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Private Lenders
December 27, 2019
5:16 pm
COIN
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These unregulated private lenders worry me. They are lending money to people declined by the banks and (probably) CU's. If these "sub-prime" borrowers default on their mortgages, it could cause a cascading effect reducing the value of all houses and their mortgages.

June 22, 2020
6:51 pm
maxb
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There are various reasons why a person would not get credit financing from a bank...

Examples include:
1. Business People with unsteady income would not qualify, even if they have lots of equity...
2. Seniors buying a cottage, have little income but lots of assets wouldn't necessarily qualify.
3. Sometimes banks don't like "bridge financing"
4. Recent immigrants with no credit history, but have cash for a sizable downpayment...

June 22, 2020
8:00 pm
Norman1
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The private lenders want their loans to be repaid too. They won't lend money to just anyone.

As maxb, just because one doesn't qualify as a prime borrower, it doesn't mean one is a risky borrower.

Imagine someone newly immigrated to Canada after selling the family business in England. Person is putting 75% down on a house in Toronto for the family home and wants to borrow the remaining 25%.

Remaining 25% to be paid off in the next five years as the rest of selling price of the business is paid by the new owner of the sold business. No Canadian credit history. No verifiable Canadian income.

June 22, 2020
8:28 pm
maxb
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I absolutly agree with you

Norman1 said
The private lenders want their loans to be repaid too. They won't lend money to just anyone.

As maxb, just because one doesn't qualify as a prime borrower, it doesn't mean one is a risky borrower.

Imagine someone newly immigrated to Canada after selling the family business in England. Person is putting 75% down on a house in Toronto for the family home and wants to borrow the remaining 25%.

Remaining 25% to be paid off in the next five years as the rest of selling price of the business is paid by the new owner of the sold business. No Canadian credit history. No verifiable Canadian income.  

I absolutely agree with you. I've done two of these deals for that/similar reason. As far as I am concerned, if there is a lot of Equity, there is security. I prefer that over a job history.

June 22, 2020
8:31 pm
maxb
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Furthermore, wouldn't you lend to someone who has managed to raise "75% of their home equity" vs "someone who has a decent job and only 20% equity"....

My money is on 75% person. As we have just seen these past two months, any job is at risk......

June 23, 2020
3:22 pm
Save2Retire@55
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I sometimes think of opening my private lending business in small amounts below $1000! Anyone thought of doing this? Rather than the crappy 1-3% interests, it will be a 10-20% interest! But how to make sure the money is paid back would be questionable!

June 23, 2020
6:56 pm
Doug
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The CMHC annually publishes a Residential Mortgage Industry Report, usually in July of every year and numbering at least 30 pages, on the average mortgage balances outstanding for each of the federally-regulated financial institutions, provincially-regulated financial institutions, quasi-regulated finance companies (typically, mortgage finance companies that securitize their mortgages through CMHC sponsored vehicles thereby making them subject to federal housing finance rules), and unregulated mortgage investment corporations and private lenders.

From page 3, you can see the federally-regulated financial institutions have about 75% market share, with provincially-regulated credit unions taking 14%, mortgage finance companies at 6%, and unregulated mortgage companies and private lenders at 1%. The latter is really a best guesstimate, based on public filings, voluntarily publicly posted data on the companies' websites, etc.

In all cases, mortgages can be held in first position, second position, and so forth, though it's probably somewhat rare for banks especially to take mortgages in second or below position.

Link: https://assets.cmhc-schl.gc.ca/sf/project/cmhc/pubsandreports/residential-mortgage-industry-report/residential-mortgage-industry-report-69589-2019-en.pdf

Note: This is the July 2019 annual report; they also publish a quarterly snapshot report, but it's not as detailed.

As at July 2019, CMHC estimated MICs and private lenders' 1% amounted to about $13-14 billion in mortgages outstanding. Also, MIC and private lender interest rates are, as you'd expect, much higher, and the Loan-to-Value ratios are much lower (since they often lend solely or largely based on the appraised value of the property, so naturally will require the borrower to have more equity). Still, the growth rate of the MIC mortgages seems to be rising at a faster annualized clip, noting $8-10 billion in mortgages as at 2016. I expect the 2020 data to rise to $18-20 billion.

It's also worth noting that many of the MIC mortgages are typically for short terms, especially for self-employed borrowers, new immigrants, and credit-challenged borrowers until they can establish sufficient positive payment history to allow a bank or credit union to take them on.

MICs range from the largest, Romspen Mortgage Investment Corporation, with several billion in mortgages on its balance sheet or under management to very small ones with as little as $10 million. The average seems to be between $100-500 million. Sources of funding are typically from retail and high net worth investors who purchase common shares, typically, in these MICs under provincial securities' law exemptions. There's also several publicly-traded MICs, including Firm Capital MIC, Atrium MIC, Builders Capital MIC, and MCAN Mortgage Corp. MCAN, interestingly, is the sole exception to most MICs in that they are a MIC under the Income Tax Act, allowing them to pay no income taxes on their income generated from mortgages, but they are also a federally-regulated loan and mortgage company. So, they also have to fall under OSFI regulatory supervision and file financial reports with OSFI.

Cheers,
Doug

June 24, 2020
8:03 pm
maxb
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Doug said

In all cases, mortgages can be held in first position, second position, and so forth, though it's probably somewhat rare for banks especially to take mortgages in second or below position.

Link: https://assets.cmhc-schl.gc.ca/sf/project/cmhc/pubsandreports/residential-mortgage-industry-report/residential-mortgage-industry-report-69589-2019-en.pdf

Note: This is the July 2019 annual report; they also publish a quarterly snapshot report, but it's not as detailed.

Cheers,
Doug  

Thank you Doug for that Link, much appreciated.

Even I, as a sophisticated investor didn't really know about this whole market. It is easy to hook up with these companies and get a secure investment. Just make sure you ask a lot of questions ! (and this goes for MICs and their private mortgages that they sometimes offer).

If you have never done these, and you don't know of at least 10 questions to ask, then this investment is not for you. If the discussion doesn't take at least 45minutes, this investment is not for you.

June 24, 2020
8:42 pm
Loonie
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Good advice for any investment. And get the answers in writing.

June 24, 2020
9:00 pm
maxb
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Latest report for my "residential mortgage" MIC (ie this is one of the questions you should ask for)

I like that its almost all First mortgages and low LTV.
Only problem is that its a very small MIC in terms of assets (if you call that a problem).

MIC_example.jpg

June 25, 2020
12:37 pm
Doug
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maxb said
Latest report for my "residential mortgage" MIC (ie this is one of the questions you should ask for)

I like that its almost all First mortgages and low LTV.
Only problem is that its a very small MIC in terms of assets (if you call that a problem).

MIC_example.jpg  

What fund is that, maxb? Sorry I missed replying to your above reply to my post.

Or was that just a hypothetical allocation to 1st and 2nd mortgages? If the latter, that would be on the very conservative side of MIC investing. Also look at the LTV ratios, too; make sure the average LTV is below 60%, so if the mortgage holder defaults, the MIC has some security to recoup part or much of the loss it will incur. There have been a few MIC failures, some supposedly long-time MICs (All Canadian Investor Corporation, for example), but in the latter case, that was run by pretty much a single guy in Salmon Arm, B.C. Also, since then, in order to sell shares in a MIC, the shares must be sold through applicable exemptions and the investor delivered a full offering memorandum (not quite the same as a prospectus). I think the offering memorandum was a requirement before, but having the investment at least go through some sort of securities commission approval and have to have a paper trail in terms of where the investor acknowledged their total assets and the amount invested is helpful.

Bottom line: I think it's fine, but don't recommend putting a substantial portion of your net worth in any one MIC. If you have $10 million and want to sink $100,000 into each MIC, to a maximum of $1 million, then have it, as long as you are okay will potentially losing much, most, or even all of that investment. Likewise, if your a smaller investor like me, obviously you can't hold too many MICs, due to minimum purchase amounts, but pick what you view are the best one or two and try and stick to no more than 5-10% of your portfolio—whatever you're comfortable with.

Cheers,
Doug

June 25, 2020
7:08 pm
maxb
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Took me a while to find the info on that MIC that failed. Yep, handled by a single guy. Sometimes that is hard to catch. The other has a lot of industrial/commercial mortgages. As with any "Mutual Fund of xxxx", there are a lot of differences between them.

Yes, there was extra paperwork for their MIC (as opposed to their mortgages). Their MIC is handled by third party. It even qualifies for TFSAs issued by two small banks (but not ones I recognise).

June 25, 2020
7:20 pm
maxb
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Note that investing in MICs is different that investing in a private mortgage on a persons residential property... Just want to make sure people reading this thread is aware of this.

June 26, 2020
9:04 am
Doug
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maxb said
Yes, there was extra paperwork for their MIC (as opposed to their mortgages). Their MIC is handled by third party. It even qualifies for TFSAs issued by two small banks (but not ones I recognise).  

Yes, MICs do qualify as RRSP, RRIF, and TFSA eligible investments under the Income Tax Act; however, if I held a MIC, I personally would not hold it in a registered account and here's why. Given that I could lose some or all of my investment, I do not want to forfeit the capital loss potential. MICs do not generate much, if any, capital growth, so any return is in the form of interest income. If you have a lot of carried forward capital losses, then you could consider it, but that's my reason for holding (if I held them) MICs in non-registered accounts only.

As an aside, I hold only bank savings accounts and GICs in non-registered accounts. This may surprise Loonie. 😉

Cheers,
Doug

June 26, 2020
9:06 am
Doug
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maxb said
Note that investing in MICs is different that investing in a private mortgage on a persons residential property... Just want to make sure people reading this thread is aware of this.  

Yes, in terms of the tax advantages and diversification, absolutely. 🙂

Cheers,
Doug

December 9, 2020
10:50 am
Bud
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Any news on Romspen

December 10, 2020
6:37 am
Doug
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Bud said
Any news on Romspen  

According to data compiled by CMHC, Romspen is the largest unregulated mortgage investment corporation by assets under management. 🙂

Cheers,
Doug

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