Series 22: Characteristics Of A REMIC

Taken from our Series 22 Top-off Online Guide  Characteristics of a REMIC

Largely to facilitate the market for CMOs and as a result of heavy lobbying by potential CMO issuers, the Tax Reform Act of 1986 created the real estate mortgage investment conduit (REMIC). This Act permitted an entity that might otherwise be taxed as a corporation to instead elect REMIC status, allowing the income to pass through to investors. Interest from a REMIC is taxable at an investor’s ordinary income rate. The REMIC is a trust, created specifically to provide CMO issuers with greater flexibility in creating new types of mortgage securities.

To qualify as a REMIC under the IRS code, the trust must be a passive agent, all of whose investments must be “qualified” mortgages or “permitted investments.” Qualified mortgages are mortgages secured by an interest in real property and acquired within 90 days following the REMIC’s creation. Permitted investments allow the REMIC to invest income from the proceeds it receives on its qualified mortgages pending distribution. REMICs are not allowed to retain any ownership interest in the underlying mortgages. The trust is, as its name suggests, a conduit through which money flows from the person who pays down the original mortgage to the MBS investor. Most CMOs today are also REMICs. In fact, the two terms are often used interchangeably.

IRC Section 860A, 860D, 860G

Characteristics of Quasi-Pass-Through Entities

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