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Real Estate Mortgage Investment Conduit Definition
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.
A Little More on What is a Real Estate Mortgage Investment Conduits
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 If those are modified the tax exemption might be withdrawn.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.
References for Real Estate Mortgage Investment Conduits
Academic Research on Investment Conduits
- · The commercial real estate bubble, Levitin, A. J., & Wachter, S. M. (2013). Harv. Bus. L. Rev., 3, 83. The result obtained from this paper indicates that there was a significant decline in the underwriting standards in the commercial mortgage-backed with securities that have in one way or the other contributed to the commercial real estate price bubble. This paper also explains that the commercial real estate bubble means an important lesson for understanding the residential real estate bubble. According to the analyses drawn from this paper, the commercial mortgage securitization market underwent a basic shift in 2004, nonetheless, as the traditional buyers of the subordinated commercial real estate debt were outdone by issuing of collaterals.
- · Making markets for structured mortgage derivatives, Oldfield, G. S. (2000). Journal of Financial Economics, 57(3), 445-471. This research thesis explains the difference between securitization in which a simple instrument that ought to be passed through was created and structured. This instrument allows the mortgages to create their derivatives claim. The main aim of this paper is to explain how structuring in a transaction can result in bringing values to a deal’s underwriter. The power of the market segmentation and price discrimination by the underwriter is also used to explain the structuring process adopted in this study. Also, this paper adopts the use of legal rules for trusts, the limits on permissible price discrimination and the algebraic rules for structuring was also discussed
- · Subordinated Rolling Equity: Analyzing Real Estate Loan Default in the Era of Securitization, Poindexter, G. C. (2001). Emory LJ, 50, 519. The processes involved in analyzing the real estate’s loans as a default in the era of securitization was exclusively studied in this research paper. Also, the subordinate rolling equity which brought about this real estate loan was also analyzed as well as the correlation between this two variable and important factors were explained.
- · On the determinants of yield spreads between mortgage pass-through and Treasury securities, Rothberg, J. P., Nothaft, F. E., & Gabriel, S. A. (1989). The Journal of Real Estate Finance and Economics, 2(4), 301-315. This paper finds the interest rate volatility and the term structures of rates and factors and explains that they are often quoted in the mortgage pricing handbook as a tool that affects the mortgage call premium. However, in this paper, these effects have been explained to have grown into being very important in recent years as more exercise of the prepayment options has increased. Evidence that shows credit concern and liquidity affect the pricing of pass-through securities. The evidence gotten from this research thesis via the models explain the differences in yields between the pass-throughs and the comparable-maturity Treasuries.
- · Risk and return perceptions of institutional investors, Worzala, E., Sirmans, G., & Zietz, E. (2000). Journal of Real Estate Portfolio Management, 6(2), 153-166. This research paper explains the responses of a survey that was mailed to portfolio managers for insurers and large pension funds stating their perceptions of the intrinsic return and risk of twenty investment choices. The main aim of this paper is to investigate whether large portfolio managers saw the intrinsic risk of the specific asset to be consistent with the expected return for that investment. The result obtained from the tests carried out indicates that these investors do not generally feel that the intrinsic risk of a lot of assets is claimed by the return acquired by the return expected for a particular return.
- · Hedonic mortgages, Chinloy, P., & Megbolugbe, I. F. (1994). Journal of Housing Research, 1-21. According to this research paper, a hedonic mortgage firm possesses quality constant that cut across the properties of a loan with a double hedonic mortgage yield that are directly observable from the derivative securities market by avoiding the risk of identification of separating demand and supply function. This paper shows that low income and minority borrowers are made to purchase prepayment insurance for which they may have little or no demand for because of the decrease in the level of mobility and illiquidity in paying the cost of the transaction or refinancing.
- · Creating liquidity out of spatial fixity: The secondary circuit of capital and the subprime mortgage crisis, Gotham, K. F. (2009). International Journal of Urban and Regional Research, 33(2), 355-371. According to the scholars that worked on this research analyses, crucial roles played by the United States Treasury Department office of the Controller of the Currency (OCC) and the Department of Housing and Urban Development (HUD) was specifically studied and the roles in creating legal regulatory conditions and policies that have nurtured the growth of a market for scrutinizing subprime loans were also studied. Hence, this paper explains the subprime mortgage problems as an example of the contradictions of the circulation of capital as expressed in the hope of capital to obliterate space through time. This paper also situates the current storm in the United State mortgage sector.
- · Sources of funds for mortgage finance, Lea, M. J. (1990).. Journal of Housing Research, 1(1), 139-161. This research paper examines the sources of funds for mortgage finance. The main aim of this research thesis is to explain the various methods or ways in which funds can be raised for the mortgage sector and how their financial status can be rated and expanded.
- · Lender’s Guide to the Securitization of Commercial Mortgage Loans, Dolan, P. D. (1998). Banking LJ, 115, 597. This research paper primarily discusses the securitization of commercial mortgage loans and how it has become one of the biggest and largest sectors of the securitization markets. This paper discusses that the commercial mortgage market was backed in 1996 to set a record of 29.8 billion USD and the 1997 commercial mortgage market was backed and expected to produce more than 40 billion USD. This paper also discusses some cogent issues regarding the securitization of commercial mortgage loans.
- · The Dialectics of White‐Collar Crime: The Anatomy of the Savings and Loan Crisis and the Case of Silverado Banking, Savings and Loan Association, Glasberg, D. S., & Skidmore, D. (1998). American Journal of Economics and Sociology, 57(4), 423-449. According to this research thesis, two perspectives were considered in the analyses of the loan and saving industry’s problem of the 1980s and the early 1990s. This paper explains two approached which primarily rely on a slim conceptualization of the concept of a white-collar crime that lays emphasis on identification of the static dimensions that explains the differences between these white-collar crimes from other crimes. Schlegel and Weis-burd’s notion regarding white-collar crimes were adopted in this study. And the end result suggests that organizational crimes may not only rise from the oppositions in the policies of the state projects. Hence, deviant behaviours and organizational crimes may be understood as unintended consequences of the oppositions in the state projects.
- · Mortgage securitization trends, Jaffee, D. M., & Rosen, K. T. (1990). Journal of Housing Research, 1(1), 117-137. This research paper explains the various processes involves in mortgage securitizations. The pros and cons were explained, as well as a suitable method for understanding how mortgage securitization can be applied to any financial problem in an economy.