Business Glossary

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 protection against 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.

The purpose of a REMIC is to hold a fixed pool of mortgages and issue interests in itself to mortgage investors. AREMIC may be a partnership, corporation, trust, or separate pool of assets. REMICs are intended to become the exclusive means for issuing multiple-class mortgagebacked securities in a form that avoids the corporate double tax.

Substantially all of a REMIC's assets must be qualified mortgages (mortgages secured by real estate) but it may also hold some shortterm liquid assets that produce interest income, and assets held in a special reserve fund, and foreclosed properties.

All interests in a REMIC must be classified as regular or residual. Regular interests entitle the holder to interest and principal income, through debt, stock, or some other ownership form. Residual interests provide income that is more contingent in nature.

A REMIC will not, in general, be a taxable entity, although it must comply with tax requirements and is subject to a 100% tax on prohibited transactions. Regular interest holders will be taxed as if their interests were debt obligations subject to their share of the REMIC's income on an accrual basis. Gain or loss on the sale of a regular interest will be ordinary to the extent of their share of original issue discount. Residual interest holders generally receive their share of REMIC income as ordinary.

a pass-through vehicle created under the tax reform act of 1986 to issue multiclass mortgage-backed securities. REMICs may be organized as corporations, partnerships, or trusts, and those meeting qualificaitons are not subject to double taxation .