Most investors read two things in a mortgage investment corporation's documents: the summary page of the offering memorandum, and the distribution history. Both are real information. Neither is where the decision-relevant material sits.
In a set of audited statements for a mortgage lender, four places carry most of the signal: the allowance netted against mortgages receivable, the notes describing arrears and credit risk, the related-party note, and subsequent events. All four are in the notes rather than on the face of the statements, which is why reading a MIC's financials usefully means starting at the back and working forward.
The balance sheet: one line matters most
Mortgages receivable are reported net of an allowance for expected credit losses — in some statements still described as an allowance for doubtful accounts. That allowance is management's estimate of what will not be recovered, and it is the one number on the balance sheet that is almost entirely a judgement.
Three questions make it readable. How large is it as a percentage of the gross book? Which way has it moved over three years, and did the book grow faster than the allowance? And is it collective — a general percentage applied across the portfolio — or specific to identified loans, or both?
A worked example
Placeholders again, chosen to show how the comparison works rather than to describe any particular vehicle.
- Gross mortgages receivable: $200m.
- Allowance for expected credit losses: $1.0m — half a per cent of the book.
- Mortgages over 90 days in arrears, from the credit-risk note: $9.0m — four and a half per cent of the book.
- The allowance is therefore about 11% of the amount not currently paying.
This is not necessarily wrong. A loan in arrears at a conservative loan-to-value against a marketable property may well be recovered in full, and a well-secured book can carry significant arrears without significant loss. But the position embeds an assumption — that roughly nine-tenths of what has stopped paying will eventually be recovered — and an investor is entitled to see the reasoning rather than infer it. The useful follow-up is simple: what loan-to-value do the arrears carry, how long have they been in that state, and what has historically been recovered on loans that reached it?
The arrears and credit-risk note
This note is where a mortgage book either explains itself or does not. The disclosures below are the ones worth finding, and the right-hand column is where the reading actually happens.
| Disclosure | What it tells you | What to check |
|---|---|---|
| Arrears by aging bucket (30 / 60 / 90+ days) | How much of the book has stopped paying, and for how long | Whether it is measured by principal or by number of loans, and whether a renewal resets the clock on a loan that was already in arrears |
| Loans in enforcement | The stage after arrears | How long they have been there and at what carrying value — a loan in enforcement for two years at full value is a question |
| Real property held following foreclosure | Loans that have become buildings | Whether it is carried at cost or at fair value less costs to sell, and how long it has been held |
| Interest accrued but not received | Revenue recognised that has not arrived as cash | How it compares with distributions paid in cash over the same period |
| Renewals during the period | Turnover in the book | Whether renewal is being used to cure arrears on paper rather than in cash |
| Concentration disclosures | Exposure by borrower, geography and property type | Whether the largest few exposures are large relative to equity rather than relative to the whole book |
The related-party note
Short, dry and frequently the most informative page in the document. It should tell you who the manager is, what it was paid and on what basis, whether any mortgages in the book are to related parties, whether the manager or the directors hold shares — and if so, in which class — and whether any fees were waived or deferred during the period. A waived fee is often a sign of a difficult year being smoothed; that is not improper, but it is worth knowing that it happened and why.
Subsequent events
The last note, usually a paragraph, and occasionally the only forward-looking disclosure in the whole set. This is where a redemption suspension, a covenant breach, a single large default, a change of auditor or an amendment to the offering memorandum appears. Read it before anything else on a set of statements that is more than a few months old.
Reading the offering memorandum against the statements
The offering memorandum describes the policy. The financial statements describe what happened. The exercise worth doing is holding them side by side, because that is how you find out whether the vehicle does what it says.
- Lending policy against the portfolio schedule. Maximum loan-to-value, maximum loan size, position mix, permitted property types — then check the actual book against each. Exceptions are normal in private lending; an exceptions process that nobody can describe is not.
- Fee schedule against fees expensed. The two should reconcile. If they do not, something is charged elsewhere or a fee was waived.
- Redemption terms against redemptions actually paid. Volume, timing and any discounts applied.
- Use of proceeds. What the money raised is intended to do — fund new mortgages, repay the credit facility, or fund distributions.
- Risk factors. Usually the most candid pages in any offering document, because they are drafted to be legally complete rather than persuasive. Read them in full, not as boilerplate.
- What is the allowance as a percentage of gross mortgages, and how does it compare with arrears over 90 days?
- Which loans or properties account for the largest exposures, and how large are they relative to shareholders' equity?
- Does the actual portfolio sit inside the lending policy in the offering memorandum, and who approves an exception?
An offering memorandum tells you what a vehicle intends to do. The audited statements tell you what it did. The distance between the two is the most useful thing an investor can measure.
Questions investors ask
Does every MIC publish audited financial statements?
Practice varies, and what an investor receives depends on how the investment is offered and what the offering documents commit to. Ask directly for audited statements covering several consecutive years. If only unaudited or summary figures are available, that is a material fact about the investment and worth weighing alongside everything else.
Is a small credit-loss allowance a good sign?
Not by itself. It may reflect a conservatively underwritten book with low loan-to-values and genuinely little expected loss, or it may reflect an optimistic estimate. The way to tell is to read it against the arrears schedule, the loan-to-values attached to loans in arrears, and how the allowance has moved over several years relative to the size of the book.
What is the difference between arrears and default?
Arrears describes payments not made and is measured in days. Default is a legal state defined by the mortgage document, which a missed payment can trigger but so can other breaches — failing to insure, failing to pay realty taxes, or a prior charge going into default. A loan can be in default while technically current, and statements do not always distinguish the two clearly.
Should I be worried about a mortgage renewed while in arrears?
It is a practice worth understanding rather than condemning. Renewing a borrower who is behind but has a credible exit can be the commercially sensible choice. The concern is when renewal is used routinely to move loans out of the arrears bucket without the underlying payment problem changing, because the reported arrears figure then understates the book's condition.
Which part of an offering memorandum should I read first?
The risk factors and the fee schedule. The risk factors are drafted for legal completeness and are usually the frankest description of what can go wrong that the vehicle will ever publish. The fee schedule tells you what the vehicle costs to own. Between them they cover most of what the summary page leaves out.