Real Estate Mortgage Investment Conduits or all you ever wanted to know about REMIC

by carra


Brief History of REMICs 

Created by Congress in 1986 (Tax Reform Act TRA ) and administered by the IRS, REMICs were designed to bring consistency to the secondary loan market Secondary loan market consists of:  Whole loan sales (individual and bulk)  Pool sales, consisting of  Pay-through securities (obligations collateralized by pool of loans) Payissued by Grantor & Owner Trusts or Offshore entities  Pass-through securities (undivided fractional interest in pool of Passloans) issued by Grantor Trusts  Preferred securities (backed by pool of loans)  Other variations (e.g., earnings based accounts, etc.)


History of REMICs, Cont. 

The TRA provided that, after 1991, an entity could only issue multi-class multiMBSs if it was a REMIC Concurrent with the creation of REMICs, Congress created TMPs as a stick to incent multi-class issuers to make REMIC elections (TMP rules impose an multientity level tax that is avoided if a REMIC election is made) As alluded to above, REMICs are not subject to the system of corporate taxation that generally subjects shareholders to double taxation:  REMIC incurs interest expense for payments to interest holders  Any remaining income is allocated to equity owner


What, exactly, is a REMIC?   

A REMIC is any entity allowed under state law (e.g., corporation, trust, or partnership) that meets the requirements and elects to be treated as such; a REMIC may also be formed as a segregated pool of assets, rather than a separate legal entity A REMIC is treated as a non-taxable entity and its regular interests are nontreated as debt REMICs must meet interest, asset and arrangement tests


REMIC - Federal Tax Qualification 

Interest Test 

All interests must be either regular or residual interests  One residual class allowed with pro rata distributions  Defined as anything that is not a regular interest  Unlimited regular classes (including none)  Issued on the startup day (a 10 day period, any one of which can be designated as the startup day)  Designated as regular interest  Has fixed terms (maturity date)  Interest payments consist of specified portion of interest payments on qualified mortgages which does not vary over life of class  Unconditionally entitles holder to receive specified principal amount

REMIC - Federal Tax Qualification, Cont. 

Asset Test 

Substantially all of its assets are comprised of qualified mortgages and permitted investments  Qualified Mortgages include:  Any obligation which is principally secured by an interest in real property and is either transferred to the REMIC on the startup day or is purchased within 3 months pursuant to a fixed-price fixedcontract in effect on the startup day  Any regular interest in another REMIC  Any qualified replacement mortgage, which is any obligation that would be a qualified mortgage if it were transferred to the REMIC on the startup day, and that is received for either another obligation within the 3 month period or a defective obligation within 2 years of the startup day  A defective obligation is one in default or reasonably expected to default, issued under fraud, that does not conform to customary representation or warranty given by sponsor or prior owner


REMIC - Federal Tax Qualification, Cont. 

Asset Test, Cont. 

Substantially all of its assets are comprised of qualified mortgages and permitted investments  Permitted investments include:  Cash flow investments representing investment of payments received from qualified mortgages for a temporary period between receipt and the regularly scheduled date for distribution to REMIC interest holders (cannot exceed 13 months)  Qualified reserve assets representing investment in a qualified reserve fund (established to pay REMIC expenses and/or amounts due on interests in the event of defaults, lower expected returns or other contingencies that could be provided for under a credit enhancement contract)  Foreclosure property


REMIC - Federal Tax Qualification, Cont. 

Asset Test, Cont. 

Substantially all of its assets are comprised of qualified mortgages and permitted investments  Substantially all means that no more than a de minimis amount of other assets can be held by REMIC  Safe harbor rule for satisfying de minimis test is considered to be met if the aggregate tax basis of those other assets is less than 1 percent of the aggregate tax basis of all REMIC assets  If REMIC fails the assets test, REMIC status is lost effective retroactive to the first day of that year  If REMIC holds a de minimis amount of nonqualified assets, any net income attributable to those assets is subject to a 100 percent tax; REMIC status is not failed


REMIC - Federal Tax Qualification, Cont. 

Arrangement Test 

Entity must adopt reasonable arrangements designed to ensure that residual interests are not held by disqualified organizations and that information sufficient to impose tax on transfers of residual interests to disqualified organizations is maintained 

Disqualified organization is any governmental entity not subject to federal tax, or any international organization

REMIC - Federal Tax Considerations, Cont. 

Prohibited Transactions 

Receipt of any fee or other compensation for performance of services Receipt of income attributable to any asset which is neither a qualified mortgage nor a permitted investment Any disposition of a qualified mortgage, other than:  Any substitution w/in first 3 months  Any substitution of defective obligation w/in first 2 years  Foreclosure, default or imminent default  Other (qualified liquidation, clean-up call, bankruptcy) cleanAny gain realized from sale of cash flow investment All prohibited transaction income is subject to 100% statutory rate


REMIC - Federal Tax Considerations, Cont. 

Prohibited Transactions, Cont. 

Certain loan modifications are deemed to be a disposition of a qualified mortgage 

A change in the terms of a mortgage if the modified loan differs materially either in kind or in extent from the original  

A modification changing the yield is material if the annual yield changes by more than 25 bps or 5% of the original annual yield A modification changing the timing of payments is material if the deferred payments are unconditionally payable later than the lesser of 5 years from the date of the deferral or 50% of the original term of the loan Changes in terms occasioned by default or reasonably foreseeable default Assumption of mortgage The conversion of a convertible ARM

Safe harbors where modification is never deemed material  

REMIC - Federal Tax Considerations, Cont. 

Prohibited Transactions, Cont. 

Certain other modifications are deemed to be a disposition of a qualified mortgage
A change in obligor  Addition or deletion of co-obligor if it results in a cochange in payment expectations  Changes in security or credit enhancement 


REMIC - Federal Tax Considerations, Cont. 

Contributions Tax 

100% tax on any contributions made to the REMIC after the startup day, with exception for cash contributions made:  W/in 3 months after startup day  To facilitate a clean-up call or qualified liquidation clean To a qualified reserve fund by a residual holder 

Foreclosure Property Tax 

35% tax on any income from foreclosure property comprised of:  Rents from real property where contingent on profits  Gain on sale where REMIC is dealer



Overview of Permissible Activities Investment acquisitions may be made via contributions of cash or other 


assets from sponsor only w/in first 10 days Investment dispositions  May be made in exchange for other qualified assets for any reason during first 3 months  May be made in exchange for other qualified assets during first 2 years only if original investments are or become defective Financing operations are not allowed subsequent to initial issuance of regular and residual interests Investment of cash flow are permissible, subject to fairly restrictive limitations Loan modifications may be performed, subject to materiality or default test Refinance solicitations of REMIC loan customers are generally not recommended, subject to industry administrative practices


Usual Pay-Through Structure
Collateral Pay-Thru Bonds Cash Cash & Ownership Interests Cash payments on ownership interests


Manager (I-Bank)

Pay-Thru Bonds Cash

Owner Trust
Physical Transfer of Collateral

Cash payments on bonds

Cash payments on ownership interests

Owner Trustee

‡ Acts as trust administrator ‡ Pays expenses of trust

Pledge of Collateral ‡ ‡ ‡ ‡ Collects payments on collateral Reinvests collections over short-term Makes payments on bonds Pays expenses of trust


Principal & Interest payments less Servicer fees

Bond Trustee

Principal & Interest payments


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