A Real Estate Mortgage Investment Conduit (REMIC) is a special purpose entity created by the Tax Reform Act of 1986 to pool residential mortgages into a single trust that issues mortgage-backed securities (MBS). REMICs hold a static set of mortgages, then structure and sell them as different classes or “tranches” that vary by risk and payment priority.
How REMICs Work
Financial institutions (sponsors) acquire thousands of mortgages from banks or lenders and place them into a REMIC. This legal separation isolates mortgage assets from the sponsor’s balance sheet. The REMIC then slices the incoming mortgage payments into multiple tranches, each with distinct payment rules called a “waterfall.”
Investors buy these tranches, which offer varying risk levels: senior tranches receive payments first with the lowest risk and yield; mezzanine tranches have moderate risk and returns; junior or equity tranches absorb losses first but offer the highest potential return. This structure helps spread risk and attracts a broad range of investors.
REMICs vs. REITs
Unlike Real Estate Investment Trusts (REITs) that invest in income-producing properties or equity interests, REMICs invest solely in mortgage debt.
Why REMICs Matter
REMICs enable lenders to convert illiquid mortgage loans into tradable securities, providing liquidity to the housing finance system. They lower funding costs, support mortgage availability, and help diversify investor portfolios.
Key Points to Remember
- REMICs allow mortgage cash flows to flow directly to investors without corporate tax at the REMIC level, as explained in IRS Publication 938 (2023).
- Tranching lets investors tailor their risk/return preferences.
- Most REMIC securities are bought by institutional investors, though individual investors can access them via mutual funds and ETFs investing in mortgage-backed securities.
For more on mortgage-backed securities, see our article on Mortgage-Backed Securities.
To understand how REMICs differ from equity-based real estate investments, visit Real Estate Investment Trusts (REITs).
Sources:
IRS Publication 938, Real Estate Mortgage Investment Conduits, 2023 IRS.gov
Investopedia: Real Estate Mortgage Investment Conduit (REMIC) Investopedia.com
