While debate continues as to whether the worst of the housing crisis is ahead or behind us, and regardless of one’s opinions about the causes, it’s important to understand the different types of real estate and mortgage-related investments. Real Estate Mortgage Investment Conduits (REMIC) are such investments.
The big picture is this: someone decided that family, second, business and other mortgages could potentially be invested. Every month people everywhere paid their mortgage to their local bank and the bank made all the money. An investor walks in and says he’s going to buy the mortgage from the bank, and the investor starts making that income.
If that mortgage defaults – if it defaults – then the investor has lost a lot of money, so he decides to buy a lot of different mortgages to minimize the percentage of mortgages that default. But even if a mortgage defaults, he still doesn’t have any money, so he wants to spread the risk of those mortgage investments. So he takes it a step further by taking a portion of each mortgage, bundling those portions into a security, and then selling that security to other investors.
So far, none of this is REMIC. The resulting bundles are called Mortgage Backed Securities (a somewhat self-explanatory term). However, if a company wants to participate in mortgage-backed securities, increase its flexibility and reduce its risk, it will create a REMIC. A REMIC then is the actual trust, corporation, partnership or other entity formed for the specific purpose of investing in and bundling mortgages.
Here are some of the key benefits of a REMIC:
· There is no minimum equity requirement, which means REMIC can sell all of its assets.
· Investors can be paid monthly; other types of investments limit payouts to quarterly.
· REMIC does not have to pay any federal taxes, although the investors do so from income.
· Risk is shared between individual securities, so a default on a mortgage has less of an overall effect.
Some disadvantages are:
· REMICs cannot simply switch mortgages at will; Once the REMIC is created and the mortgages are bundled, they stay with it.
· REMICs are subject to state taxes depending on the state.
· If all mortgages default, as has happened in recent years, most of the investment can be lost.