As businesses and families across the country struggle to adjust amid rapidly changing circumstances as a result of the COVID-19 pandemic, it’s understandable that many questions are being raised about Canada’s mortgage market. A lot of these questions include the impact on mortgage investment corporations (MICs), like Frontenac.
As a public MIC invested in a portfolio of residential first mortgages in Ontario, Frontenac is fielding questions from concerned investors and portfolio managers.
To ease concerns, we explain how our fund mitigates risk, and how we have maintained relatively stable returns, even during previous periods of upheaval.
Strategic safeguards
There is an element of risk in any investment, so it is always important to understand the exposure and any steps taken to manage it.
Frontenac’s mandate is to preserve capital and provide a reasonable rate of return to investors that reflects the fund’s conservative investment philosophy. This mandate guides our decision making and ensures our steadfast stewardship of the capital entrusted to us by our investors.
Frontenac mitigates the risk in our mortgage portfolio with three strategic decisions:
- Our fund invests only in first mortgages.
This ensures that if a default occurs, we are at the front of the line to recoup our capital. - Our fund invests only in mortgages at conservative loan-to-value ratios.
This provides ample equity “cushion” behind our mortgage to protect our capital against default or downturns in real estate markets. - Frontenac does not use leverage.
This provides a simple capital structure and a direct link between investors and the underlying mortgage assets.
Not all MICs are alike. The strategic safeguards described reflect Frontenac’s conservative approach to mortgage investments. Other MICs – particularly those with leveraged positions or portfolios of second mortgages – may adopt a different approach and have a higher risk profile.
Our goal is to consistently deliver on our mandate and continue to be a sustainable, long-term solution that investors can trust and rely on through both bull and bear markets.
The risk of increasing defaults
Defaults are a natural part of the lending business. It is crucial, however, to understand that defaults don’t necessarily equate to losses, particularly given the conservative loan-to-value ratios at which we lend.
Historically, our fund has been able to maintain its performance through periods of increasing borrower defaults because modest loan-to-value ratios allow capital to be recouped and preserved.
Stability in uncertain times
Given the current environment, it is possible that we will see default rates rise. If this occurs, it will mean more work for our team as we seek to recoup our capital, but we do not foresee any significant disruption to the fund’s overall performance.
Our team is focused on providing a degree of stability and consistency amid the turmoil we are all experiencing. For the sake of our families, friends and communities across the country, we sincerely hope that the current downturn results in minimal harm and disruption.
If you have any questions or concerns, please feel free to contact us.
