To qualify as a REMIC, an organization makes an "election" to do so by filing a Form 1066 with the Internal Revenue Service, and by meeting certain other requirements.
They were authorized by the Tax Reform Act of 1986 and introduced in 1987 as the typical vehicle for the securitization of residential mortgages in the United States.
[6] The Tax Reform Act eliminated the double taxation of income earned at the corporate level by an issuer and dividends paid to securities holders, thereby allowing a REMIC to structure a mortgage-backed securities offering as a sale of assets, effectively removing the loans from the originating lender's balance sheet, rather than a debt financing in which the loans remain as balance sheet assets (as is the case for covered bonds).
Nonmortgage assets, such as credit card receivables, leases, and auto loans are ineligible investments.
A PSA is the legal document that defines the rights and obligations of the servicer, the trustee, and other parties over a pool of securitized mortgage loans.
Cash flow investments are temporary investments in passive assets that earn interest (as opposed to accruing dividends, for example) of the payments on qualified mortgages that occur between the time that the REMIC receives the payments and the REMIC's distribution of that money to its holders.
After obtaining foreclosure properties, REMICs have until the end of the third year to dispose of them, although the IRS sometimes grants extensions.
If the REMIC makes a distribution to residual interest holders, it must be pro rata; the pro rata requirement simplifies matters because it usually prevents a residual class from being treated as multiple classes, which could disqualify the REMIC.
To extract some higher ratings for regulatory risk-capital purposes, several REMICs were turned into re-securitized real estate mortgage investment conduits (re-REMICs).
REMICs abolish many of the inefficiencies of collateralized mortgage obligations (CMOs) and offer issuers more options and greater flexibility.
REMICs offer more flexibility than CMOs, as issuers can choose any legal entity and type of securities.
The REMIC's multiple-class capabilities also permit issuers to offer different servicing priorities along with varying maturity dates, lowering default risks and reducing the need for credit enhancement.
[28] Though REMICs provide relief from entity-level taxation, their allowable activities are quite limited "to holding a fixed pool of mortgages and distributing payments currently to investors".
[34] "Many states have adopted whole or partial tax exemptions for entities that qualify as REMICs under federal law.
There are penalties for transferring income to non-taxpayers, so REMIC interest holders must pay taxes on gains that they do not yet have.