Real estate investment Flashcards

Real estate investment Flashcards Classes of REMICs, 1. Sequential Pay Classes (SEQ) also called Plain Vanilla, clean Pay, or Current Pay classes are the most basic classes within a REMIC structure. The principal on these classes is retired sequentially; that is, one class begins to receive principal payments from the underlying securities only after the principal on any previous class has been completely paid off.Support or Companion Classeshave the most volatile cash flow behavior. Prepayment variability from the underlying mortgage-related collateral cannot be eliminated; it can only be redistributed. PACs, TACs, and other support classes rely on companion classes to absorb this variabi Hybrid TrustsA form of REIT that engages in the activities of both equity trusts and mortgage trusts.hybrid trust, also called a combination trust, unites real estate equity investing with mortgage lending. This allows the trust to gain profits from rental income and capital gains as well as mortgage interest and placement fees. Many REITs that become chartered today request permission to invest in real estate and to finance real estate, even if they do not intend to do both.Real Estate Mortgage Investment Conduit (REMIC) A tax entity that issues multiple classes of investor interests (securities) backed by a pool of mortgages.A REMIC can be a corporation, trust, association, or partnership.A REMIC is an investment-grade mortgage bond that separates mortgage pools into different maturity and risk classes. REMICs hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. A REMIC can be a corporation, trust, association, or partnership.Investors in Accrual Classes (Z)receive no cash flow from the security until certain other classes are paid off.Interest Only and Principal Only Classes (IO/PO) are complex securities that are extremely sensitive to interest rate changes because prevailing rates affect prepayments.Tax ConsiderationsA REMIC is a conduit for tax purposes, meaning that the income of the REMIC is passed through to the investors who report the income on their individual tax returns. The Tax Reform Act eliminated the double taxation of income earned at the corporate level by an issuer and dividends paid to securities holders. A REMIC itself is exempt from federal taxes, although income earned by investors is fully

taxable. As a tax-exempt entity, a REMIC may invest only in qualified mortgages and permitted investments, including single family or multifamily mortgages, commercial mortgages, second mortgages, mortgage participations, and federal agency pass-through securities. Credit card receivables, leases, and auto loans are not eligible investments.A REMIC can issue mortgage securities in a wide variety of forms. Fannie Mae and Freddie Mac are among the major issuers of REMICs, along with privately-operated mortgage conduits owned by mortgage bankers, mortgage insurance companies, and savings institutions.The Basic Structure of a REMICA REMIC might include any number of classes of regular interests and is required to include a single residual interest class. These regular interest classes are identified by letters such as "A" class, "B" class, etc. These classes are assigned a coupon (fixed, floating, or zero interest rate) and the terms for payments to the investor. Often, one or

more "Z" classes, or accrual bonds, are included as regular interest classes. The "R" class is the residual interest class.In the REMIC structure that is the most simple, the principal on the regular classes is retired one after the other. An investor in a regular class is paid interest calculated on the outstanding principal balance of the class; however, principal repayments to an investor do not start until the previous class is retired or it is handled as the security's prospectus explains.The final regular interest class to be paid is the "Z," or accrual, class. This class receives no interest payment until certain other classes have been paid. Instead, the interest accrues and the balance of the "Z" class grows until the retirement of all other previous classes is complete.Targeted Amortization Classes (TACs)designed to produce more stable cash flow by directing prepayments from the underlying mortgage-related collateral to other classes, called companion or support classes. The PAC investor is scheduled to receive fixed principal payments over a predetermined period of time

through a range of prepayment scenarios.Planned Amortization Classes (PACs)are designed to produce more stable cash flow by directing prepayments from the underlying mortgage-related collateral to other classes, called companion or support classes. The PAC investor is scheduled to receive fixed