Real Estate Mortgage Investment Conduits (REMICs) direct principal and interest payments from underlying mortgage-backed securities to classes with different principal balances, interest rates, average lives, prepayment characteristics and final maturities.
REMICs allow investors with different investment horizons, risk-reward preferences and asset-liability management requirements to purchase MBS tailored to their needs.
Unlike traditional pass-throughs, the principal and interest payments in REMICs are not passed through to investors pro rata; instead, they are divided into varying payment streams to create classes with different expected maturities, differing levels of seniority or subordination or other characteristics. The assets underlying REMIC securities can be either other MBS or whole mortgage loans.
Ultimately, REMICs allow Issuers to create securities with short, intermediate and long-term maturities, flexibility that in turn allows Issuers to expand the MBS market to fit the needs of a variety of investors.