Is clamour for a new type of investment product in MIC lending growing?
Private and MIC (mortgage investment corporation) lenders have been steadily growing market share in Canada in recent years – and large-scale institutional interest in those sectors also appears to be on the rise.
While those investor types are still looking at individual MICs or private funds, plenty also want to see a more homogeneous, easily digestible and globally accessible product that they can purchase, according to Dabble Capital Advisory founder and principal Benjamin Sammut (pictured top).
That’s because instead of performing arduous due diligence on a single MIC, a standardized bond could allow them the option to invest in a rated product with a clear understanding of the tranche they’re buying within a pool of mortgages, Sammut told Canadian Mortgage Professional.
Mainstream lenders’ conservatism could push more borrowers to other options
With little indication that bigger conventional lenders are set to loosen their lending criteria anytime soon, he said institutional appetite for the private and MIC spaces is likely to strengthen as more Canadian borrowers gravitate to those channels and away from institutional mortgages, which are typically backed by the Canadian government through mortgage insurance and securitization.
“Fast forward six, 12, 18 months from now, as OSFI [Canada’s financial institutions regulator] tighten the reins further, if there’s some changes coming out from the Bank of Canada we’re probably going to end up seeing even further restrictions,” he said. “More and more Canadians are falling off that cliff and into the private space.
“I think we’re going to keep seeing more restriction, which isn’t necessarily a bad thing. I’m a huge proponent of the Canadian government not derisking but decentralizing, because there’s no reason why a large swathe of our mortgages should be covered by the Canadian public and only the Canadian public.”
The Bank of Canada’s Market Participants Survey points to a policy rate of 2.25% by year-end, with markets watching inflation, GDP, and trade tensions closely.
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Borrower profile of MIC customers continues to evolve
Mortgage-backed securities in the US made it easy for global investors to buy into pools of mortgages, including many subprime loans, precipitating the 2008 financial crisis – but an important difference is that while the private and MIC sector is growing in Canada, it still comprises a relatively small percentage of the total mortgage market.
What’s more, while the risk profile of the largest 25 mortgage investment entities in Canada rose modestly in 2024’s fourth quarter, those organizations have been taking concrete steps to mitigate that higher risk, according to Canada Mortgage and Housing Corporation (CMHC).
Those measures include increasing loan loss allowances and shifting their lending focus toward single-family homes, which are usually lower risk than multifamily or commercial lending.
Meanwhile, Sammut highlighted that the reputation of private and MIC entities as a lender of last resort is no longer applicable, and said the space needs to evolve as a result.
“It’s sort of a poor legacy for the private space where they were just taking on whatever garbage they could find for their books so they could capture a great yield for a small pool of investors,” he said.
“Now, you’ve got these MIC funds that have to scale into the hundreds of millions just to support demand for their product. But the borrowers on their books are still prime borrowers. They’ve got great credit scores. They’ve got decent loan to value. They have very low, if not at par, default rates. By all means, it’s an incredible borrower and loan profile, but you’ve got high-risk lenders that are taking it on just because they’ve got the money on the books.”
Higher institutional attention to the MIC space means it’s likely to remain a valuable source of business for brokers in the months and years ahead, Sammut said.
“There’s no doubt more things are going private. If you compare how onerous it is to get a deal done on the prime side and then for rather similar pricing on the B or private side and way fewer docs, way quicker turnarounds – it just makes sense that brokers are going back to what they were maybe 25 to 30 years ago, which was a source of alternative funds when the client just can’t walk into their bank,” he said.
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