Posts Tagged ‘remic’

What is a REMIC?

A Real Estate Mortgage Investment Conduit, or REMIC, is a kind of special purpose entity, or SPE, made up of various mortgage loans for the purpose of issuing mortgage-backed securities, or MBS.

Are you confused yet? Let’s break it down.

A REMIC is a legal entity – a limited partnership or a limited liability company – created for no other purpose than to pool mortgage loans together. (This narrow purpose is what makes it a “special purpose entity” or “special purpose vehicle.”) Once the REMIC has invested in selected family, commercial, second, or other mortgages, it issues securities (hence mortgage-backed securities). Each security issued represents a portion of all the combined mortgages, as opposed to each security representing an individual mortgage.

To make it even simpler – and maybe even oversimplify – a REMIC company is created for the sole purpose of buying mortgages. The company buys the mortgages, knowing they will see a return on their investment as people pay back their mortgages. This company takes it a step further by allowing people to invest in their company through securities – securities made up of portions of each mortgage.

There are several advantages to REMICs. Because they are made up of many different mortgages, if some of the mortgages default it may lessen the value of the security, but being broken up to include lots of mortgages makes it more diverse and more secure. The actual REMIC also doesn’t have to pay federal taxes, although individual investors are required to pay taxes on any income.

One disadvantage to a REMIC is that once the mortgages are bought and pooled, it’s not easy to add or remove individual mortgages. This means if one or two mortgages bundled in the REMIC aren’t doing well, investors are stuck with them. The other major disadvantage to a REMIC if all the mortgages default (like what’s happening with the current real estate market) then the REMIC loses almost all of its value.

So while a REMIC may be a good investment, it’s important to take into account current market trends.