Differences in Mortgage Investment Vehicles

 

Mortgage Investment Entity Syndicated Mortgage Investment
OSC Regulated Yes No
FSCO Regulated Yes* Yes
Diversification of loans Yes No
Sold through Registered Dealer Yes No
RRSP/TFSA etc. eligible Yes Yes
Investor Concentration Limits Yes No
Consistent Income Stream Yes No
 *Typically the MIE sponsor or manager is operating as a brokerage or administrator which is FSCO regulated

 

Mortgage Investment Entities

In Ontario, the Ontario Securities Commission (OSC) considers a Mortgage Investment Entity (MIE) an issuer which proposes to invest all or substantially all of its assets in a pool of mortgages.  In a typical MIE structure, money is raised pursuant to an Offering Memorandum or, in the case of publicly listed securities a Prospectus, and purchases are made through a registered Exempt Market Dealer (EMDs) or other Dealer licensed to sell securities.

There are rules in place governing the ability of an individual to invest in MIEs through the Exempt Market (or Private Market). In order to purchase an MIE through the private market, an investor purchase must fall under a Prospectus and Registration Exemption of OSC National Instrument 45-106. At present, the main way in which an individual in Ontario can participate in the returns of an MIE is by being an “accredited investor” – less than 5% of the population meet this standard.  Registered sellers of MIEs must adhere to “Know-Your-Product” and “Know-Your-Client” guidelines and make a suitability assessment of the investment for the individual (for example, the investment cannot be more than 10% of the client’s assets).

MIEs can vary in structure (e.g. Mortgage Investment Corporation, Limited Partnership, etc.) but the underlying investment premise is usually the same – Investors purchase shares, or units, of a mortgage vehicle.  The proceeds from the share sale are pooled together to invest in a portfolio of mortgages.  So long as the investor holds onto the shares or units, the investor should get a steady income stream.

As the mortgages are aggregated in a portfolio, the impact of any one loan going bad is mitigated by the remaining performing loans, hence while possible, it is unlikely that an individual would lose all of his investment in an MIE.

 

Mortgage Syndications

In Ontario, mortgage syndications are a mortgage brokering activity and is regulated by the Financial Services Commission of Ontario (FSCO) through the Mortgage Brokerages Lenders and Administrators Act, 2006 (MBLAA).  Persons licences under the MBLAA are not required to be licensed as a dealer under the Securities Act (Ontario) and there is no need for a prospectus when trading in a syndicated mortgage.

While there are disclosure requirements that a brokerage must adhere to when presenting a deal to a client, and a certain level of “suitability” must be achieved prior to investing, there are no requirements for an investor to qualify for an “exemption” (as is the case for Exempt Market MIEs)

In a mortgage syndication, once the loan matures, the investor receives back whatever capital is left in the mortgage, and then must find another mortgage syndication opportunity – this can lead to “cash drag” as the money is not invested at all times.

Since the mortgage syndication is typically tied to one individual loan, if that loan goes bad, it is possible for the investor to lose all of his money.