REMICs and CMBS Loans
A Real Estate Mortgage Investment Conduit, or REMIC, is an entity which is utilized to pool loans and issue mortgage backed securities (MBS), or commercial mortgage backed securities (CMBS). First authorized by the Tax Reform Act of 1986, REMICs can be organized in several different ways, including corporations, trusts, or partnerships. In the case of CMBS REMICs, they are typically organized as special purpose entities (SPEs) or single-purpose vehicles (SPVs). REMICs are typically considered to be pass-through entities, so they are not directly taxed. Investors, however, will need to pay taxes on income derived from REMICs.
Real Estate Mortgage Investment Conduits are typically governed by pooling and servicing agreements (PSAs), which detail the right and responsibilities of the various parties involved in the loan pooling and servicing process, including the borrower, the master servicer, and the special servicer, among others. PSAs may include various restrictions on properties funded with loans that are currently part of REMICs. For instance, CMBS borrowers may not be able to renovate or rehabilitate their property if the potential renovation would significantly increase the value of the property.
REMIC restrictions also occur at the securitization level; in most cases, the loans placed inside a REMIC are fixed, and can generally not be changed. In limited cases, some loans may be replaced, especially if other loans have defaulted, but this process is subject to specific rules. Just like the mortgage backed securities and commercial mortgage backed securities that are derived from them, REMICs can be segregated into a variety of classes, or tranches, of varying interest rates and payment priorities. Generally, class A securities get paid first, but carry the lowest interest rates, while subsequent classes, or tranches get paid later, but carry higher interest rates based on the increased risk.