The Canadian Investor - Why Private Mortgages Can Trap Investors for Years

Episode Date: December 25, 2025

Simon Belanger is joined by Dan Foch to demystify Canada’s private mortgage landscape from MICs (Mortgage Investment Corporations), to mortgage finance companies, and why syndicated mortgages. They break down how these funds generate eye-catching yields, where the real fees live, why first vs. second-position lending matters, and the biggest risk most investors underestimate: liquidity. The conversation also covers gated redemptions, conflicts of interest in vertically integrated lending, and the key questions investors should ask before allocating registered-account money to private mortgage products. Tickers of Stocks Discussed:  Our New Youtube Channel! Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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This has to be one of the biggest quarters I've seen from this company in quite some time. Welcome back to the Canadian investor podcast. I'm back here with not Dan Kent, another Dan, so Dan Foch. Lots of Dan's in my lives, so I'll be honest. And Dan, welcome back to the podcast. We're here. we're going to be talking about more private mortgages and it's pretty, pretty interesting what's been happening in the space. And I know you're well connected with that. So I think people will

really enjoy it. And even if you're not into real estate all that much, I think there is a lot of value here because a lot of these type of investments are readily available for people to invest in their RSPs and TFS, for example. Yeah, I think that's a big benefit. Like, it makes them, you know, that you can use them in registered accounts, which is different for, like, it's a good way to get exposure to real estate in a way that you can't really, like, one of the hardest parts about real estate is, you know, it's hard to use registered accounts to directly invest in real estate. So that's one of the main benefits. And man, it's nice to be, nice to be back on the show. I feel like we haven't done this in a while. And I was really in our little macro

episode. Yeah, I think, and there's going to be probably some macro that we talked about here, but we'll definitely try to demystify this. So, We'll talk first about mortgage investment corporations. They can be either private or public. It's really just a structure, right? And a Mick, short for the acronym here, is essentially a type of private debt fund. There is a pool of investor that buys shares into the MiG. The Mick then uses the capital to provide mortgages to borrowers who often don't qualify for traditional bank loans.

For example, they could be self-employed, people with bad credit, developers, or isn't even quick bridge financing. Any other kind of type of borrower is they'll cater to that? I think the bridge financing one kind of has like a bunch of subcategories. Like a lot of a lot of construction financing is private because on construction debt, you're not paying interest on the full amount. You're only paying interest on what you've drawn from the construction loan. So you're less rate sensitive.

And you just want something that's going to fund quickly and ask very few questions. So a really good example, probably the most common type of deal that people are doing right now in real estate investment is they're buying a piece of land, they're building a multiplex, like, you know, six to 100 units, and they'll use CMHC's MLI Select Financing Program, which Nick and I do a lot of. We've talked a lot about it on the show. It's basically government-insured loan long-term mortgage, and that's 50-year amortization, 90% loan to value, cheapest interest rate in the market.

It's literally the best credit product you can get in Canada. We can set aside. That's an observation, right? It's not a sales pitch. But the problem is CMHC's construction financing is not good. It's very hard to use. It takes a long time to get through the process. It funds really slowly. And so people will use private loans to fund their construction and then they'll get a takeout term debt from CMHC. Okay. No, that makes a whole lot And in terms of a mig the revenue, so borrowers pay interest and fees to the mortgage in to the mick, because the loans are private, the fees and interest rates are much higher than what you would get with banks. I mean, what, what are people looking at right now in terms of rates like 15% like in that range? Like 15 might be high. Like you're, you're, so it's, it's funny because like their their fee structure is like it kind of hides what the rate actually is. So you often see like a. like a 10 plus 2, right? Maybe 10, 11, 12, even plus 2.

And the 2% is your lender fee, 1% typically lender fee. And then a 1% broker fee you're usually paying. And those get baked into the principal. So they're not really like interest that you're paying. And then your annual rate would only be like 10% if you stayed in that credit product for a long time. But the reality is they're not long term credit products. They're typically one year at a time. And so most of these businesses, they distribute, like if I'm,

If I'm a Mick and I'm collecting 10%, I'm distributing probably 9% or 8% to my investors. I mean, some yields are lower than that, but they're pretty aggressive on the yields. You take a lot of risk as an investor, which we're going to talk about a lot in the show, but you get a pretty good yield back out of it. And then they make the companies themselves make all of their money on fees. And this would be no different than like a hedge fund or an equity group, private equity, where they make their money on management fees or deal fees, acquisition fees. you know, they put a whole bunch of different ways to make money in there.

Yeah, exactly. And we'll talk about those fees a bit later. And I guess the last thing they have to, they need a minimum of 20 shareholders with the fund with no single person owning more than 25%. I think of the share of the fund, I guess depends how the share structure is, is done. Aside from that, anything else people should know about mix that? A lot of them have limits on like they're all governed by a declaration in their, in their corporate documents.

So a lot of them have limits on how much. commercial debt they can take on because it's a little bit more volatile. So you'll see, they'll have a big portion of their book is residential credit because that's considered to be more stable and then a smaller portion of a book reserved for more commercial activity like construction financing, land loans, et cetera. So they try and limit that stuff. A lot of them also will try and do like lower leverage positions. So, you know, to protect their investors and to try and be like in first position only. If I was going to make a recommendation, if somebody wanted to, you know, invest in one of these, I would really be looking at one that is only lending in first position

and not too high of a loan to value. And we'll discuss sort of why those risks are what they are. And just to clarify, first position would be, for example, most people might be familiar who have a mortgage. You have a mortgage with a bank. The bank is in first position. While a second position would be you have a mortgage with a bank and then you go to a private lender to maybe get some additional equity out of your home or for whatever reason. And they would come in second position if the home would go as a power of sale. Yeah. I think power of sell mostly in Ontario, right?

Yeah, exactly. So, yeah, if there's a loss, basically if there's a loss position, then the lender in second would get their principal loss realized. Yeah. Well, yeah, yeah. Or they're the ones who absorb the loss before the first position. Yeah, exactly. So that's really important.

And that's something we, I was critical about when I looked at Go Easy Financial. Because one of the big things is they were saying how they have secured debt on auto loans, but also on real estate, on mortgages, but a lot of those mortgages are second mortgages. And even if they try to use a loan to value, that might be an 80% loan to value or whatever it is, you start getting into risk. If it's not a flat or up market, if it starts being a down market, then you have even less equity than you had. You factor in the fees if you have to go ahead with power of sale. And there might not be a whole lot left after that. Yeah, I mean, you're seeing loan to values increase because prices or values are going down, right?

Like, if the value is going down and the loan amount doesn't change, then your loan to value goes up. And that's what's happened lately. Like a lot of these mix who are in decent positions when they take the loan in 2022, let's say, that, you know, by 2023, when that loans up for renewal, you know, they could have been 80% loaned to value in January 2022 and prices drop 15%. They're now at 90, you know, 95% loan to value. it's a much higher risk position and it becomes very difficult to renew. No, exactly.

And they can be, I know there's some mortgage rates in the U.S. So you can have a mix that are, and of course, the structure might vary slightly, but you can have some publicly traded one. I think there's some mortgage rates, quite a few in the U.S. In Canada, I think there's a few as well that are publicly traded. Yeah, Timber Creek, firm capital is a good one. They do a bunch of like inventory loans for developers right now. I think they'd be like the biggest, most active, publicly traded one.

A lot of these basically are just private funds that raise capital. But yeah, I mean, you mentioned like in the U.S., they call these mortgage reits and they're structured in a similar way to a reet. Basically, as an investor, you get the tax flow through on the yield. So that gets registered as your income, not the funds income. And then you just get the yield from debt in that situation rather than rental cash flow. There, again, you mentioned like the couple of publicly traded ones. But I think, like, more often you'll find these as sort of, like, exclusive private placements

through, like, investment advisors or, like, just advertising, et cetera. I mean, we've had numbers of requests of people, you know, who want to advertise their funds on our content, obviously, right? So, yeah. The one thing that's funny is Sagan, the second largest insurer after CMHC, their stock ticker is Mick in Canada, but they're not a Mick. It's a, a, mic in that case, stands for mortgage insurance companies. So anyway, yeah.

Yeah, and do you want to go over some of the other structures that we might see in the private lending space here? And then I can go over why some of these mix and type of private investment became pretty popular, especially between 2020 and 2022-23. Yeah, so I'll go through the couple of different types of, they're called MIEs or mortgage investment entities. And as of CMHC's most recent report, they're very small market share compared to the big six banks. So big six banks are about 75% of the mortgage market. Mortgage investment entities are about 1.3% of the mortgage market, which mortgage market is trillions of dollars. So this is still, you know, five to 10 billion given the size of the market. But so you have a couple of different ways that companies will raise money into these mortgage investment.

entities. So Mick is the most common one. This is a corporation that pools investor money to invest primarily in mortgages, typically private, non-prime and bridge loans to avoid corporate tax. A Mick must distribute 100% of its net income to shareholders and unit holders. That's why they collect their money as lender fees, not as interest. And then it's taxed at the investor level as interest income. They're governed by the Income Tax Act in that way. Investors typically we can buy shares or units in the corporation, typically a private corporation and illiquid, but there are some publicly traded ones that we mentioned. And the liquidity risk is one of probably the key risk, which is gated redemptions, which we're going to talk about in the show

pretty substantially because that's a big theme that we're seeing right now with some of the larger ones in this space, as well as like credit quality, I would say, you know, market risk and stress on the real estate values. Anything you want to add there before I move over to mortgage finance companies? No, no, that's good. And we'll go over those risk. bit more when we talked about why they became so popular and why I think a lot of investor overlooks some of those risks. Yeah. Having cash on hand is essential for any business.

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know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store, and I'll see you there. Yeah, so the next one would be MFC, which is a mortgage finance company. This is a non-bank institution, often a Sked 1, Sked2 bank that are regulated federally under the Bank Act. They tax income differently. It's at the corporate level, and then you would get a dividend or whatever it is.

They're very regulated through OSFI. They are primarily funded through deposits, season savings accounts. although there are smaller MFCs that raise very similar to the way than a Mick would. But they have the ability to borrow a bit more so it's not solely investor equity. And they, in many cases they play in the bank space, right? So this would be like your B lenders in a lot of cases, but there are smaller, like more private lender style MFCs as well. Would the, not a co-op, but a credit union, would that fall in that category? I know they may be provincially regulated, but would they fall in that?

of their own type of entity, but I guess they would kind of fit under that umbrella, I am. Yeah. But yeah, similar regulatory risks as soon as you're getting out of the A side, or surely not regulatory risks, the risks to mix, capital requirements, liquidity risk, et cetera. The other two, would be a mortgage reet. This is more like the U.S., so your M. REITs, basically like a MICC, but for the U.S., same thing, it flows through to the tax of the individual investors, and the unit holders actually invest in that mortgage trust. And then the last one, which has really kind of fallen

by the wayside. And we're going to talk about why it basically blew up because of this company called Fortress was syndicated mortgages. So syndicated mortgages are basically a single mortgage loan where the capital is provided by multiple investors. So like, for example, if I wanted to fund a multi-million dollar deal, I would go and raise capital from a bunch of different investors. And they would all, I would collect all of their funds and syndicate that and put it into the loan. So it's kind of like a mix structure, but on a per deal basis. But there was a lot less limitations in the way that they used to be able to raise capital. But now it's, you know, basically these guys were raising money for debt, but they were actually treating it like equity.

And so there's been limitations in how people can raise money. There's a lot of regulatory scrutiny, especially post-fortress scandal, often restricted to accredited investors. So they'd be they'd raise capital similar to the way like an EMD exempt market dealer would in those exempt markets. The bigger risks on these is because they're using this sort of different structure, there's higher risk for them underwriting poorly. They have a lot more discretion on what they can do with these things. You were seeing a lot of project failures, a lot of developer fraud, plus the liquidity issues and then also being in a junior charge position. So they'd be like the B, the second or third or I think I saw some of these loans from these guys where they

were in like seventh position, you know. Oh, wow. Yeah. So, yeah, that became a lot pretty quickly. Yeah. Okay. No, that's really interesting. And we'll touch now on why and talking about, let's just say, mortgage investment corporation, so mix, why they became really popular, especially from 2020 to 2022. Big part of it is higher yields. So it's pretty common to see these mix. I mean, you see a lot of them. I was just browsing a few. They'll advertise yields between six and 12 percent, eight and 12. Like, it kind of varies, but you're getting pretty high yields. And if you rewind back to 2020, 2020, we were in the ZERP area, so the zero interest rate policy the area, rates were extremely low. You would just get crumbs if you bought a GIC or traditional

bonds. Same thing if you got government treasury bills. And I guess a lot of people were looking at mix to get income, monthly income, right? So you have these monthly distribution. So it becomes really attractive for people if they're looking for income. There was a perception of security from investors the loans are issued and this is something we talked about by would go easy they'd be marketed as loan are issued against secured real estate they're bag by real estate so they're safe worst case scenario we take back the home the market's booming we recoup our investment no problem to the fund we can just loan the money out to the next person no problem here well i'll talk Well, of course, as you know, that's a bit more of an issue when, that's fine when markets are going up, but that starts being an issue when markets are going down like we're seeing right now, especially in Ontario, in BC as well.

And I know then you know this a lot better than I do. But when you have these loans that are not necessarily of great quality, because there's a lot of people cannot get loans from the banks. and a lot of these loans are not necessarily the best borers, then you start getting into some liquidity issues like you mentioned earlier. And another reason why it was attractive, and I think gave this false perception of safety, a lot of them are marketed as are registered account eligible. So TFSA, RIFs, RESP, which is not false.

Like, it's, you just meet the criteria by the CRA to have those, investments eligible doesn't mean that they're safe investments but I think when investors see this they associate that with safety unfortunately and then I guess the last one I've seen and you can chime in a bit on that is I've seen some funds that are marketed as no fees well you can rest assured that the fund manager is not eating craft dinner for for all his meals or her meals they may be marketed as no fees but like you alluded to earlier there's fees, there is broker fees, there's other type of fees that they'll actually be getting that may not be traditional management fees like you'd see on other funds and performance fees

would be another one as well, but there's still fees. I know that's, I think it's probably technically right what they're advertising, but it's kind of a gray area too. Yeah, the way, the easiest way to think about this is that they aren't technically charging a fee to the investors, but in a lot of cases, most cases, that would. actually say. They are charging a fee to the borrower and that creates risk. So if the borrower is paying 2% extra that's getting added to the principle of their property, then that's making your loan less liquid when it's up for renewal or less recoverable when it's up for renewal. And so there are fees. It's just not paid by the investor side. So they're technically telling the truth to you as an

investor and they're not taking your money, but they are taking money and using it for, or they are taking money from the, from the borrower and using it to add to the principal and they're collecting that money themselves. And so you as the investor absorb the risk of the principal balance going up during the loan term from this fee, and they get the benefit of it. So it is a little bit of a moral hazard maybe is the right word to use it. I don't know. And now I think it's worth noting like why people flock to these especially for as investors, but also as borrowers. So a lot of people jumped into into investing in mix because they were considered this like low risk alternative to direct investing in real estate or lending private

mortgages out on your own. So the last type of mortgage that I didn't mention is just an individual private. So like you want to borrow, you know, an extra 100k and you call me and you're like, hey, Dan, do you have an extra 100K laying around? You can register. or charge on my house, that's an individual private mortgage. If I just gave you a mortgage, we'd do it all the same way of Mickwood through a lawyer and all of those different things. But during the pandemic, like a lot of people didn't want to underwrite their own deals, et cetera.

And so they started going in more into these pooled funds because it spreads your risk, right? It's basically diversifying across a handful of different mortgages rather than being just exposed to, as an example, as a borrower. And diversifies to some extent because at the end of the day, sure, there's diverse of and numbers, but if we saw during the GFC, if all your diversification is the same type of product, are you that diversified? Yeah, I guess diversification is the wrong word.

It's more of a spreading, right? It spreads the risk across multiple borrowers and products, yeah. So you have that. And then borrowers were really piling into this space during the pandemic because they, you know, they basically, people were bullish on real estate and they were doing by any means necessary trying to buy deals. But the problem was that during, that really frenzied era of like 2021, A-side debt was pretty easy to get. Like, rates were

super low, banks were pretty lenient with credit. We're in a very different credit environment than what we're seeing right now. And so the big banks just for people listening. Yeah. And so your mix had to take on a lot more risk to generate yield. So they would distribute higher yield than bank stocks, but you, you know, it's a risk return thing, right? You take on more risk. You get more, typically get a higher return, but you're subject to way more volatility or gating of funds, etc. And so their delinquencies run way higher than chartered banks. So like as an example, charter banks, delinquencies, you have this chart up here for anybody who's watching on the videos, but is, you know, charter bank delinquencies like 25 basis points right now and it's climbing still,

but Mick delinquencies like over 1.5%. It's 1.6%, I think. And so their delinquencies are a lot higher. The interesting part about this, though, is that MEC delinquency and other non-bank lenders, so like the MFCs that we mentioned, are actually trending down. And I think there's a chance that they've peaked, to be honest. And the reason is because they take shorter loans. So they're taking a one-year rate. So if I was a lender doing a bunch of these one-year deals in 2021, 2022, all my risk has already been realized. And you can see that in the huge spike that they saw in delinquencies from 23 to 25. But 25, basically, they seem to be starting to come down since then. And I think that a lot of that has to do with their agility to respond to

these changing market dynamics. And so that's the interesting part. Yeah. And if you have a one year loan versus a five year term, right, that you can maybe stretch out a year without being delinquent on your loan where, you know, it's harder to stretch out five years if you're struggling. Yeah. Or if you are going to be delinquent, the lender knows it right away, which you can see in the spike up, like all of their writ, like any, any deals that they had that were going to go sideways happened pretty quickly. It happened within a one year time frame. And they've, you know, taken it off their books. They've taken a power sale, whatever. They've already realized the loss. So now they're kind of already on the other side of the risk terms simply because they turn their loans over five times faster on average than a charter bank because most people are taking three to five year terms from a charter bank. But isn't there an incentive for these fund managers to just renew these loans, get some new loans, no matter how bad they are, because their compensation is tied to that in some cases. Yeah. That's sort of the moral hazard that I described. I would have a concern that as an investor that a lender, if a lender, and then this is where I'm kind of saying, like the borrower is paying that fee. So the investor doesn't notice a difference as long as the loans aren't realizing capital loss. or failing to pay their interest payments, which they tend to begin to as risk materializes.

But the lenders certainly do have an incentive to renew or take on loans that might not actually be exceptionally good deals because they can make money. They make money off of the fees, the act of doing deals. So they're always chasing more deals. They're always chasing. And you'll see a lot of these companies end up being vertically integrated with a mortgage broker and a lawyer and a realtor and you know whatever else and and that's where you know because like it's not to say that it's necessarily wrong like synergies exist in business but i think that it does

raise some red flags for moral hazard in that in in that industry when that's happening right like if a mick is taking loans off their book and their buddy realtors listing it and they're charging the investors commission to sell those properties that gets baked into the deal and the realtor's giving a kickback to the fund without anybody knowing like or to the manager or whoever like that's where there's you know there's always these risks and the real estate industry is famous for these risks and and it's being heavily scrutinized for these risks right now like the Ontario government just took took control of the real estate council of Ontario which is you know so there's funny business and like the one thing for me is you know Charlie Munger's

famous quote, show me the incentives and I'll show you the outcome. And especially when there's no actual management fee on the fund, because you can make a case, and I'm sure there are somewhere, there's, let's say, 2% management fee. And maybe there are other fees, but then they have more of an incentive to be a bit more risk averse or look at risk a bit more over just issuing loans to just issue loans so you can get the volume. So you can get those fees where they have a bit more of an incentive to protect the assets under management because they still get some fees out of that. Well, in funds where they're charging like typical hedge fund management fees, like 2% of assets under management, but 20% of profit, they're far more incentivized to improve profit

because their marginal return is way higher on profit than just patting the fund with more assets under management. Then you go over. But in this case, you know, if you don't have those fees, you don't then your incentive is purely to do deals. It's purely to get more deals. And that creates a little bit of a, like you said, like the outcome of that aligns with the incentives, which is more deals equals, well,

you might be a little bit more lenient on what deals you're doing. Well, yeah, exactly. And we were texting. And that's kind of, you weren't as surprised. I was pretty surprised when I started digging into this. Where, you know, I was looking at some funds.

And then you had the kind of owner, or the main person in charge whatever you want to call it with a high interest in a mortgage brokerage firm, then also the fund manager of the Mick and also had some ties into the legal firm, which created some really big red flag, especially on the legal side, because the lawyers technically are there to protect the investors on that side, because you would assume that the deals would flow to the legal firm on the lender side. Obviously, the borrower is fine because they're probably, they have to go and get their own lawyer. They can't use that same lawyer.

So they're okay. But from the investor perspective, I'd be pretty scared that there's some proper risk management being done there. I think that the incentives are just cause for alarm and some red flags. And there's definitely some room for things to go wrong, which we've seen. And we'll talk quite a bit about it. I mean, even like the funds that are that are gating redemptions and stuff like that, Like, they're not even the ones that I would say are necessarily all that bad. I think that it's scale that really constricted them.

But the smaller ones where, you know, they're kind of in a regulatory gray area and, and, I mean, look, like, there's a lot of this. And I wasn't surprised when you mentioned it because it's just so common, like, you know, that everything is always vertically into. And what did they say, right? The bodies tend to rise to the surface when things start going bad. I'm probably butchering that. But when things were good, clearly, you didn't. I'm sure you heard some of this stuff, but it doesn't really start coming up because if borrowers are not paying, they can take the property, they sell it, the market just increase 5%, whatever it is, or fine, they recoup their money, and everyone's kind of happy. But the finding here are from the regulator, FESRA, so the Financial Services Regulatory Authority of Ontario.

So they did this review of 15 of those firms that had essentially some brokerages that had some interest in the brokerages, but also in the fund itself. So there were, yeah, some integrated services, lack of better words here. And they found that 14 out of 15 brokerages did not have policies or procedures specific to arranging related Mick mortgages. And what's really alarming is that 81% of reviewed file had no documentary evidence that a borr suitability assessment had been performed. So basically, did they look at the borer and was the borer like credibly able to repay the loan or make those payments? So they found 80% of those filed and 80% of the reviewed files did not document or

had inadequately disclosed a conflict of interest between the mortgage brokerage and the related mix. And this is regulator. And that was, I think, end of 2023 that was done or at least published. And that's a pretty high number when you take a sample of 15 and you're finding this discrepancy. Maybe I'm too alarmist, but this, this looks like a whole lot of the ninja loans that were happening in the U.S. before the financial crisis, Ontario edition, no? Yeah, I think so. I mean, I think that borrowers who don't want to commit mortgage fraud and, you know, like that's another whole thing on its own, like to get an A or B loan, we'll go to a lender like this. And so, yeah, they do end up taking like they're, they're typically equity based

lenders. So they're more really concerned about whether or not their equity is protected or that the equity of the property is protected. So they, they can be a lot more lenient on. And they're not regulated by, you know, the Bank Act, et cetera, to have to stay within required GDS, TDS, ratios, et cetera. So yeah, I think there's a lot more room for, you know, for bad loans stand up on the books for sure. So that would be the key risk that you'd want to think about if you're interested in investing these types of funds, right? No, exactly. Having cash on hand is essential for any business. Traditional business accounts hit you with high fees while paying little to no interest on the cash you need for day-to-day operations. That was our experience too

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Winters in Canada can be pretty cold, but they can also be pretty magical. We're thinking about taking a short trip from Ottawa to Quebec City for the winter carnival. My wife and I spent our honeymoon there a few years ago, so it will always have a special meaning for us. And now with my daughter, she'll also get a chance to appreciate how great Quebec City is. She'll be able to practice speaking French and I can already picture her lighting up when she sees the ice sculptures or tries snow tubing for the first time. After a full day of activities, I can imagine us heading back to our home away from home on Airbnb, making a warm dinner, maybe picking up some local pastries for dessert, and just winding down playing some board games with a nice glass of red one. It got me thinking about hosting our own place. While we'd be away, our home could give another family the chance to enjoy winter loot in Ottawa

as it will just be sitting empty while we are away. The nice part is we get to decide when our place is available and it lets us make a little extra to put towards our next trip instead of having our place just sit empty. Your home might be worth more than you think. Find out how much at Airbnb.ca. Calling all DIY, do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because broker, accounts are linked. And then once you link your brokerage account, you can get in-depth

portfolio insights, track your dividends, and there's other stuff like learning duolingo style education lessons that are completely free. You can search up Blossom social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up, some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Going back to the liquidity, actually the first thing, it kind of reminds me of that scene

in the great short where you have these mortgage brokers and they're asking them what kind of verification that they do and they just start laughing. Like, my job is to approve the mortgage. Yeah. So it kind of, yeah, it reminds me of that. But if we get back here to the liquidity risk and that's, That's a key risk here that anyone looking to invest in these mix or private loans should definitely make sure they're aware of, but it's just not easy to get your money out.

You usually will have to put a request in. There's going to be a delay, but if the fund is starting to see some losses and there's a lot of investor redemption, you can have something that will be like freezing redemption, right? So they'll be gating the funds, which is not illegal. they're definitely allowed to do that, especially to protect the fund. But how has that been, like, has that been increasing? I know you mentioned a few cases.

There are some prominent cases, but are you hearing that it's also increasing for those smaller funds, the funds that may not be a billion or two in AUM, they may be a closer $100 million fund or something like that? Yeah, I mean, there's definitely liquidity issues with a lot of these funds. And the crazy part is I guess there's no real, like, regulations on whether or not they can stop, or they have to stop raising money if they've stopped distributions. So we, like, I mean, we, we've had people who have asked us to promote their, their stuff, right? Like, just so people are aware of like how much we scrutinize what we talk about on these, on these. Oh, yeah, we said no,

too. Remember in 2020 or 23 and we talked to you and I and we're like, yeah, this is just, well, I just said, you know, have they gated redemptions? And it's like, then we just Google it. And it's like, oh, they've gated redemptions yet they're trying to raise more money. It's like, well, you know, so that's kind of weird. To me, that's a weird one. But yeah, I mean, you're seeing it in the smaller funds too. You'll see that. You'll see distributions will be watered down because they're experiencing principal loss

or loss of interest paid and no, nothing catastrophic, to be honest. It's just like they're really just not capable of sustainably delivering the great returns that were promised in a high risk environment. So that would be probably the big one. And I guess some will do paper distribution where they would stop paying out distribution to shareholders, but they would give them shares, additional shares in exchange. I've seen that. Yeah, I'm not familiar with that, but it wouldn't surprise me, to be honest. I mean, I think that they're always creative to try and reduce capital churn in markets like this,

right, where they don't want to lose an investor. So they do anything they can to try and keep them in there because it's a lot easier, reduces your cost of acquisition of a new capital if you can keep an existing investor in your fund rather than I'm going to go find a new one. Okay. And do you want to go over some example that I've made the news and just break that down a little bit? I know there's some pretty prominent ones that made the news in the last year or so. Yeah. So I think the biggest one like by size would be Romspin who gated redemptions and they have both a Canadian and a US fund. And I believe they gated for both. There's some other ones. in the syndicated mortgage space

which happened over a little while ago which was Fortress and Fortress is probably the most iconic other than like maybe Home Trust which I'll talk a little bit about and then Rom Spend but Fortressers they were one of the most high profile failures involving syndicated mortgages in Canada

and really like a black eye on the idea of syndicated mortgages rather than mixed. They've kind of left a bit of a void for mix to fill which is why you're seeing so many mix coming into the space because they really really scorched earth, like, just demolished the syndicated lending space. Basically, instead of borrowing from a single banker institution, they would parcel out a large loan into many smaller units, which

were sold to individual investors. The appeal to investors was insanely high returns. I think they were promising, like, 20 plus on some of these things at a time. And this was, they weren't, like, they weren't loans. They were going, they were going in as basically equity. Like, they were going to equity levels of loan to value. So they would go to like 100, 120%. And they were secured by real estate. So people thought, oh, it's a mortgage. It's secured by real estate. I've heard of friends doing private mortgages, whatever. So people thought that they were safer than stocks and more lucrative than a GIC. And they were often marketed as things like you were mentioning RRSP and TFSA eligible. And I think that there was a degree, like so you can raise into a fund using like a mutual fund

trust like an MFT or like an EMD exempt market dealer, etc. And so people think, oh, well, if I can do it in my RRSP or my TFSA, it must be like low risk, right? Like it wouldn't get approved by those registered funds, but there isn't really an approval process per se. And so you just meet a certain criteria. Yeah. Keep in mind, you can you can put penny stocks that trade on the venture that it has had a lot of issues with fraud in the past on the TSX venture, you can still put that on your TFSA. So it's not like you can buy in your TFSA that it's without risk or safe. Yeah, exactly.

So I think, I don't know, maybe I'm wrong. Then maybe your audience is a lot smarter than I think. But I think people hear, oh, I can do it in my RSP and my TFSA, it must be like somewhat safer than, you know, like they categorize it in with safer investments and it's just not that. And most mix are like higher risk lending opportunities, but these syndicated mortgages were especially bad. And so they would take on high risk positions to try and deliver those returns. And a lot of their projects stalled or were never completed. And when the loans matured, they couldn't

repay their investors. And this was like these guys raised $2 billion, I think. So the company and the principles basically were being scrutinized by regulators, OSC, the RCMP rated their offices. And you know, for misrepresentation, fraud, etc. And they actually ended up getting charged. And I think we'll probably go to jail in Canada, which, and they wiped out capital from thousands of investors. So this is like, really, I tell this horror story to say, like, make sure you're doing your homework on this stuff. Yeah. Then they really ruined syndicated mortgages as a result. Like, it hasn't been the same type of industry since then. There's an easy rule of thumb that I've applied and it's served me very well. If it sounds.

too good to be true. If you can get 15, 20% promise yields, as a rule of thumb, that served me well without doing a lot of work. It takes a few minutes. You can usually, I will just avoid them. If something sounds too good to be true, that served me well when DeFi summer years ago was happening in crypto. You could get the same kind of thing, 25, 30, even higher yields. A lot of those just imploded. Same thing here. If you're getting 20% plus when you can get one or 2% in the GIC, I think alarm bells should be coming off. Yeah, 100%. I think that's an excellent rule of thumb. It makes it very simple, right? But people get attracted to the too good to be true stuff. So I think shifting over to the MEC and private fund difficulties, obviously a direct

bankruptcy for a MEC is pretty uncommon than for like other standard corporations. But, But it's probably because they have these liquidity levers that they kind of pull. So ROM spend, gated investor redemptions, which basically means that investors can't take money out of the fund in late 2022. Trez Capital, another major fund manager in the space, took steps to address rising difficulties in their funds, which included MECS, front neck, MEC, managed by Trez, face scrutiny, and operational restructuring as a result of this kind of stuff going on. And so a lot of smaller, regionally focused mix or private funds have faced similar challenges, ranging from outright gating of redemptions to dramatically reducing the yields or restructuring the fund in ways that you described that I wasn't really necessarily aware of.

So I think the key takeaway from this to me is it really underscores the liquidity risk. Like you might not take a capital loss, but the things that they'll do to protect you are probably going to piss you off a little bit, which means I can't get my money out. You think about it like the made-off example, not to say that any of these things are Ponzi's, although some were, right? Yeah. But everything was fine until 2008 happened and everybody was trying to redeem their capital from the fund. And then it was like, well, I can't, I can't do it. And that's where that's the market that we're seeing for these mix right now where people are saying, hey, I want to take my money out and they get a huge capital call. And it basically becomes like a run on the bank, like a comparable anecdote. And they're like, no. no, sorry, we can't give out any more money. We were stuck in all of these loans. You have to ride it out. So that's the issue. If you are relying on liquidity, you know, you want this to be able to trade like a stock, you could end up with some challenges. The other one that I'll mention that I think is noteworthy is a 2017 home capital group crisis where they had a big liquidity

issue following allegations of mortgage fraud and subsequent regulatory action. And they were actually doing mortgage fraud. And investors and depositors basically did when I just mentioned and did a run on the bank and that threatened the company's insolvency. And they relied heavily on these high interest savings accounts and GICs to fund their mortgage book. And so the loss of depositor confidence basically led to a bank run where billions of dollars were withdrawn in a matter of weeks. And Warren Buffett actually stepped in as a cornerstone investor. He agreed to provide home capital growth group with a $2 billion line of credit at a 9% interest rate and to buy significant equity stake in the company. So I always think that's funny

to see, you know, Buffett getting involved in bailouts of Canadian lenders. But I remember when that happened before he had stepped in to save them, I was like, this could be our big short moment because it would have just kept rolling after that. Yeah, it seems like I don't know where it's going to go with the private mortgages. And obviously there's some good ones out there. But when you start seeing the integrated stuff and the mingling happening and the control between the mortgage brokers you have the fund manager and then even legal form in some cases i i feel like there's going to be some more stories happening especially if prices continue to decline and go sideways in ontario at some point because a lot of these have a lot of exposure to ontario at some point

some things got to give. And for investors in these funds, I guess the worst outcome is they see a permanent loss of capital, maybe not 100%, but they see 20, 25, 30%, whatever it is, right? Yeah. Yeah, totally. I think they're like, I think these can be great tools to make money in a decently like well risk adjusted return, but they are like you have to really understand what you're getting into from a risk perspective. And I think a lot of people just don't. And so the key is do your homework, right? Do your research. Look at the kind of loans they're doing. Ask the right questions. Have they ever gated redemptions? Have they experienced capital losses? What does their power of sale process look like? Like there's so many things that if you don't get the

real estate space, it's very easy to take on risk that you're just not even aware of and haven't even thought about. And so it is something that I think you want to really understand. And if you don't And you don't want to understand it. I would just say go with like a bigger bank or, you know, if you want to get a little bit more a yield, maybe like a challenger bank or like non-bank to get, you know, a bit of an improved return, but more safety on on the mortgage side of things. Or the public crowd, right? If you go with like a mortgage reet, that would be it's much more liquid, right? You're just buying shares in a mortgage rate. Of course, if it's facing issues, shares could be trading out.

a pretty significant discount, but if you're looking for liquidity, that would be a way to look at it, then I'm just thinking too in terms of private equity. We've seen issues now for the last few years. There's been a big rise over the last decade of private equity firms, but now with so much competition, there are some of the top firms out there. They end up taking capital. They buy businesses, but oftentimes their exit strategy is five, ten years down the line, but what we've been seeing is that the exit strategies are not always panning out. So they have to roll over those funds into other funds. And you're seeing institutional investors starting to get pretty unhappy with how the capital

is locked up. And these institutional investors usually have a very long time horizon. So it's not even like an individual investor who may have a higher liquidity need than a pension fund, for example. Yeah, I think you, like a lot of people get into these without acknowledging. that as a risk, right? Like they'll say, like, especially with the mix, it's like, oh, well, I'm in a real estate mortgage. Like, what's really the worst that could go wrong? And, you know, it should be able to get my money out whenever I want or whatever it is. But, you know,

the time when you're going to want the money out is the time when you're not going to be able to get it out. You know, the correlation, like, that's like that, the made off example, right? Like, the if the economy is going bad and people are losing jobs and unable to pay these loans and the lenders are stuck in these loans that they had to renew like you mentioned earlier kind of people being incentivized like the lender is being incentivized to renew to get the fees but the other thing is they can also be incentivized to renew just to protect the loan because the so I meant to mention this but like one of the reasons people use private credit is often like nobody nobody says I'm going to be paying a 10% or 14% interest rate forever like I don't think and if

they do like it's not you know that's a horrible decision and so their intention in a lot of cases people buy the buy a property with these and or they they refinance property with these because they you know maybe lost a job or had a bad credit or whatever and their intention is okay I'm going to use this product for one year and then I'm going to go to a B loan and then I'm going to use that for a year and then I'm going to go to an A loan and you know I'll be reducing my cost of borrowing and they're climbing this mortgage ladder. the problem is when risk happens, it constricts people's ability to do that. And so a lot of these lenders got stuck in loans because the path for the person was, oh, I'm going to replace this

with an a lender in a year. And then a year happens and it's a horrible year like 22 or 23, and that person can't qualify for an a loan. And now the Mick is stuck in this one year term that they're going to renew. But every time they renew it, they're taking. taking on more risk and putting the person deeper into debt and worsening their financial position. And so as the loan grow because of fees and the interest? Yeah, the fees get added to the principal, right? Yeah. Even if it wasn't added to the principle, it's still money that the person spent that they don't, like that, you know,

they don't have if they're using debt of that magnitude. So yeah, like the person's financial situation doesn't improve as a result of paying 2% of the value of their property and fees every year to a lend. or plus 10% of it in interest. So this is the problem is you're gradually kind of crippling your borrowers. And so that I would say the risk profile of these loans can often worsen as they're in these gated positions. It's supposed to be a solution. Hey, we're stuck in this loan.

We're going to do some workouts, whatever. But it actually, just because of the cost of these loans, it actually worsens. And they're not amortizing either, right? So it's typically their interest only. And so the person, in a lot of cases, you'll see. balloon payments. So people actually, they'll just add the interest to the principal at the end of the loan term rather than the person paying interest every month. That's super common in private mortgages. And so by the end, so a year, you know, nobody, nobody takes a one year loan saying,

oh yeah, I'm definitely going to go bankrupt on this thing in a year. They're ambitious that it's going to help them solve their problems. But then a year goes by and they haven't solved their problems. And now we're all stuck saying, okay, well, how are we going to fix this? And it's like, well, I can't because I'm actually in a 12% worse position than I was last year because I just, you know, evaporated all that money. Especially when you factor in the macro risk that we're seeing. You have Trump taking office, all the tariffs, the economy slowing down. And if you have to roll these loans for a couple times, I mean, at one point, you know, is it really realistic that you will get into a better lender? especially if markets continue to going sideways or down the little bit and the value your loan keeps increasing.

I don't know. It doesn't seem like very optimistic for a lot of these potential borrory. It's funny, right? Like I hear a lot of people like, oh, should I take a, should I take an A lender or B lender, like fixed variable? Should I take a private loan? It's like if given the market that we're in and I've given this advice to people over the last couple of years, honestly.

I mean, unless you're an expert technician. And to be honest, if you're an expert technician, you don't have the financial problems that I'm about to describe. Unless you're an expert technician, if you're faced with the question of should I take a private loan or like the answer to the question is sell, you know, like that's the realistically. Like more debt, if you're in a position where that's your own, that's your last line of defense. That's your only remaining option. your more debt isn't going to solve your problem and more expensive debt isn't going to solve your problem and that to me is the key risk that's associated with these is that they're never going to be the yeah during like in a bull run it was easy because everybody was making equity on their property and things looked okay and you know it was easy the escape routes were easy to access

but that's gone and that's gone for probably a long time and so that to me is one of the biggest things that I think a lot of people don't necessarily think about. It's like, do I want to be lending money to people who literally can't borrow from anyone other than me? And do I want to be lending that money to them almost indefinitely? Like, to me, most of those people should be selling properties, selling their properties. No, that's a great point, especially if you're the bore at that point, it's also, okay, maybe there's a 10% chance. If you take that loan, then you can go to an A lender or B lender, whatever it is. But there's also a 90% chance that you're going to be in a much worse position after the loan is done.

So I think in a lot of cases, it's probably an emotional thing for a lot of people. They don't want to sell the home, so they do everything to keep it. But if you have to, sometimes it's just best to take a step back and look at the most probable outcomes. And if you just, you're pushing the inevitable or just making things worse, I mean, you're better off just selling the home. And I guess from the lender's perspective, I guess that's all. where you get into this weird incentive mix between the fund manager and the investors.

But I guess time will tell, right? Like my spidey scent just says, like, oh, especially with the findings from Fezra, it just feels like if the real estate market keeps going down, especially in Ontario, for a couple more years. Like, I don't see how some of these don't blow up. I think you're right. I would say that the risk does take time to materialize. Like I think even though the delinquencies are going down on this mortgage type, which I think I would anticipate it will continue. It doesn't mean that like there's still high delinquencies and delinquencies hurt their books, which means that eventually they're going to run out of room or investor capital to keep the things on side. Like all of this stuff does take a really long time to materialize. I would say risk. Like if there's one thing I've learned about this cycle is that everything takes like four times as long as I think it's going to. And I would say that that's very especially true in the real.

estate asset class because you only have to renew your mortgage every five years or one year if it's one of these things. But even then, it's still a very long time. You think it can just be a flash crash or things can just drop off very quickly, but it doesn't happen instantly. Okay. No, that's a great way to put it. And I guess the big takeaways here, just make sure you know what you invest in. And if it looks too good to be true, it probably is. Anything else, Dan, before we wrap this up that you wanted to share with people? The one thing I would say is like, I mean, I obviously have a bit of a bias here because I host the real estate show, the Canadian real estate investor podcast, which I'd love for people to check out. But understanding the way that real estate is underwritten and like actually thinking about these funds on a deal by deal basis. Like what is the loan of value of all of the borrower, all of the loans that we're putting out? Who are the borrowers? Like underrated as if you were giving an individual private loan to me or Simone or whatever. Like if one of your friends came up and asked you to borrow money, would you give them $100,000? Now you just think about one of these mix as, well, you know, you just have thousands of those people.

Who are they? What are the risks? What are their jobs? You know, where are their houses? Because like a lot of these funds, this is the craziest part, actually. And this is like a lot of funds focused on urban areas. And that ended up actually being the problem for them because they were focused on, hey, we only lend in, you know, 905 and 416 Toronto or, you know, lower mainland or whatever because there's more data and there's more liquidity. whatever but those are the markets that actually got hit the hardest during the collapse of house prices and they're getting hit the hardest on on delinquent rising delinquencies right now as well and so you really want to like underwrite these companies as if you're a real estate investor or a lender yourself like you're just giving money to to someone that's like I would say the same thing about what was it the other one that you mentioned go easy it's like yeah if your buddy

asked you to borrow like 800 bucks to finance a PS4 like would you say yes no probably not right like I personally wouldn't right like I just somebody who doesn't have 800 bucks to buy a PS4 no offense like I just I that's not that doesn't seem like a good idea and so why would I invest in a company that does that at scale right so that's like I think people just need to think about that right hey can I I can't refi with with RBC so I'm going to take this 14% loan and I'm sure everything will be better next year. If your friend came up to you and said that, what would you, what would your advice be to them? My advice personally would be, hey, man, I think you should maybe consider like just selling your house, realize the equity go rent for a couple of years, rebuild your, your

financial life. So that's what I think people really need to understand is like what are the loans that we're actually giving out here. Yeah, no, I totally agree. Oftentimes taking the tough decisions now will, it may be hard for a year or two in the short term, but you're much better off long term. And I think that's probably a good takeaway for people. I know we're seeing cost of living go up. We saw CPI, food inflation, got starting to get pretty bad for people in general. So I know it's not easy for a whole lot of people. But if that's a good takeaway, I think, from all the takeaways as well is sometimes it's, you need to take the hard decision. It may be tough short term, but for the long term, it'll be better. Yeah. Couldn't agree more. Okay. Well, Dan, thanks again.

If you want to hear more from Dan, you can go and listen to the Canadian Real Estate Investor podcast. There is a link in the show, No, him and his calls Nick Hill do a fantastic job. They cover all kinds of real estate topics, macro stuff as well. I really encourage people to go and listen to that, especially you'll hear this, probably New Year, New Year's Resolution. So if you want to get started on listening on a good real estate podcast, highly recommended. But thanks everyone for listening, and we will be back in a few days with a new episode. The Canadian Investor podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast.

Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.