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REIT & REMIC   Term Paper ID:45571 Click to get this paper

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Paper Introduction: real estate investment trusts and real estate mortgage investment conduits an in-depth review Table of ContentsIntroduction REIT Review History Functioning Tax Ramifications REMIC Review History Functioning Tax Ramifications Summary and Conclusion References real estate investment trusts and real estate mortgage investment conduits an in-depth review Introduction Two investment vehicles are reviewed in this paper The first is thereal estate investment trust REIT The second is the real estate mortgageinvestment conduit REMIC REITs are formed as investment corporations AnREIT sells shares of the Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Briefings in Real Estate Finance, 2(2), 139-161.Sutton, P. Derivative mechanics: The CMO. (2 9, Fall). A., & Fabozzi, F. A major advantage of an REIT from the perspective of the individualinvestor is that a stake in real property investments can be gained atlegally limited personal risk. At such times, shareholders are liable for federal capitalgains taxation (Li & Weber, 2 9). This condition isthe same as it is for dividends received from other types of shareinvestments. The investor receives more principaltoday, when interest rates are down, and so must trade the high interest onthe original CMO for lower interest on something else (Knight, 1991). (2 9, July). The globalized financialmarkets assured that the market for these financial derivatives wouldbecome global as opposed to remaining domestic (Meyers, 2 5; Roever &Fabozzi, 2 3). J. CMOs break themortgage-backed security into a series of bonds known as tranches. (2 9, October). Third, the taxramifications of the investment vehicles are reviewed. Summary and Conclusion REITs and REMICs were reviewed in this paper. CMOs are a form of financial derivative that is classified as aReal Estate Mortgage Investment Conduit, or REMIC. (2 9, January). Forces that are changing REITs forever. According toFrantz (1996), share prices in REITs tend to be less volatile that is trueof the overall equity market. G., & Knight, R. The pre-payment effect, however, causes CMOs work somewhatdifferently. Structural changes, market growth and productivity gains of the US real estate investment trusts in the 199 s. An REIT sells shares ofthe corporation to investors. Additionally,individual investor federal income tax liability on capital gains isdeferred until such time as capital gains are distributed by REITs. Taxes and ex-dividend day returns: Evidence from REITs. Each of these corporations is a major participant in thesecondary mortgage market. This procedure breaks the security into several shorterbonds (de Benedictis, 2 5). As an example,as interest rates fall, more people pre-pay their mortgages, so eachtranche has a shorter maturity. G. There are six criteria mustbe met by an REIT to qualify for the federal corporate income tax-exemption. REIT ReviewHistory The real estate investment trust became a feasible investmentalternative with the enactment of the Real Estate Investment Trust Act of196 . (2 9, November). R. Securitization matures, gains status on way to magic $1 billion. The first is thereal estate investment trust (REIT). > A maximum of 5 % of the outstanding shares of an REIT may be held by any combination of five or fewer shareholders.Functioning REITs are formed as investment corporations. The holder of a $1 million firsttranche, by contrast, would get her or his principal back from the first$1 million paid. The interest due accrues,and as is true of a zero-coupon bond, it initially makes no interestpayment. The secondary mortgage market is comprised of companiesthat purchase and service real estate mortgages from mortgage lendingfirms. P. Appraisal Journal, 77(4), 3 2-311.Frantz, J. Thus, theREIT investment is exempt from the so-called double-dip of federal taxationwherein (a) the corporation pays the federal corporate income tax oncorporate earnings and (b) individual shareholders pay federal personalincome tax on dividends received from the corporation. Second, thefunctioning of the investment vehicles is reviewed. As interest rates rise, fewer people pre-pay their mortgages, so each tranche has a longer maturity. tax considerations for ABS sponsors and investors. In each case, thedouble-dip federal income taxation is eliminated by exempting REITs andREMICs from liability for federal corporate income tax. (2 2, September). Revised criteria were enacted in Tax Reform Act of 1996 and theREIT Modernization Act of 1999 (Vogel, 2 9). Accounting Horizons, 5(2), 55-63.Li, O. real estate investment trusts and real estate mortgage investment conduits:an in-depth review Table of ContentsIntroduction 1REIT Review 2 History 2 Functioning 4 Tax Ramifications 4REMIC Review 5 History 5 Functioning 7 Tax Ramifications 12Summary and Conclusion 12References 13 real estate investment trusts and real estate mortgage investment conduits: an in-depth review Introduction Two investment vehicles are reviewed in this paper. (2 3, Summer). New York, NY: Simon and Schuster.DeLisle, J. The federal government supports three corporations that are active inthe secondary mortgage market. Journal of Structured & Project Finance, 9(2), 5-19.Singh, A. Real estate mortgage investment conduits: Mortgage vehicles for the 199 s. (2 7, October). Theinitial advantage of the new type of investment-company was the exemptionfrom the federal corporate income tax if the criteria delineated in the lawwere met. M. This bond gets neither principal norinterest until all previous tranches are paid. > A minimum of 75% of the gross income of an REIT must come from (a) real property rents, (b) mortgage interest, and (c) gains from sales of real property. (1991, June). CMO tranches take another "hit, because nowtheir payments also come later as prepayment rates fall" (Haubrich, 1995,p. When one of thesefinancial instruments consists primarily of sub-prime mortgages, however,the associated long-term risk becomes very high (Engdahl, 2 8). Journal of Structured Finance, 1 (4), 7-2 .Parks, J. B. B. The mortgages described above constitute the primarymortgage market. If they drop off, however, the TAC has no protection (deBenedictis, 2 5).Tax Ramifications As is the case for REITs, REMICs are exempt from federal incometaxation. The Z-bond acts as a stabilizing influence on the other tranches.The interest that would otherwise go to the Z-bond tranche instead goes tothe other tranches and counts as a principal payment (Sutton, 2 7; Topuz,2 9). J. The evolution of innovative debt and equity structures: The securitisation of US lodging real estate finance. The subprime panic. Because thecorporation is not allowed to deduct dividends from gross income incalculating taxable income, there is in effect double taxation on equityshare investments in most corporations. CMOs are a form of financial derivativethat initially was created to provide more stability and predictability forthose investing in mortgage assets. The REIT invests thefunds paid in to shareholders in real property. Income earned by investors holding REMIC bonds are liable forpersonal federal income tax. (2 5, Winter). TACs offer a similarsort of protection, but only against pre-payments rising. The ABCs of CMOs, REMICs and IO/POs: Rocket science comes to mortgage finance. The personal liability of individualshareholders in a corporation typically is limited to the value of theshareholder's investment in the corporation (DeLisle, 2 9). (1991, April). No bottom and no net. The REIT invests the funds paid in toshareholders in real property. An REIT is a corporation, albeit a special type of corporation. Z., & Weber, D. A. The review of REITs and REMICs focuses on three points of interest.First, the history of the investment vehicles is reviewed. Eachtranche gets its share of interest payments, but the principal is repaidsequentially. Thus, as is also the case for REITs, double-dip federal income taxation is eliminated for REMICs and REMIC bond holders(Topuz, 2 9). European Financial Management, 15(1), 1 -46.Haubrich, J. There are multiple types of mortgage-backed securities. Any breech of the conditions of themortgage contract entitles the lender to demand full payment on thecontract. > An REIT must have a minimum of 1 shareholders. The CMO also is known as a real estatemortgage investment conduit, or REMIC (Singh, 2 2). When rates fall, the CMO tranche pays offquickly, again at the wrong time. When interest rates rise, the CMO extends at exactly the wrongtime, that is, when interest rates are high and investors would like toreinvest at the higher rate. Mortgages began as a lien on chattel property. The complete real estate adviser. These mortgagesprovide the underlying collateral backing up the security. CMOs have prominenceboth because of their wide use and because of their role in a series ofmajor financial setbacks, the latest of which is the sub-prime mortgagecrisis that in turn was an important factor in the development of thefinancial crisis and ensuing economic recession that began in December 2 7(Gorton, 2 9).Functioning Securitization essentially means assembling and bundling otherwiseilliquid, essentially non-marketable assets and converting them intomarketable securities. In the United States, the federal governmentauthorized Fannie Mae) and Freddie Mac to purchase pools of mortgages anduse them as collateral for issuing securities. The distributions are considered to be dividends, and as such they must be reported as income by individual shareholders. Effectively, the PAC has priority over the other tranchesthrough having first claim on the money available. Initial interest rates on variable-rate mortgages typicallyare lower than on long-term fixed-rate mortgages, because the lenderassumes a lower risk by committing to a specific interest rate for ashorter time period. AnREIT sells shares of the corporation to investors. Normally, investors holding a bond want interest rates to dropbecause it gives them a capital gain. In 1983, market participants developed the CMO to solve theseproblems. Journal of Economics & Finance, 33(3), 288-315.Vogel, J. J. An REIT functions at a general levelsomewhat along the lines of mutual funds; however, REIT-specific regulatoryrequirements and tax laws affect functioning and the shareholder benefits(Singh, 2 2). Real Estate Finance, 26(3), 3-8. Some investors wanted even more certainty about their bonds, so themarket responded with PACS and TACS-Planned Amortization Classes andTargeted Amortization Classes. This situation presentsa problem in that the security has a very long maturity-it takes yearsuntil the last home owner in a pool completely pays off the last mortgageand returns the full value of the principal. In the secondary mortgage market, Collateralized mortgage obligations(CMOs) were introduced in 1983. T. A primer on select U.S. The TAC haspriority over other tranches and hence can keep to its schedule if pre-payments increase. Lower levels of volatility tend to protectinvestors from dramatic, temporary market price swings.Tax Ramifications The annual distributions that REIT shareholders receive from the REITrepresent taxable income for the individual shareholder. (1995, September 1). If a substantial proportion of the mortgages included in acollateralized package include sub-prime borrowers and/or borrowers on high-leveraged properties, the risk tends to be higher. The first typeof mortgage-backed security is the pass-through. The points ofinterest are reviewed first for REITs, with the review of REMICs following. When residential mortgages are assembled into packages as mortgage-backed security instruments, the basis of the risk/return characteristicsof such financial instruments are the overall risk/return characteristicsof all of the individual residential mortgages included in a collateralizedpackage. REMIC ReviewHistory Today, a mortgage is a debt instrument that is executed by a borroweragainst real property as collateral. > A minimum of 75% of the assets of an REIT must be invested or held in cash. The concept of thereal estate mortgage developed as a part of the development of the bankingand credit systems subsequent to the demise of the feudal system ofeconomics (de Benedictis, 2 5). > A minimum of 95% of the gross income of an REIT must come from (a) real property rents, (b) mortgage interest, (c) gains from sales of real property, (d) dividends on shares in other REITs, (e) interest from government securities, and (f) gains from sales of shares in other REITs and government securities. ReferencesCrompton, S. The second is the real estate mortgageinvestment conduit (REMIC). Residential mortgages,including sub-prime mortgages, are bundled into CMOs. This structure makes a CMOs a derivative (value dependson, or derives from, the value of the underlying mortgage pool). The six criteria are as follows (Vogel, 2 9): > A minimum of 9 % of an REIT's taxable income must be distributed to shareholders annually. Journal of Accountancy, 171(4), 41- 51.Roever, W. An REIT's capital gains are not counted as capital gains, and thus are not required to be distributed to shareholders on an annual basis. The REIT and the REMICprovide taxation benefits for individual investors. PACs provide principal payments according toa pre-specified schedule. 2). C., & Timan, D. A major difference (and advantage), however, is that the REITitself is exempt from federal corporate income tax liability. Real estate mortgages are issued in a variety of forms. To mitigate these risks, market participants created a new type oftranche-the accrual bond, or Z-bond. Interest-rate risk exists because market rates can change, making thepresent value of the payment stream worth different amounts. (2 5). Economic Commentary, 1-4.Knight, L. M., Jr. International Financial Law Review, 28(1 ), 43-44.de Benedictis, D. As an example, an investor holding $1 millionof a $1 million pass-through would not get all of her or his principalback until every mortgage had been paid. A primer on securitization. What is a mortgage REIT? REMICs are firms that createsecuritization investment vehicles by pooling real estate mortgages.Undivided interests in the mortgage-backed securities then are sold toinvestors in the form of bonds (Parks, 1991). REITs are formed as investment corporations. This advantage derives from the corporateform of organization of an REIT. National Tax Journal, 62(4), 657-676.Meyers, T. Allowable investments are (a) real property, (b) real estate mortgage loans, (c) shares in other REITs, and (d) government securities. Investment vehicles allowed for REITs are prescribed. Today, themost prevalent formats are fixed-term/fixed rate, adjustable (variable)rate mortgages. The three corporations are (a) the FederalNational Mortgage Association, known generally as Fannie Mae, (b) theGovernment National Mortgage Association, known generally as Ginnie Mae,and (c) the Federal Home Loan Mortgage Corporation, known generally asFreddie Mac. They stick to this schedule as long as pre-payments stay in some broad range (for example, 5 to 35 percent PSA.Additionally, the PAC is exempt from the serial pay down pattern of thetranches, so that other tranches may receive principal payments at the sametime as the PAC. When investors withdraw from anREIT or when an REIT is disbanded, capital gains are distributed toshareholders. (2 9, December). Since each monthlypayment includes both principal and interest, investors get a mixture ofthose elements passed through from the home owners. Real Estate Finance, 24(3), 3 -36.Topuz, J., & Isik, I. In effect, they buy mortgages from privatesector lenders, which, in turn, free funds for the extension of additionalresidential mortgages by mortgage lending companies (Knight & Knight,1991). Since home owners have theoption to pre-pay their mortgages, a pass-through also implies a risk thatpayments may arrive on a different schedule than investors initiallyexpected (Engdahl, 2 8). When interestrates rise, even ordinary bonds drop in price as the present discountedvalue of their payments falls. Investors receive a prorata share of payments made by mortgages in the pool. That is, principal payments go exclusively to the firsttranche until it is paid off, then to the second tranche until it is paidoff, and so forth. The Secondary Market Enhancement Act became law in 1984 (deBenedictis, 2 5). (1996, April). (8th ed.). Bond prices rise as interest ratesfall. National Real Estate Investor, 38(4), SEC3-SEC8.Gorton, G. Real estate tax update. An REIT functions at ageneral level somewhat along the lines of mutual funds; however, REIT-specific regulatory requirements and tax laws affect functioning and theshareholder benefits (Crompton, 2 9). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.