Mortgage Investment Corporations have come a long way since their inception in 1973. Now popular among investors for their well-balanced risk-and-return profiles, the Canadian MIC industry has attracted a growing number of companies who strive to put your hard earned capital to work.
But not all MICs are created equal. The most successful ones acknowledge that mortgages, like any other investment, have accompanying risks and that those risks should be mitigated by careful assessment, responsible management, and transparency. On this note, mortgage investing doesn’t begin with a signed document or the issuance of a cheque; it starts with an interested investor’s due diligence.
The onerous task of selecting a MIC can be eased by recognizing performance indicators and asking the right questions. Let’s begin with a basic and common investment inquiry.
- When can I expect any income?
MICs have different payment schedules and may distribute dividends monthly, quarterly, or annually. Some investors feel more comfortable receiving income more frequently, and yet others will prefer receiving larger amounts in annual disbursements.
- Does the MIC have a history of ROI growth and stability?
As the saying goes, the best predictor of future behaviour is past behaviour. The same is true for a MIC’s performance, although as with any investment there is a certain economic cycles where performance may stray. Nevertheless, it is good practice to look into the MIC’s performance reports and ROI patterns to gain some insight into how investors are treated and the likelihood of earning your money back.
- Does the MIC have reputable standing?
Pending and ongoing litigation can affect how a MIC operates; especially if it is publicly traded, lawsuits can affect the shareholders’ confidence in management and affect the corporation’s market value.
Another issue that could significantly affect your investment is the MIC’s compliance with government regulations. One of the greatest advantages to investing in a MIC is that income is only taxed once it has been disbursed to the investors. If the entity loses its standing as a MIC, the ITA will tax its earnings prior to the release of dividends and then shave off, even more, when you receive your share as income.
- Is the MIC private or publicly traded?
Publicly traded MICs can offer more liquidity, but the risks of relying on the volatile stock market undercut the benefit of a more secure, collateralized, private investment.
- What maximum LTV ratio does the MIC keep?
The loan-to-value ratio speaks volumes about the MIC’s risk tolerance. The higher the LTV, the less buffer the loan has against property depreciation.
- How diverse is the portfolio?
Portfolio diversity has a positive correlation to risk diversity. A MIC is required to have 50% of its investments in residential mortgages, but the rest can be spread out among commercial, industrial, and even land development loans.
A lack of both diversity and transaction quantity in a portfolio could indicate that the MIC invests in too few mortgages for too much money.
- What are the MIC’s underwriting practices?
A Mortgage Investment Corporation should act in the interest of its investors and mitigate risk as best it can. An experienced MIC that knows what it is doing will have a team or a pool of underwriters in the form of industry experts and real estate lawyers. Every loan must be assessed based on reasonable criteria that are designed to hedge against risks and to optimize the deal’s chances of success.
- Do they choose borrowers well?
It is also prudent to look into the borrower mix in the MIC’s portfolio. Whom the entity lends to affects its risk profile. Just because the private lending industry offers more flexibility than traditional financing doesn’t mean that the MIC should be dealing with very high risk borrowers. If a large chunk of a MIC’s borrower mix consists of pre-revenue developers, for example, it could mean slower returns for investors and the bigger risk of not ever making your money back.
- What is the percentage of first mortgages to second and third mortgages?
Mortgage seniority also has a lot to do with how MICs manage their risks. While it is not out of the ordinary for a private lending institution to take on second and third mortgages, too many of them in a portfolio could indicate poor risk regulation. In the event of default and foreclosure, the primary loan is prioritized and paid first, and there may not be enough left for the second and third mortgages for the MIC to make its money back.
- How do you withdraw your investment?
Lastly, a MIC investor must consider his or her exit strategy. Early withdrawals may involve penalties and fees, and it is wise to know of the MIC’s redemption policies in case you suddenly need the liquidity.
Every investor will have a different set of “correct” answers to these questions. The qualifications you develop when selecting a MIC will depend on your risk tolerance, expected returns, and other personal investment preferences. These questions will help you determine your own metrics and eventually lead you to the right MIC.