Borden & Reiss: Beneficial Ownership and the REMIC Classification Rules

Bradley T. Borden (Brooklyn) & David J. Reiss (Brooklyn), Beneficial Ownership and the REMIC Classification Rules:

REMICs are securitized pools of mortgages that qualify for special flow-through taxation. To qualify for flow-through tax treatment, the pool must satisfy several requirements. An intended REMIC that fails to satisfy those requirements will likely be taxed as a corporation and payments made to holders of interests in a failed REMIC will likely be nondeductible dividend payments, subjecting the REMIC to significant tax and penalties. Such tax and penalties will cause beneficial interests in the pool to lose value and frustrate investors who relied upon REMIC classification as an incentive to purchase interests. Thus, tax classification is critical to REMICs and their investors. Nonetheless, recent litigation and various media reports suggest that many mortgage pools may not qualify for REMIC classification.