REMIC | Internal Revenue Code §§860D, 860F(a), 860G(d)


REMIC | Internal Revenue Code §§860D, 860F(a), 860G(d)

REMIC | Internal Revenue Code §§860D, 860F(a), 860G(d)

One cannot step into the same river twice, Heraclitus famously declared

Real Estate Mortgage Investment Conduit (REMIC).

A REMIC or special purpose vehicle (SPV) is an entity that is created for the specific purpose of being a tax-free pass-through for interest income generated by pooled mortgages. This allowed investors to purchase shares or certificates in a mortgage pool that was only taxed once at the investor level. The REMIC rules allowed the mortgage pools to collect interest income from the pool and disburse that income to the certifi cate holders tax-free at the pool level. Prior to the REMIC, interest income from pooled mortgage investments were taxed twice, once at the pool level and again at the investor level.

REMIC rules are very specific, and to qualify as a REMIC under federal and state tax codes, the SPV had to meet very stringent requirements. With respect to RMBS the controlling trust document is known as the Pooling and Servicing Agreement (PSA). One function of the PSA is to establish the rules governing the trust such that the trust’s activities and management conform to IRC 860. If the trust did not conform, it could lose its REMIC status and its tax-free pass-through status.

REMIC structure allows SPVs to create tremendous efficiency in the capital markets. A secondary market was created where mortgage loans could be turned into bondlike securities and traded on an open market. The capital markets adapted quickly, and entire institutions were created to service this new financial instrument. The SPV allowed originators of residential and commercial mortgages access to capital and a competitive market where they could sell their loans. Aggregators and depositors facilitated mortgage pooling. Investment banks and commercial banks turned the mortgage pools into securities and marketed them to investors. Servicing agents monitored the loans in the pool trusts for the pool trustees. Pool trustees acted on behalf of the trust certificate holders (investors).



(a) General rule

For purposes of this title, the terms “real estate mortgage investment conduit” and “REMIC” mean any entity—
(1) to which an election to be treated as a REMIC applies for the taxable year and all prior taxable years,
(2) all of the interests in which are regular interests or residual interests,
(3) which has 1 (and only 1) class of residual interests (and all distributions, if any, with respect to such interests are pro rata),
(4) as of the close of the 3rd month beginning after the startup day and at all times thereafter, substantially all of the assets of which consist of qualified mortgages and permitted investments,
(5) which has a taxable year which is a calendar year, and

(6) with respect to which there are reasonable arrangements designed to ensure that—

(A) residual interests in such entity are not held by disqualified organizations (as defined in section 860E (e)(5)), and

(B) information necessary for the application of section 860E (e) will be made available by the entity.

In the case of a qualified liquidation (as defined in section 860F (a)(4)(A)), paragraph (4) shall not apply during the liquidation period (as defined in section 860F (a)(4)(B)).


(b) Election

(1) In general

An entity (otherwise meeting the requirements of subsection (a)) may elect to be treated as a REMIC for its 1st taxable year. Such an election shall be made on its return for such 1st taxable year. Except as provided in paragraph (2), such an election shall apply to the taxable year for which made and all subsequent taxable years.

(2) Termination

(A) In general

If any entity ceases to be a REMIC at any time during the taxable year, such entity shall not be treated as a REMIC for such taxable year or any succeeding taxable year.

(B) Inadvertent terminations

(i) an entity ceases to be a REMIC,
(ii) the Secretary determines that such cessation was inadvertent,
(iii) no later than a reasonable time after the discovery of the event resulting in such cessation, steps are taken so that such entity is once more a REMIC, and
(iv) such entity, and each person holding an interest in such entity at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such entity as a REMIC or a C corporation) as may be required by the Secretary with respect to such period, then, notwithstanding such terminating event, such entity shall be treated as continuing to be a REMIC (or such cessation shall be disregarded for purposes of subparagraph (A)) whichever the Secretary determines to be appropriate.




(a) 100 percent tax on prohibited transactions

(1) Tax imposed

There is hereby imposed for each taxable year of a REMIC a tax equal to 100 percent of the net income derived from prohibited transactions.

(2) Prohibited transaction

For purposes of this part, the term “prohibited transaction” means—

(A) Disposition of qualified mortgage

The disposition of any qualified mortgage transferred to the REMIC other than a disposition pursuant to—
(i) the substitution of a qualified replacement mortgage for a qualified mortgage (or the repurchase in lieu of substitution of a defective obligation),
(ii) a disposition incident to the foreclosure, default, or imminent default of the mortgage,
(iii) the bankruptcy or insolvency of the REMIC, or
(iv) a qualified liquidation.




(d) Tax on contributions after startup date

(1) In general

Except as provided in paragraph (2), if any amount is contributed to a REMIC after the startup day, there is hereby imposed a tax for the taxable year of the REMIC in which the contribution is received equal to 100 percent of the amount of such contribution.

(2) Exceptions

Paragraph (1) shall not apply to any contribution which is made in cash and is described in any of the following subparagraphs:
(A) Any contribution to facilitate a clean-up call (as defined in regulations) or a qualified liquidation.
(B) Any payment in the nature of a guarantee.
(C) Any contribution during the 3-month period beginning on the startup day.
(D) Any contribution to a qualified reserve fund by any holder of a residual interest in the REMIC.
(E) Any other contribution permitted in regulations.


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