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A Mortgage Investment Corporation (MIC)

A Mortgage Investment Corporation “MIC” is essentially an externally audited, federally and provincially-regulated company that allows investors to invest in a diversified pool of mortgages in residential and commercial real estate with the benefit of using a corporate entity allowing 100% of the net profits of the MIC to flow through to investors.

The MIC structure is unique to Canada and does not exist in the United States. Similar to a mutual fund, the MIC mortgage pool provides a way to diversify into a portfolio of investments; in this case mortgages, instead of stocks and bonds. Unlike a mutual fund, and to the investor’s advantage, the investor’s money is secured by real estate, often along with the borrower’s guarantee and is not subject to the volatility of the stock market.

Like a mutual find the MIC’s manager is paid a management fee, typically calculated as a percentage of total assets under administration. The investor in the MIC earns a blended rate of return based on the interest rates and fees earned by each of the respective mortgages. The MIC pool of mortgages is continuously and cautiously managed with new mortgages replacing mortgages that mature.

The MIC is entitled to special nontaxable status under Section 130.1of the Canadian Income Tax Act. This special tax-exempt status allows the MIC to pay out all of its net yearly revenue as dividends directly to investors without incurring income tax. While the tax burden is passed on to its shareholders the capital pool is not diluted thus preserving the total fund capital for distribution to shareholders and for re-investment. MIC Investment Shares are referred to as “flow-through” shares.

The Safety of Canadian Mortgages

The Canadian mortgage market has maintained historically low default and foreclosure rates. Due to the dominance in the market by Canada’s chartered banks and strict governmental regulation and oversight, higher underwriting standards have remained in place. As a result second mortgages in Canada carry about the same level of risk as prime-first mortgages in the US. Currently first mortgages in Canada have a statistical foreclosure rate of .27 % versus 1.99% in the United States.

Subprime mortgages in Canada have a statistical foreclosure rate of 2.22% versus 16.42% in the US. The securities and financial services regulatory environment in Canada is tightly regulated. Financial transparency insures high degree of compliance with regulation. The system is effective in disciplining offenders ensuring a stable market. All aspects of the mortgage market are regulated. In the case of the MIC, regulation and supervision comes from the Canada Revenue Agency, the Financial Institutions Commission and the Securities Commissions of the provinces of British Columbia and Alberta.

Investing in Canada Today

The banking industry in Canada has earned the formidable reputation as the number one banking system in the world forsecurity and liquidity.The Canadian economy continues to move forward, demonstrating strong fundamentals and, due to responsible fiscal management over the past decade, the government is well positioned to cushion the anticipated fallout from the ongoing global financial challenges. Despite a dramatic cooling of exports to the US, unemployment remains manageable and job creation has thus far generated sufficient new positions to cushion the job losses in the manufacturing sector.

The Canadian housing market has softened with price reductions driven by slower sales, the mortgage market remains strong however with the demand for high quality mortgages is increasing in a market where available mortgage fund sources is decreasing. Ironically the MIC’s status as a growing private lender in a market of decreasingly available mortgage funds positions the MIC as a positive hedge in a down real estate market.