an offering through the public exchange markets. A private placement does not have to be registered with the SEC, as a public offering does, if the securities are not purchased for resale.

mortgage securities vehicle authorized by the Tax Reform Act of 1986 that holds commercial and residential mortgages in trust, and issues securities representing an undivided interest in these mortgages. A REMIC, which can be a corporation, trust, association, or partnership, assembles mortgages into pools and issues pass-through certificates, multiclass bonds similar to a Collateralized Mortgage Obligation (CMO), or other securities to investors in the secondary mortgage market. Mortgage-backed securities issued through a REMIC can be debt financings of the issuer or a sale of assets. The Tax Reform Act eliminated the double taxation of income earned at the corporate level by an issuer and dividends paid to securities holders, thereby allowing a REMIC to structure a mortgage backed securities offering as a sale of assets, effectively removing the loans from the originating lender's balance sheet, rather than a debt financing in which the loans remain as balance sheet assets. A REMIC itself is exempt from federal taxes, although income earned by investors is fully taxable. As a tax-exempt entity, a REMIC may invest only in qualified mortgages and permitted investments, including single family or multifamily mortgages, commercial mortgages, second mortgages, mortgage participations, and federal agency pass-through securities.

Federal legislation enacted in 2004 (the American Jobs Creation Act) relaxed some of the restrictions on REMIC issuance, allowing securitization of mortgage-related open-end credit, such as homeequity lines of credit.

A REMIC can issue mortgage securities in a wide variety of forms: securities collateralized by (Ginnie Mae) pass-through certificates, whole loans, single-class participation certificates and multiclass mortgage backed securities; multiple class pass-through securities with fast-pay or slow-pay features; securities with a subordinated debt tranche that assumes most of the default risk, allowing the issuer to get a better credit rating; and Collateralized Mortgage Obligations with monthly pass-through of bond interest, eliminating reinvestment risk by giving investors call protectionagainst early prepayment.

Among the major issuers of REMICS are freddie mac and fannie mae,the two leading secondary market buyers of conventional mortgage loans, and also privately operated mortgage conduits owned by mortgage bankers, mortgage insurance companies, and savings institutions.