Real Estate Mortgage Investment Conduit (REMIC)
What is Real Estate Mortgage Investment Conduit (REMIC)
This is a special purpose vehicle or an SPV for issuance of mortgage-backed securities (MBS) or to pool in mortgage loans. Real estate mortgage investment conduits (REMIC) are responsible in holding residential and commercial mortgages in trust and issuing new interest for these mortgages to investors. It is a pass through tax thing that holds the real estate property. This financing vehicle was created through tax reform act of 1986. They are mortgage backed security.
To qualify as a REMIC, a pool of assets must be making a REMIC election and follow certain rules to asset composition. This includes adoption of methods that are reasonable in order to prevent unqualified or disqualified organization from holding residual interests. Qualified mortgages have various obligations and interests. It is defined as an obligation that is secured through any interest in any property that is either transferred to the REMIC on a startup exchange day or residual interests or purchased within 3 months of startup day for a contract in fixed price. It also includes any qualified replacement mortgage, FASIT regular interests or even any regular interest present in any other REMIC transferred to the REMIC on the startup day in lieu of regular residual interests.
These are mainly cash flow investments and qualified reserve assets or even a foreclosure property. These temporary investments allow the earning of interest on payments that are made for the mortgages that qualify. Qualified can vary including mortgage payments of principal or interest, profits that are earned from disposing of mortgages, foreclosure property funds, funds from credit enhancements, foreclosure property funds, warranty breach payments or even prepaid penalties. Permitted investments also include qualified reserves, and foreclosure property. The first one is an intangible property that is held because of investments from the funds that are available from the qualified reserves fund. Foreclosure on the other hand is the real property where REMIC receives upon the defaults.
This is more of a resembling debt. They possess low risk with a low yield. Regular interests are taxable. Regular interests should be in fixed terms, and also provide for interest payments.
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