Borden and Reiss on REMICs

Brooklyn Law School Professors Bradley Borden and David Reiss have co-authored a new 14 page scholarly article Wall Street Rules Applied to REMIC Classification. In addition to being posted on SSRN, a shorter version of the article appeared in Thomson Reuters News & Insights earlier this month. The SSRN abstract reads:

Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities. This calamity is compounded by the fact that those professional advisors should have known that the REMICs they created were flawed from the start. If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.

The Federal Tax Glossary (available in the BLS Library subscription to CCH Intelliconnect - password required) defines a REMIC as an "entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors. An entity qualifies as a REMIC if it makes an election to be treated as a REMIC for federal income tax purposes and meets certain requirements as to its assets and investors' interests. An entity that qualifies as a REMIC is generally treated like a partnership with its income passed through to its interest holders. However, the REMIC is subject to tax on prohibited transactions, income from foreclosure property, and on contributions received after its startup date." SARA, the BLS Library catalog, links to BNA Bloomberg Tax Management Portfolio 741, REMICs, FASITs and Other Mortgage-Backed Securities which discusses the taxation of holders and issuers of Mortgage-Backed Securities and various tax reporting requirements.