RRSP investment in a Mortgage Investment Corporation (MIC) | Page 2 | RRSPs and RRIFs | Discussion forum

That's the theory. But, it is not an accurate picture of what really happens.

The dealer "should not proceed". But, they will, if they find a way to get it past compliance. There are ways to do that, especially if the investor really wants that 5% to 7% from a MIC instead of the 2% from a GIC. A dealer likely won't ask for proof of the income and assets one writes on the KYC form when one is investing money and not borrowing money.

The dealers are commissions funded sales organizations. They are not fiduciaries looking after the investor's best interest. The reps are closer to car salespeople than to one's trusted doctor or accountant.

Also "suitable" is not what one thinks it means. That word has special legal meaning when it comes to investments. Unsuspecting people think a "suitable" investment is something that is "in their interest" and unlikely to lose them money. It is doesn't mean that.

People quickly discover that when the investment loses money and they try to recover the losses from the dealer who gave the "suitable advice" to put money in the investment.

The "OSC, FSRAO, OBSI and Fintrac rules, plus IFRS audits" sound warm and assuring. But, they are also not meaningful.

Fintrac deals just with money laundering and terrorist financing. FSRAO and OBSI deal with the how the borrowers applying for a mortgage are treated. They won't get involved if one loses money invested in a MIC.

The OSC won't get involved either if there were no problems with disclosure, self-dealing, or fraud. It's just too bad if one loses money in a MIC that has all its mortgages in town and the town's biggest employer decides to shutdown.

The offering memorandum did disclose that the MIC only lends in the town and surrounding area. No-one took off with money. Investors funds, less fees, were indeed lent out as mortgages. Just unfortunate that there won't be fully recovery when the properties are foreclosed.

Lots of people believe in the diligence myth. Somehow, one can avoid loses if one does more investigation. That's simply not the case in business.

No amount of investigation in Q4 of 2019 would have uncovered that those well-paid career airline pilots would six month later be laid off en masse and have problems servicing their mortgages because of the COVID-19 pandemic.

Don't take those 90-day arrears statistics too seriously either. Some of us have been around and know that the legal and accounting definition of "arrears" is flexible. Is the loan in "arrears" if the lender and borrower both voluntarily agree to payment deferrals?

Once again, opinions are my own, this is not advice specifically for you, etc.

This is a great discussion and perfectly summarizes why the private MIC space continues to occupy a small percentage of the Canadian real estate financing market. Regulation is heavy and complying is not easy (or cheap).

Nothing can put a bad investment horse back in the safe money barn. If someone invested in a MIC that was not prudently managed, or was run by someone(s) who did not fully commit to compliance and tried to stay off the radar with the OSC, yes, there may have been losses. But hopefully future MIC investors will read this discussion first and will come away with some better questions to ask of the person who tries to sell them MIC shares. (And - was it actually a MIC? Or did it just play a MIC on TV? This is another point of confusion that compliance MICs and MIEs have to deal with.)

First off, I totally agree that the 90 day arrears number (from both the non-bank lenders and from the CBA) needs more work. Let me give you a current example. I have a mortgage client right now with one of the big 5 banks who (for legitimate reasons) is over 1 year in arrears on his mortgage and the bank has not commenced legal action. Is this one being reported in the 90 day arrears figures, and is this one being reported in their loss allowance on their quarterlies? Based on their policy documents, we can't tell. The person at the bank who has the file is "holding it" for him as the amount is not above the threshold of materiality. I expect there are lots of files like this that are in the grey area on both sides (bank and non-bank).

To address this, a MIC can actual disclose the actual number of mortgages where payments were made, and where they were not. Ask them if the files where the payments were not made were deferred or if they had an actual NSF. If you ask them and the refuse to tell you, take it as a warning sign. If they answer (and can support it with proof) take the information as part of your due diligence. I doubt a bank would be able to supply this (due to scale). A MIC on the other hand might have 50 to 500 mortgages. They are small enough to confirm this.

On regulators:

For private MICs, OBSI governs the share issuance and not the mortgage lending side. The OBSI will address unsuitable investments in the exempt market space. There are recent OBSI case studies on this.

FSRAO is taking steps to license non-bank lenders (like private MICs) over the next period. Expect this to result in new E&O requirements. Right now, as it stands, a MIC's dealer is registered with the OSC and a MIC's administrator is typically licensed with FSRAO. The lending entity itself it not typically subject to registration or licensing. Once FSRAO sets its terms for lender licensing, this will change.

On the other hand, many MIC managers are registered as both dealers and administrators so they wear both hats at all times. They can't un-know stuff about the lending side in order to force through a suitability determination. This category of dealer is called a captive dealer.

(Full disclosure: my firm is a captive dealer.)

My personal opinion, which contradicts the current regulatory thinking of the CSA and OSC who state that captive dealers present more risk to investors due to various conflict of interest concerns, is that a captive dealer in the private MIC space is forced, by the onus of the various regulatory responsibilities layered onto them, to be more careful about all aspects of compliance (including suitability determinations) from first contact with an investor through to the trade and past into CRM2-required reporting.

A captive dealer is usually the entrepreneur who runs the MIC. They have the MIC, the dealer and the administrator at risk if they fail in their duties. Their burden for misrepresentation, or reporting failures, is heavier than that borne by a non-captive dealer. What's unfortunate about the captive dealer model is that there is no current rule under which the regulators allow arms' length due diligence to be relied upon about the investment product. The product due diligence (to approve the product for a shelf and allow it to be sold to the public) must be done by the captive dealer (hence the conflict of interest).

Let's assume that an investor has decided that the public markets are not for them - too much to pay attention to, not enough bandwidth to monitor performance and execute trades, unusable funds in registered plans, not fond of fluctuating returns, can't meet asset minimums imposed by full service firms, don't like the fee structures, prefer to keep the money in Canada, etc. And this investor wants to put part of their net financial assets into exempt market products. Let's assume this investor is an otherwise empirically suitable candidate to invest in the exempt market.

Here's what I would suggest to deal with a captive dealer MIC: other than actually reading the OM and the financial statements, when looking at a MIC managed by and sold by captive dealer - ask who's on the board. Ask to speak with the board members. Ask if they are related to or connected to the entrepreneur. Speak with the auditor. Speak with the corporate lawyer - most MICs provide this information for investors. If the MIC denies this access or pushes you off onto staff, push back.

Did you know that recent IFRS rule changes require that all "other information" including marketing materials and things like non-IFRS measures to describe rates of return be subject to audit? So now, if a MIC is using IFRS, their auditors would have to report negligence re: claims re rates of return? I think this is cool and a positive change for both investors and issuers.

ON KYC process. I have often observed that often potential investors (especially those with more assets vs less) only want to provide the bare minimum on their KYC form. They don't want to tell dealers where and what all their holdings are. They hold it back, and only give enough to get the trade qualified.

After the CSA proposed their targeted reforms a couple years ago (which went deeply into suitability determinations and KYC but have since been scaled back) I tried to propose a solution to what we then saw as an impossible KYC hurdle being set by the regulators. I proposed to an organization of national mutual fund compliance officers that - in order to KNOW that a KYC form is correct - we lobby for Equifax to provide an asset report of the same sort as they do for debts. I mean, why not? If every asset held in a reporting Canadian financial institution were in one easy-to-get, compliant, locked report, would that not solve the KYC accuracy problem? No dice. 🙂

KYC is a double-edged sword, for sure. Let me make a generalization: HNW investors are ok with us, as MIC managers, knowing everything about the borrowers but don't want to disclose everything about their assets in order to make the KYC process more accurate and compliant.

On regulation of MIC lending practices: Over my time in the business, I have tried to crack the nut of getting a private MIC to be an NHA approved entity and therefore subject to OSFI rules. (Why not? If the objection to private MICs is lack of oversight over lending quality, this would be good, right?) I'm still working on it. It's hard to make a regulator decide to regulate you if the law does not give them a mandate over you.

I think this is why the non-bank lenders' survey was created by StatsCan and CMHC. They're measuring the risk. If the risk of the MIC space as it stands now is more than the banks' risk, I expect more regulation to follow. Due to the impact of COVID on the data, this is probably years away. But MICs have been around since what, 1973? There's time to get it right.

The lending challenges raised by the pandemic apply to all classes of mortgage lenders. They apply equally to all conventional lenders (lenders who are not backed by default insurance like CMHC et al. on a individual loan or portfolio basis). Any investment that funds a lender (of any class) which lends entirely in one area or industry deserves more scrutiny.

A potential MIC investor would be well-served to know, when the MIC manager is also a mortgage broker, what percentage of the MIC's deals are originated by that brokerage. This is a potential conflict of interest. As the mortgage broker, the MIC manager is getting paid on both the mortgage and the investment. (See elsewhere in this post where I recommend talking to the board and seeing if family members are involved.)

The trend that I see is that as a MIC gains AUM, it expands its geographic footprint and its lending parameters to try to mitigate regional or sector concentration issues. The inflection point for geographic diversification seems to be around $50 million. Some have a different business model and lend to a broader geographic region from the get-go.

To that point: some MICs and MIEs are new. Is that a bad thing? Older MICs market on their track record but older MICs are often dogged by legacy compliance regimes, historical financial obligations and, frankly, owners who resist the new compliance requirements that are on the industry. Just because a MIC is older does not mean that it is more or less risky than a new one. Very often a new MIC is formed under current compliance rules which, in my opinion, addresses a significant risk factor faced by the issuer. (For a new MIC: definitely ask who their dealer is and who their securities lawyer is. If they are relying only on the friends and family and private company exemptions, that's a red flag for me.)

And remember: your favourite bank probably lends tens of millions of dollars to MICs. I think all of the big 5 and many smaller banks and credit union consortia provide cheap leverage to MICs and MIEs through their commercial banking divisions. On the upside, leverage providers also oversee the operations of the MICs to which they lend, which adds a little more compliance work to the process.

I'll be here all week.

dwdrajesh said
… I list the downsides of these private MICs, apologies if I still didnt' get the whole picture:
1. You can cash your investment on short notice,
…

I think you meant one cannot cash in one's private MIC investment on short notice.

I saw one private MIC that requires one month's notice. But, many have the right to suspend or limit withdrawals. That comment in that Globe & Mail article from private MIC investor Michael Weintraub about not getting all his money out before he dies was not actually a joke.

He was an investor in a MIC run by CareVest. Apparently, he and all the fellow investors now wanted out. Withdrawals ended being capped at less than 2% per year. He was age 72.

As AltaRed mentioned, publicly traded MIC's can be sold in a microsecond. The catch is that there has to be a buyer and the buyer may not be want to pay what you paid for the MIC shares. The buyer most certainly won't offer the original cost if there is now a problem with the MIC.

Loonie said

…
However, there are commentators who appear regularly on TV and radio who appear to make their living from having opinions! A distressing amount of journalism is now opinions and columns.
And if they're not marketing opinions, they appear to be marketing the organizations they work for - anything from themselves ('consultant") to an investment house to a bank.
…

I think honestly held personal opinions are fine. Just not paid ads masquerading as held personal opinion. What AltaRed calls stealth marketing, I call fake reviewing.

It's one thing for someone introduced as a BMO marketing rep on a radio show to promote the latest credit card offering and saying the new BMO card is "great". Everyone knows that "great" is marketing hyperbole and not necessarily a serious evaluation of the product.

That is in contrast to a seemingly independent consumer advocate repeatedly mentioning some real estate limited partnership as being is a "great" investment, one of the best he has seen. However, unknown to the audience, the person is a partner in the firm through which all the sales commissions on the partnership units are funneled!

That depends on how much evidence and fact the opinionated columnist has supporting what he or she is saying.

I don't see lots of so-called journalists practising journalism, defined by Wikipedia as "the production and distribution of reports on current events based on facts and supported with proof or evidence."

I see many of them report based on a subset of the facts and a subset of the evidence that reinforces their viewpoint. That's why one has to look at multiple sources in order to get the full set of the facts and evidence.

Democracy is weaken by faux journalism. But, it is weakened more by uncritical people looking for an echo chamber for their beliefs rather than the truth.

I suspect it feels better to believe that, if I'm poor, it is because of some global conspiracy of the wealthy to keep people down. I suspect it doesn't feel as good to consider that it may have something to do with a decision to try to make a living creating and selling landscape paintings instead of doing something more mundane like the plumbing trade.

I wouldn't go as far as saying there are no journalists left. But, I would say that some news reporters play fast and loose with the truth.

For example, one politician said he wanted to stop immigration until we get better screening of the applicants. That got reported as he wanted to stop immigration. Big difference between what was said and what was reported to have been said.

Kind of like sending a new bride a photo of her new husband cuddling with another woman. Just don't mention that the photo was taken months before she even started dating her new husband.

Furthermore, MICs that trade on the stock exchange are not all equal. I've chased a few who claim to be in 1st mortgages only with better LTVs, and find that behind the scenes they enhance their returns by borrowing money!!! SO they claim low LTV, but then make it higher risk by borrowing (hence your close to 100% ltv. In addition, some as well trade above BV !!

maxb said
I have invested in a MIC and am very happy with the job done (yep they pay 8%). HOWEVER, as mentioned by lots of people here, they are not all the same!!! Lots try to enhance returns in one way or another. MAKE SURE you understand thoroughly how they obtain their returns ! Lots have construction, 2nd mortgage, high LTVs to obtain their returns. The more I chase, the more I'm happy with my MIC.

Mine has around 62%LTV, all 1st, all residential, and near 0% internal management fees (they already made money from arranging the mortgage).  

I am very surprised based on the description of the one you own, that it can generate a 8% return. The puzzle is missing a piece...