With the new mortgage rules, qualified borrowers are increasingly looking for alternative options to obtain the capital needed outside of the traditional lending channels. Whether it’s for purchasing their next home, refinancing, generating working capital for their business, or providing funds for a myriad of personal reasons, borrowers are increasingly looking to MICs to provide mortgage capital in the residential housing sector.
This increasing demand has motivated many investors to provide alternative means of lending to this expanding segment of borrowers. One of the several types of investment funds capitalizing on this widening market gap comes in the form of Mortgage Investment Corporations (MIC).
A Mortgage Investment Corporation is structured similarly to mutual funds with the main difference being that the investment asset is comprised of mortgages, instead of bonds, stocks, and other equities. It is also a flow-through investment vehicle because all of its income is redistributed back to the investors without triggering income tax to the corporation.
A MIC is generally governed by a board of directors and an investment committee which pools investors’ money and offers residential and commercial mortgage loans to approved individuals and companies. MICs are managed by a fund manager who oversees the portfolio management, recommends mortgages to the committee and handles the portfolio. In return, the fund manager receives management fees and, in some cases, performance bonuses.
MICs have provided an alternate option to Canadians in financial need when they are turned away from banks or when they require a faster lending option. The large financial institutions tend to shy away not only from the lack of creditworthiness of home buyers but also the area that the home is in.
If the borrower’s situation does not fit within the traditional parameters of lending (banks, credit unions, etc.), then financing options become more restricted. A MIC manager will have more flexibility regarding the borrower’s qualifications and even the loan structure itself. The manager would conduct the necessary due diligence to mitigate the default risk and at the same time understand the fluctuations in the local real estate market concerning the subject property.
Considered an alternative lending option, MICs typically attract borrowers that don’t fall under traditional lending guidelines, including the area within which the property sits as well as the rigid parameters constraining an applicant’s chance of mortgage approval. For example, when evaluating a mortgage portfolio, it is not uncommon to find a good percentage of its properties located in less urban areas.
When investing in MICs, investors are entrusting their money via securities dealers to a fund secured by Canadian real estate.
MICs use diversification in order to reduce risk, with the goal of providing stable rates of returns with generally low correlation to stocks and bonds (aka more traditional investment assets)
Consider these five critical factors before selecting a MIC:
A MIC typically has the in-house resources to not only undertake the loan processing but also carries out their own research on where to invest and what types of assets in each area have attractive, risk-adjusted returns. They work to stay aware of market movements and attempt to identify trends before over a market correction occurs. This enables them to position themselves to try and best capture returns while mitigating risk.
MICs in Canada have been around for 40 years and have been on a steady rise over the past decade. Currently, more than 300 MICs are operating in Canada and are present in almost all provinces. MICs are now becoming a popular form of investment among small to large investors because the underlying asset within a MIC is real estate.
Investing in a mortgage investment corporation enables you to invest in a company that operates and manages a diversified pool of mortgages. Shares of a MIC are typically qualified under the Income Tax Act (Canada) for any of the following: Registered Disability Savings Plan or RDSPs, Registered Education Savings Plan or RESPs, Registered Retirement Savings Plan or RRSPs, Tax-Free Savings Account or TFSAs or Registered Retirement Investment Fund or RRIFs.
The Canada Mortgage and Housing Corporation (CMHC) recently stated that the average credit score of Canadian real estate mortgage holders is improving across the country. Toronto, Vancouver, and Montreal are well positioned with relatively strong credit scores in the last five years. This may be a factor when deciding which MIC you could potentially invest in as risk can be further mitigated by having more secure borrowers make up a larger portion of the MIC’s portfolio. Examining the average credit score of borrowers in a MIC is a further indicator of the risk associated with the underlying assets held by the respective MIC.
If you are thinking of investing in a MIC, it may be great market timing to enter and capture the impending growth within this investment sector. Participating in MIC investments requires due diligence to find the best professionals who truly know where to place your money.
In the end, it all boils down to the management team and their qualifications on how to run the MIC. The success of MICs heavily relies on the management experience behind a MIC and their investment decisions.