Evaluating a mortgage investment corporation is not the same exercise as evaluating a mortgage. When you buy shares in a MIC you are not buying a loan; you are buying into a company that owns a book of loans, borrows money in some cases, pays itself and its distributors out of the proceeds, and sets the terms on which you can get your capital back. A good book inside a poor structure can still disappoint, and a conservative structure does not rescue a badly underwritten book.
There are three layers, and they are worth examining in this order: the book, the economics, the operator.
Layer 1 — the book
This is the asset you are indirectly exposed to, and most of what you need is in the portfolio schedule rather than the marketing summary.
- Number of mortgages and average loan size. Together these tell you how concentrated the book is. One loan at 8% of assets is a different proposition from eighty loans at one-tenth of a per cent each.
- Weighted-average loan-to-value, and what it is weighted by. Weighted by principal is the meaningful version; a simple average across loans flatters a book with a few large, highly levered positions.
- Position mix. The split between first and subsequent charges, and whether a stated loan-to-value on a second charge includes the prior charge or only the MIC's own.
- Geography and property type. Concentration in one city, one condominium project or one category of building is concentration, however many separate loans it is split across.
- Weighted-average remaining term, and renewal concentration. If a large share of the book matures in the same quarter, the vehicle has a refinancing event rather than a schedule.
- Arrears, loans in enforcement, and real property held after foreclosure. These are the three stages of the same problem, and the carrying values attached to them matter as much as the counts.
The number most often quoted and least often qualified
A single average loan-to-value figure does more work in MIC marketing than any other statistic, and it is rarely accompanied by what it needs to be useful. Four follow-up questions make it meaningful: weighted by what, measured as of when, against appraisals of what date and on what basis, and does it include charges ranking ahead of the MIC's own. A book described as being at a conservative average loan-to-value against two-year-old as-complete appraisals is not conservative in the way the sentence implies.
Layer 2 — the structure and the economics
This layer is where the difference between the borrower's coupon and your distribution gets decided.
| What to ask for | Why it matters |
|---|---|
| The all-in fee load as a percentage of assets | Management, administration, servicing and any dealer trailing fee are usually separate lines in separate documents. One combined number is the only way to compare two vehicles. |
| Whether there is a credit facility, and how much is drawn | Borrowing to fund mortgages amplifies returns and losses alike, and introduces a lender whose covenants rank ahead of your shares. |
| Distributions declared against net income | A payout ratio consistently above 100% means distributions are being funded by something other than earnings. That is a business model question, not a scandal — but you should know which model you are in. |
| The credit-loss provisioning policy | How the allowance is set, whether it is collective or loan-specific, and what assumptions sit behind it. This is where optimism hides most comfortably. |
| Share classes and their relative rights | Classes can differ on distribution priority, redemption queue position and voting. Ask which class you are being offered and who holds the others. |
| Redemption terms in full | Notice period, any early-redemption discount, annual gates, the board's right to suspend, and whether any of those provisions has ever been used. |
A worked example: the payout ratio
The arithmetic is simple and the figures below are placeholders chosen to make it legible.
- Mortgage interest and fee revenue: $10.0m.
- Less management and administration: $1.6m.
- Less provision for credit losses: $0.6m. Net income of $7.8m.
- Distributions declared: $8.6m. A payout ratio of about 110%.
The extra $0.8m came from somewhere: retained earnings from prior periods, the proceeds of new share subscriptions, or the credit facility. Each of those is a different thing, and only one of them is sustainable indefinitely. Asking which is the single most informative question in this layer, because a vehicle distributing new subscribers' capital to existing shareholders behaves well while money is coming in and badly when it stops.
Layer 3 — the operator
The book and the structure are both products of the people running them, and this is the layer least amenable to a number.
- How long, and through what. A record built entirely in a period of rising prices has not been tested on the thing that tests a mortgage book. Ask what the arrears rate did in the most difficult twelve months the vehicle has seen, and what was done about it.
- Who approves a loan. Whether there is a credit committee, who sits on it, and whether any single person can commit capital alone.
- Licensing and administration. Whether the entity that administers the mortgages holds the licence its province requires. Requirements differ across provinces and more than one has changed recently.
- Audit. Whether the financial statements are audited, by whom, and whether the auditor has changed.
- Related-party lending and alignment. Whether the manager or its principals borrow from the vehicle, and whether they hold shares in the same class as the investors they are offering it to.
- Key-person risk. What happens to underwriting, servicing and reporting if the principal is unavailable.
The three documents to insist on
Audited financial statements for several consecutive years rather than the most recent one; the offering memorandum, including its risk factors and fee schedule; and the latest investor report with a portfolio schedule. Where one of these does not exist or is not available to you, that absence is itself a finding and is worth recording next to the rest of your notes.
- What is the all-in cost of this vehicle as a percentage of assets, including anything paid to whoever is selling it to me?
- What were distributions and net income in each of the last three years, and what explains any gap between them?
- Has a redemption ever been delayed, discounted, gated or suspended — and under what provision?
A MIC is a company before it is a portfolio. Read the book to understand the asset, the structure to understand what reaches you, and the operator to understand whether either will hold up when conditions are unhelpful.
Questions investors ask
Is a long track record proof that a MIC is safe?
No. A record tells you what happened in the conditions the vehicle has actually lived through. The useful question is not how many years but which years — a book that has never seen a period of falling prices, rising arrears and difficult refinancing has not been tested against the risk that matters most to a mortgage lender.
What does a weighted-average loan-to-value not tell me?
The distribution behind it. An average of 65% can describe a book where almost every loan is near 65%, or a book where most loans are at 50% and a handful are at 90%. Ask for the range and the proportion of the book above whatever threshold you care about, not only the average.
Should I be concerned if a MIC uses a credit facility?
Not inherently — many use one to manage the timing between subscriptions and fundings. What matters is the level, whether it is used for liquidity or for leverage, the covenants attached to it, and the fact that the lender's claim ranks ahead of your shares if things go badly.
What does a payout ratio above 100% mean?
That more was distributed than was earned in the period. It can be a timing effect, a deliberate smoothing of distributions using retained earnings, or distributions funded from new subscriptions or borrowing. They are very different situations and the financial statements, read across several years, usually show which one it is.
How many mortgages make a book diversified?
There is no threshold that settles it, because diversification depends on correlation rather than count. Forty loans in one condominium development in one city are more correlated than eight loans across different property types and regions. Look at what the loans have in common before you look at how many there are.