Understanding REMIC (Real Estate Mortgage Investment Conduit)

The REMIC (Real Estate Mortgage Investment Conduit) is an investment vehicle that uses a pool of mortgages to generate mortgage bonds. Investors can buy those bonds and either hold onto them or sell them to someone else. If they do chose to hold on to them, they will receive interest payments every month.  The bonds' worth is derived from the mortgages within the pool. As soon as the mortgages are paid off, the bonds lose value. While the popularity of REMICs has declined considerably since the latest housing bubble burst, they are still the investment vehicles of choice for many investors.

How REMICs Work

When a mortgage lender issues a mortgage, it normally holds onto the mortgage until it is fully repaid, earning profit through interest payments and fees. Some lenders, however, may choose to earn more immediate profits by selling those mortgages to investment banks. The banks put the mortgages together into mortgage pools. Investment managers can then use the mortgage pools to issue bonds. The mortgages within the pool provide the underlying value. Until the mortgages are paid off, the bonds will have value. If the borrower defaults, the bonds lose some of their value, but they don't lose all of the value unless every single borrower winds up defaulting.

REMICs and Risks

With REMICs, the mortgage pools are divided up based on the dates of maturity—the times when the borrowers are scheduled to repay the mortgages in full. They are then subdivided based on risk. For purposes of mortgage loans, risk represents the possibility that the borrowers would default on their mortgages. It is based on the value of the mortgage, the borrowers' income and their credit histories, among other factors. When investors buy bonds generated through REMICs, they will be able to see just how risky the mortgages are that back their bonds. The more cautious investors would be able to pick bonds backed by safe mortgages, while the more adventurous investors would be able to pick one of the riskier options.

The mortgage pools may be further sub-divided based on other characteristics of the underlying mortgages. This may include the type of mortgage, the term of the mortgage, the size of the building, the value of the building, and other such factors. This gives investors more options and allows them to fine-tune their investment strategies.

Qualified Mortgages

REMIC mortgage pools can be made up of a wide variety of mortgages. This includes single family mortgages, multifamily mortgages, commercial mortgages, second mortgages and participation mortgages. Having a wide variety of mortgages reduces the odds that a significant number of underlying mortgages will succumb to default. This, in turn, makes all of the bonds more secure.

Interest Payments

The investors receive interest payments while they hold onto their bonds. Those interest payments are portions of the monthly payments the borrowers make on the underlying mortgages. The value of the interest payments is directly related to risk. Generally speaking, the riskier the underlying mortgages are, the higher the interest rates will be. However, this advantage is mitigated by the fact that the higher-risk bonds are more likely to lose value. Ultimately, investors must decide for themselves whether or not the higher interest rates are worth the risk.

blog comments powered by Disqus