Real Estate Mortgage Investment Conduit - Explained
What is a Real Estate Mortgage Investment Conduit?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is a Real Estate Mortgage Investment Conduit?
A Real Estate Mortgage Investment Conduit is a special purpose vehicle (entity), authorized by the Tax Reform Act of 1986, that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors and is treated like a partnership for Federal income tax purposes with its income passed through to its interest holders". It is used to pool mortgage loans and issue mortgage-backed securities.
How Does a Real Estate Mortgage Investment Conduit Work?
Real Estate Mortgage Investment Conduits hold mortgages secured by real estate properties, both commercial and residential and issue multiple classes of ownership interests to investors in the form of pass-through certificates, bonds or other legal forms. These securities are then traded on the secondary mortgage market. Such conduits may be organized as a partnership, a trust, a corporation or an association. Real Estate Mortgage Investment Conduits are tax exempted under the Federal law however, the investors incomes are taxable. According to the law, the loans within a given pool needs to be constant and that cannot be significantly modified or exchanged with different loans with new terms. If those are modified the tax exemption might be withdrawn. In cases of commercial real estate loans, there are restrictions on renovating the property. As a renovation might considerably change the value of the property that is used as collateral for securing the loan the owner is not allowed to make any significant changes in the property that have been securitized by REMICs. The proposed legislation of the Real Estate Mortgage Investment Conduit Improvement Act of 2009 recommended amending the REMIC rules by allowing property owners with commercial loans securitized by REMICs to renovate their property to make it more attractive to the market. Freddie Mac and Fannie Mae are two major issuers of REMICs. They are leading secondary market buyers of conventional mortgage loans and privately-operated mortgage conduits. Freddie Mac and Fannie Mae are owned by mortgage bankers, mortgage insurance companies, and savings institutions.