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What’s behind the rise of Mortgage Investment Corporations (MICs)?

by Joe Rosengarten on 26 Sep 2017

With returns ranging from 6% to 10%, depending on location, equity and scenario, it’s little surprise that mortgage investment corporations are becoming increasingly popular among Canadian investors. Mortgage Investment Corporations (MICs) also provide investors with a level of liquidity and flexibility that can be difficult to find in the alternative space.

The underlying assets of the MIC are fully secured by real estate, with properties that will be appraised and borrowers analyzed, and investors have the benefit in sharing the risk with the other investors of the fund along with the fund diversifying its risk across many mortgages.

“MICs are a great vehicle for Canadian investors right now, whether they are experienced or new to alternative investments,” says Bryan Jaskolka, VP of Canadian Mortgages Inc. (CMI). “It is a completely passive entity. When describing MIC investments, I make the comparison between an investment into a REIT and buying your own homes and managing them. With a MIC, there is no stress and no responsibility on the investor to do anything.”

A MIC is, essentially, an investment fund whose assets are made of carefully selected mortgages, just as traditional mutual funds buy stocks and bonds or a mix of the two. In most cases, MIC investors are paid a dividend distribution on a monthly or quarterly basis, and the better quality MICs provide regular performance reports. Many MICs also allow investors to choose between receiving a monthly income payment and re-investing for a monthly compounding effect, MICs insulate investors from the all of the operational aspects of the underlying investments in the fund

“There are no bounced cheques and no people to chase, because you’re invested in a pool of mortgages that continues to expand and grow,” Jaskolka says. “Even if a couple of mortgages within that pool do not perform as expected or have problems, the investor still receives a distribution provided there is surplus income in the fund.  While some mortgages may payout early and others may get extended, investors are completely insulated from all of the mechanisms of the underlying investments.”

The vast majority of investors don’t have millions of dollars to fund their own pool of mortgages. In utilizing a MIC, and buying into a larger pool of mortgages than they could create individually, investors are able to achieve a level of diversification that may be out of reach for them otherwise. By its very nature, a MIC socializes risk. An investor is just one share of a large fund, and even if the MIC loses money, the investor is only responsible for their specific pro rata share.

“Something that some MICs, likes ours, does it to put money away on a regular basis to build a loss reserve; it is similar to how banks work,” Jaskolka say. “Money is put aside in good times so that if there is a bad period, there is money to buffer against that. As a result, interest returns may not be impacted if there is enough of a buffer to absorb any future losses, and investor’s capital is further protected vs a direct investment in mortgages.”

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