Investing in REMICs
Have you been looking for an investment opportunity in real estate in Virginia or other places? The REMIC (Real Estate Mortgage Investment Conduit) is an investment vehicle that uses a pool of mortgages to generate mortgage bonds. As an investor, you can do one of two things: you can hold onto the bonds or sell them to someone else. If they do chose to hold onto them, they will receive interest payments every month.
How it all works
When a mortgage lender issues a mortgage, it normally holds onto the mortgage until it is fully repaid, earning profit through interest payments and fees. Some lenders, however, may choose to earn more immediate profits by selling those mortgages to investment banks. The banks put the mortgages together into mortgage pools. Investment managers can then use the mortgage pools to issue bonds. The mortgages within the pool provide the underlying value.
With REMICs, the mortgage pools are divided up based on the dates of maturity — the times when the borrowers are scheduled to repay the mortgages in full. They are then subdivided based on risk. For purposes of mortgage loans, risk represents the possibility that the borrowers would default on their mortgages. It is based on the value of the mortgage, the borrowers’ income and their credit histories, among other factors. When investors buy bonds generated through REMICs, they will be able to see just how risky the mortgages are that back their bonds. The more cautious investors would be able to pick bonds backed by safe mortgages, while the more adventurous investors would be able to pick one of the riskier options.
The mortgage pools may be further sub-divided based on other characteristics of the underlying mortgages. This may include the type of mortgage, the term of the mortgage, the size of the building, the value of the building, and other such factors.
This gives investors more options and allows them to fine-tune their investment strategies.
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