REMICs, FASITs and Other Mortgage-Backed Securities (Portfolio 741)

Bloomberg Tax Portfolio, REMICs, FASITs and Other Mortgage-Backed Securities, No. 741, focuses on the most-used vehicles for repackaging interests in home and commercial mortgages and reselling those interests into the secondary market. Real estate mortgage investment conduits (REMICs) is the primary topic and the portfolio considers in detail: (i) the tax requirements for qualifying and remaining qualified as a REMIC, (ii) the tax consequences of funding and operating a REMIC, and (iii) the treatment of the holders of the REMIC's regular interests (which are deemed to be debt whether they meet the usual tax conditions for debt classification or not) and the REMIC's residual interests (the income on which cannot be reduced by deductions).

Mortgage Trusts, which were the initial mortgage securitization vehicle and the predecessor to REMICs are also considered. Special attention is paid to classification issues, in particular, the ways in which trust property can be shared without causing the securitization vehicle to be classified as a partnership or corporation. The distinction between foreign and domestic trusts is touched on and so is the distinction between trusts that issue debt and trusts that issue certificates representing ownership of debt instruments held by the trust.

Mortgage Real Estate Investment Trusts (Mortgage REITs) are discussed as an alternative to REMICs. Mortgage REITs issue mortgage backed debt instruments through taxable mortgage pools. These vehicles are commonly referred to as “REIT-TMPs.” As part of the general discussion of Mortgage REITs, the Portfolio explains the advantages of REIT-TMPs over REMICs (greater flexibility in managing mortgage assets) and their disadvantages (unlike REMIC regular interests, which are deemed to be debt, REIT-TMP instruments sold to investors must qualify as debt under the usual tax rules for distinguishing debt from equity).
Because of the prevalence of distressed mortgages, the REMIC, Mortgage Trust and Mortgage REIT discussions all consider the special rules published by the IRS and Treasury that enable mortgage securitization vehicles to address problem loans without jeopardizing the favorable tax treatment of such vehicles.

Financial asset securitization investment trusts (FASITs) are not discussed in detail. To provide help to the practitioner, however, the worksheets provide the statute and legislative history and the proposed regulations and explanation. Other worksheets discuss special aspects of foreclosing on REIT-held mortgages and modifying REMIC-held mortgages. REMIC liquidation plans, examples of two-tier REMIC structures and general REMIC tax provisions (reporting and filing duties) are also provided.