Q: How do you mitigate risk with new construction mortgages?
A: With a strategy steeped in experience, and a strong mortgage partner.
We have a lot going for us when it comes to managing risk in our mortgage investments.
- Our experience and expertise with residential real estate and construction in Ontario
- We also have a huge advantage with our mortgage partner, Pillar Financial Services, who are deeply engaged with borrowers and who offer hands-on involvement with new construction projects.
Here are more ways our unique model insulates the W.A. Robinson Asset Management Ltd., Pillar Financial Services Inc. (“Pillar”), and the Frontenac MIC from risk.
- Location, location, location
W.A. Robinson Asset Management was founded in a small town. Investment opportunities and investors came from the area. It soon became clear that rural and small-town real estate expertise offered both a market… and an edge.
We continue to invest predominantly in rural and small-town mortgages in a limited number of Ontario postal codes. Over the years, we’ve built strong relationships within these communities that give us an advantage when it comes to choosing investments.
We avoid the GTA and other large urban centres where costs are higher, pricing bubbles more likely, and where the development projects are larger.
Why Ontario? We have occasionally invested outside of the province but realized we get better results closer to home. We understand the Ontario recourse laws on property better than anywhere else. Further, of all the Canadian provinces, Ontario’s laws are most favourable to the lender, which reduces our risk should a property become impaired.
Ontario also offers enormous market potential. The “rural revival” from COVID years is still playing out as remote-enabled workers leave city life for more affordable parts of the province.
- Keep it simple
Through our mortgage partner, Pillar, we invest in smaller, short-term mortgages with a reasonable LTV ratio and an average term of one year.
Smaller sized mortgages mitigate overall portfolio risk because if one, or a few, small mortgages happen to go sideways, it will have a negligible effect on the total overall portfolio versus a MIC that has some larger mortgages go sideways. For example:
- “MIC A” contains 400 mortgages with an average mortgage size of $500,000 making it a $200M MIC.
- Meanwhile, “MIC B” contains only 40 mortgages but with an average size of $5M, making it a $200M MIC also.
- If each MIC has 6 properties in default, MIC A has 1.5% of its book in default, whereas MIC B has 15% in default — and a great deal more money at stake.
Short term mortgages can also mitigate risk in a few ways.
- By allowing us to reprice back to the market more often (think about 1-year terms vs 5-year terms). This is particularly helpful during a period of rising interest rates as we have recently been experiencing.
- By giving the borrower an opportunity to move to lower rates faster than if we tied them up to a long-term mortgage. As soon as their dream home is built, or their credit score is in such a place that the banks or credit unions will say “yes” to them again, a borrower can return to those places and secure a better mortgage rate. This is the most desired outcome by our borrowers, and by us.
A good exit strategy
Pillar always ensures a well-defined exit strategy is part of the mortgage underwriting process. This sets out how the borrower can improve their financial situation and return to their bank at the end of the term.
- Construction expertise
Pillar provides expertise in construction project management. With years of experience working with builders and general contractors, they know how to help a project move forward.
They have also come to know many of the real estate brokers, residential contractors, and construction firms and suppliers in their lending markets.
When a potential borrower comes to Pillar through their mortgage broker, (or is even referred by one of the large banks who trust Pillar with their important clients) we are quick to understand the opportunity and any associated risks.
- Looking at the whole picture
Pillar’s clients most often can’t get support from a Schedule A bank, Credit Union, or other traditional lender. This can happen for any number of reasons, including temporarily bruised credit, or a general reluctance to give a mortgage on certain property types, such as vacant land.
In fact, most of the people that do construction financing with Pillar are “A” clients and are often referred by large banks. These are strong borrowers with good net worth that are embarking upon personal projects like building a forever home.
Regardless of the circumstance, Pillar’s goal is always to help clients get to a state of credit recovery or to a point of project completion so that when they complete their term, their bank or credit union can take them back at lower rates.
We don’t know of another MIC in Canada that puts as much care into their mortgage portfolio. Between our acquired market expertise, our small value, short-term philosophy, and the personal attention given to borrowers’ projects, we encounter few surprises and very little risk along the way.
Contact us today to learn more about our low-risk strategy, and to find out whether the Frontenac MIC is the right fixed-income solution for your clients’ portfolios.
Prospective investors should read the Frontenac Mortgage Investment Corporation prospectus for more complete information, and should consider the advice of their financial, legal, accounting, tax and other advisors when evaluating this product.
