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Mortgage Investment Corporations Today

1. Credit Quality – MICs outline their underwriting criteria and credit quality review process in their offering documents so be sure to review them to get an understanding of how the MIC lends.  They generally perform a thorough background check on the borrower although they have more lenient credit quality conditions compared to traditional bank mortgages.  This makes MIC portfolios more risky than typical bank financed mortgages, but that is also why investors are expected to get compensated with a higher return. 
2. Liquidity Mismatch – MICs can be prone to liquidity mismatch when investors are in a hurry for an exit. This situation can happen when the MICs do not have sufficient funds on hand to pay back their shareholders retraction or redemption requests.  Many MICs will reserve excess cash not only to take advantage of lending opportunities but also to satisfy redemption or retraction requests, however, sometimes excess cash is not sufficient.  So investors need to be careful of their own liquidity needs as it relates to the proposed investment amount. 
3. Fluctuations in Value of Real Estate – Rapid changes in housing prices may affect the value of the properties used as security or collateral for the MICs mortgages, thus creating a negative impact on MICs. Some MICs might fail to recover an expected value based upon an appraisal that might no longer reflect market values.  

There are many more risks related to investing in the private exempt market such as MICs. These risk factors we highlighted are only some of the major risks associated with investing.   Always seek professional advice before investing. 

Generally, you can invest both cash (non-registered funds) and with registered plans such as TFSA, RRSP, RRIF, LIRA, LIF, and more. Create a free account in minutes to view all offerings including investment documents and full offering details to determine which registered plans are eligible. We wrote another article about investing from your registered plans here.

Prospective investors can invest individually, jointly, or through their corporate entity.

Mortgage investment corporations lend money to people who would or have been turned down by more traditional outlets like banks, credit unions or large alternative lenders. As such, they are able to charge significantly higher interest rates on their mortgages (in some cases in excess of 10%). With the hot housing markets in areas such as the GTA and Vancouver, many borrowers have sought money from MICs to purchase homes or bridge gaps in funding.

• Contractors, entrepreneurs, and small business owners who have volatile income and have a difficult time retaining traditional bank financing;
• “New to Canada” immigrants who are likely to find jobs, form households, and buy homes, but do not have credit history in Canada yet so are not able to obtain traditional bank financing;
• Borrowers with challenging credit history;
• Asset accumulators who invest heavily in rental properties and have ‘too much debt’ on paper, making them riskier to schedule A banks;
• Investors purchasing income properties or second properties for family/recreational use;
• Those acquiring certain rural and agricultural properties that have residential components.

• A rental property may appreciate in value and may experience the tax advantages of depreciation and other expense allowances. A MIC is a “flow through” investment and, in fact, the MIC must distribute 100% of its net profit to its investors every year. It is not designed to accumulate profit and is not likely to increase in value as a rental property might.
• While a rental property is likely to be an active investment involving hands-on management, the MIC is more a passive investment. It simply flows dividends through to its investors in whose hands the dividends are treated as interest income for tax purposes. The MIC sometimes, but rarely, flows capital gains or losses through to its investors.
• A MIC is likely to be purchased at a nominal $1 per share, for example, and may end at a $1 or lower per share redemption or wind-up value. It is expected to provide dividend income throughout the investment period. In exceptional circumstances the MIC might experience a capital gain if, for example, the MIC buys a property or forecloses on a property, takes it into inventory, and sells it at a profit. The MIC may flow capital gains – and capital losses – to its investors, but these are relatively rare occurrences.
• As stated, dividends paid to MIC investors are treated as interest income for tax purposes. Income from a rental property is taxed differently depending, for instance, on whether it is held personally or in a corporation. Investors should consult tax experts when choosing between a MIC and a real estate investment, such as rental property.

• MIC lending is private as opposed to conventional lending, so risk and reward must be viewed from that perspective.
• The number of impaired mortgages as a percentage of the total number of mortgages in a MIC at any given time is one consideration.
• The dollar volume of impaired mortgages as a percentage of the total dollar volume of the portfolio is another.
• The level of impairment is also a consideration. For example, an NSF cheque is one level, non-payment of property taxes, insurance or strata fees is another, and non-payment of the mortgage on maturity yet another.
• Assessing the number of mortgages and the dollar volume of mortgages in a portfolio that is under default or foreclosed upon is important and you should compare it against the overall MIC industry as a benchmark.  Based upon the Financial Services Regulatory Authority of Ontario, they publish an annual report that indicates what proportion of mortgages (as voluntarily reported by the MICs) the percentage of # of mortgages under default and under foreclosure.  
  • See the report here.
• Impairment doesn’t necessarily mean a loss of interest or capital. At any time a MIC may have 5-10% of its loans in an impaired state, but that does not mean it will lose 10% of its capital. It may not lose any capital, it really depends on if the MIC’s management team is able to successfully foreclose on defaulted assets in a manner that does not significantly jeopardize the principal capital value, recovers owed interest, and completes in a timely manner.
• Any discussion of impairment level must take into account the composition and relative risk of a MIC’s mortgages, and risks vary from one MIC to another. Some MICs underwrite lower risk 1st mortgages (including insured mortgages), some MICs underwrite more risky 2nd mortgages, and some MICs underwrite the full spectrum of mortgages: 1sts, 2nds, land development, construction, mezzanine financing, and so forth. It is difficult to assign impairment ratios without carefully considering the portfolio mix.