Thursday, December 15, 2011

43 Years Later

“In July 1968 I made my first mortgage loan and started investing client money in mortgages. Forty-three years later I’m still investing my own savings as well as the savings of 3,700 or so investors in mortgages secured by Canadian real estate property. Nothing has changed fundamentally; however, nowadays we not only invest cash but we also invest funds from a growing array of registered pension and registered savings plans, including the RRSP, RRIF, TFSA, LIRA, LIF, LRIF, IPP, RESP and RDSP. We still invest exclusively in mortgages secured by Canadian real estate and backed by the personal guarantees of our borrowers.

Canadian real estate is recognized around the world as a sound investment. It is not only local need, but international interest that will sustain Canadian real estate values in the long run. Fisgard’s mortgage security is based on Canadian real estate values. We are satisfied with that.

  • We like Canadian real estate
  • We like bricks and mortar security. What is more tangible that an owner occupied home?
  • A mortgage produces a regular income
  • Mortgages contain specific maturity (payout) dates, allowing us to plan our finances.

Mortgage investments are simple and straightforward. We won’t run the risk of losing money on a hunch that this or that stock or mutual fund might make us a fortune. We are just interested in regular income and steady growth. We have confidence in the enduring value of real estate and we are advocates of compound interest to achieve steady predictable growth. Mortgages are
relatively trouble free and stress free. They are healthy investments compared to speculations that you have to keep a sharp eye on every day, hoping that you will not wake up one day, read the newspaper, and find that your stock has simply evaporated.

Security is everything. I’m always impressed by the fact that all home-owners I’ve talked to think of the mortgage on their home as their most important and pressing debt and, if a choice must be made, they would pay their mortgage before most other debts. Think of that from the point of view of a lender in terms of security. As an investor/lender, this makes a mortgage a relatively safe investment.

Unlike many stocks and mutual funds, mortgages aren’t just graphs and projections on paper; they have a physical reality backing them – real estate. Our investments may be boring, but at least we have security – real buildings that are insured and are situated on real land that is basically indestructible.

Better than a colorful graph. Works for me . . . and thousands of others.”

Thursday, December 8, 2011

Risk & Reward

It varies from one fund to another but generally speaking the cost of operating a Mortgage Investment Corporation, including setting aside a reasonable reserve, is about 3%. Therefore when a MIC delivers a 5% net dividend to you, the MIC must lend its money out on mortgages at 8% interest.

This is possible and reasonable for a private lender such as Fisgard. However, a MIC that offers a 9% net dividend to its shareholders must be lending its money at about 12%, which is quite high.

Who would pay 12% on his or her mortgage? Under what circumstances would you pay 12% interest to borrow money on the basis of mortgage security? It’s a question that needs to be asked, as you could be stretching your risk a bit too far by reaching for such a high return. In today’s real estate market borrowers would have a hard time paying 12% except under unusual circumstances, and would run the risk of default.

Our policy is safety first, so we avoid the level of risk associated with high interest rates. Fisgard investors are satisfied with a more modest return and better security.

Tuesday, June 21, 2011

Fisgard is the only private issuer of the REGISTERED DISABILITY SAVINGS PLAN (RDSP) in Canada, and its income investment is the perfect fit for the RDSP.

If you have a disability or a limiting medical condition you should definitely check out the Registered Disability Savings Plan (RDSP), a federal government program to help people with disabilities save. The federal government will pay up to $20,000 lifetime to a person’s RDSP without any personal contributions and up to $70,000 in matching contributions. Tax on investment earnings is deferred until funds are used. Neither disability benefits from the provincial governments nor federal seniors’ benefits are reduced when people use the RDSP. It’s simply the best way for people with disabilities to save for their future.

If you are a parent the RDSP is the best way to save for your child’s future and to achieve peace of mind knowing that your son or daughter has financial security.

The RDSP Resource Centre provides information and makes qualifying easier for people. Headed by Jack Styan, Canada’s lead advocate of the RDSP, the RDSP Resource Centre is the site for RDSP information and application processing. The Centre makes the process simple and understandable. The RDSP Resource Centre’s website, help desk and qualifying services make it easy for you to determine if the RDSP should be part of your plan, and how to qualify for the Disability Tax Credit (DTC). You will be pleasantly surprised at the outcome of your call to the Resource Centre. Many applicants end up with a tax refund that they can contribute to their RDSP; money they didn’t even know was available to them!


Angela, 28, is an entrepreneur who makes luxury bath products. She qualifies for the Disability Tax Credit and has a yearly adjusted net family income of less than $24,183 which is the cut-off amount to receive the full $1,000 Canada Disability Savings Bond per year. Apart from new carry-forward provisions, Angela qualifies for $1,000 per year to a total of $20,000 without her or her family making any contributions. Projecting average investment earnings of 5% per year, Angela will have approximately $55,000 when she is 58. Not bad considering neither she nor her family have had to contribute a cent.

Victor’s family opened his RDSP when he was 8 and they plan to contribute $1,500 per year for 20 years. Their adjusted net family income is below $83,088 and they expect that Victor’s will be below $24,183 once he turns 19. Projecting average investment earnings of 5% per year, Victor’s RDSP will be worth approximately $316,000 when he is 38. Here’s how it works:

Family contributions$30,000
Canada Disability Savings Grant$70,000
Canada Disability Savings Bond$20,000
Investment Income$196,000

Total RDSP at age 38$316,000


To open a Registered Disability Savings Plan, the beneficiary must:

  • qualify for the Disability Tax Credit, be under the age of 60 (the RDSP must be opened before December 31st of the beneficiary’s 59th year),
  • be a Canadian resident, and
  • have a Social Insurance Number.


The federal government provides generous incentives for people to save through two programs: the Canada Disability Savings Bond and the Canada Disability Savings Grant. The Bond Program pays up to $1,000 per year to a lifetime maximum of $20,000 to the RDSPs of people with lower incomes, even if they are unable to make contributions themselves. The Grant Program matches personal contributions by as much as 300% to a yearly maximum of $3,500 and a lifetime maximum of $70,000. The government matches the contributions of any person, organization or company. The amount of Grant and Bond depend on the beneficiary’s income or the family’s income if the beneficiary is a child. The Grant and Bond are available through age 49. People can receive both the Grant and Bond. Visit the Resource Centre’s website ( for more details.


The Disability Tax Credit (DTC) is not granted on the basis of having a specific disability. A person might have a physical disability, visual or hearing impairment, developmental disability, mental illness, learning disability, acquired brain injury or medical condition. Eligibility depends on how the condition impacts his or her life on a daily basis. This may include mental as well as physical restrictions. Your best advice is to call the RDSP Resource Centre for a free eligibility assessment.

With the specialized RDSP knowledge and experience of Ability Tax Group, the Centre can walk you through the application process, including filing an appeal, if necessary. The Centre makes it easy for you. In addition to handling your application the Centre will review and re-file your taxes and where appropriate, transfer the available credit to an eligible family member to enable you to claim retroactive credits that may be owed to you. These credits may be substantial. Don’t miss out!

Eligibility for the RDSP is not the only benefit of qualifying for the Disability Tax Credit. Other benefits include:

  • tax savings from $1,443 to $2,344 (2010 tax year) plus an additional amount for children under 18. The tax credit and any transfers may be claimed retroactively for the previous 10 years! This often means lump sum refunds and future tax savings for the person or an eligible family member;
  • access to, or enhancement of, other tax credits, deductions or social benefits (e.g. Working Income Tax Benefit – Disability Supplement); and
  • estate planning advantages such as superior tax status for trusts and tax free rollover of RRSPs and RRIFs to RDSPs.


Effective 2011, a person’s Canada Disability Savings Grant and Bond entitlements back to 2008 will be carried forward and paid where applicable. With the carry-forward a person who opens an RDSP in 2011, and who has had low incomes since 2008, will be eligible for up to $4,000 in Bond money.


The RDSP Resource Centre has professional resources to help you:

WEBSITE - Visit for information about the RDSP and to post questions and comments.

HELP DESK - provides answers to your RDSP or Disability Tax Credit questions by phone, email and live chat.

QUALIFYING SERVICES - provides help in applying for the Disability Tax Credit.


Register for the Program
Call Fisgard at 1-866-382-9255 and ask to register for the Easy Access RDSP Program. If you have no taxable income, the RDSP Resource Centre will help you free of charge.

Get Informed about the RDSP
Visit or call the RDSP Resource Centre help desk at 1-855-773-RDSP (7377) to find out more about the RDSP.

Get Your Disability Tax Credit
Contact the RDSP Resource Centre at 1-855-773-RDSP (7377) for a free eligibility assessment and to get your Disability Tax Credit application underway. The Centre will also ensure your taxes are filed properly.

Start Saving NOW!
Call Fisgard at 1-866-382-9255 to open your RDSP, apply for the Canada Disability Savings Grant and Bond and make your first contribution!



Jack Styan is the purveyor of the Registered Disability Savings Plan. After working with disabled people and their families for twenty years Jack realized success in 2007 when federal Finance Minister Flaherty implemented a plan to assist disabled people and their families to secure their financial futures. On December 23, 2008 Canadians started opening RDSPs and saving for their futures.

Two years later 43,000 people have opened RDSPs and saved over 250 million dollars. Jack estimates that nearly 500,000 people qualify for the RDSP, meaning that less than 10% of Canadians who qualify for the RDSP have taken advantage of the program.

In conjunction with Ability Tax Group (‘Ability’), Canada’s foremost professional service for people with disabilities, the RDSP Resource Centre was launched in November 2010. Ability is Canada’s leading disability tax specialist. The RDSP Resource Centre raises awareness of the RDSP financial resources that are available and provides professional friendly assistance to those who need RDSP assistance. The RDSP Resource Centre makes the RDSP process simple and user friendly. It is the best in Canada.

“The RDSP was designed to help people in many different situations. For example, if you want to assist a relative or friend, your contributions will be matched by the federal government. If you know people with no means to contribute themselves, they can benefit from the Bond Program. Please tell family and friends about the RDSP. One of our biggest challenges is getting the word out!”
Jack Styan
RDSP Resource Centre Founder

Thursday, April 28, 2011

Inside Mortgage Investment Corporations

To learn about an exciting and fast-emerging investment class, Rob McLister, editor of Canadian Mortgage Trends, interviewed veteran investor and mortgage lender, Wayne Strandlund, who is the founder and CEO of Fisgard Capital, a $250 Million Canadian Mortgage Investment Corporation (MIC). In this wide-ranging interview Wayne shares his thoughts on how the simple, interesting and unique tax-exempt MIC works, how it is managed, its formidable investment potential, and how investors can take advantage of the opportunities the MIC offers.

CMT: Wayne, let’s start off with why the MIC was created.
STRANDLUND: The purpose of the MIC, and the Residential Mortgage Financing Act, is explained by the Honourable Ron Basford, Minister of State for Foreign Affairs, in this 1973 excerpt:

By amendments to the Loan Companies Act and the Income Tax Act, the bill also provides for a new form of Canadian Financial Institution, the Mortgage Investment Company, which is intended to make investment in residential mortgages and real estate more accessible to the small investor. It is extremely difficult at the present time for smaller investors to make this kind of investment. Unlike investment in securities through mutual funds, mortgages and real estate investments are legally and administratively cumbersome to split in such a way that investors can become owners of separate, divided interests.

Backed by expert management service and the security of a diversified portfolio, mortgage investment companies will be able to provide opportunities for the smaller investor to participate in mortgage and real estate investments on much the same lines as mutual funds, and in this way attract new savings into residential mortgages and real estate investments.

Click here to read Statute 130.1 of the Income Tax Act in its entirety.

CMT: So essentially, MICs let the average investor participate in mortgage lending?
STRANDLUND: Yes; and enhance their earnings by leveraging their investment in residential mortgages and enjoying the spread between the interest paid on borrowed funds and the interest charged on mortgages. Since 100% of a MIC’s income can flow through to registered plans (RRSPs, RRIFs, TFSAs, RESPs, RDSPs, etc.) without intermediary tax, and be reinvested, the investor can grow the entire return on a tax-exempt basis until the funds are withdrawn. Essentially, the MIC allows the little guy to share in the benefits of the lucrative and relatively secure mortgage business.

CMT: Is it a requirement that all MICs distribute 100% of net income annually to investors?
STRANDLUND: Yes. The Section 130.1 Mortgage Investment Corporation (MIC) is a flow-through investment and 100% of its net income must be distributed to investors. The MIC may deduct ordinary expenses as well as reasonable reserves for doubtful accounts. In addition to operation expenses and reserves MIC dividends are deemed to be expenses for tax purposes and deducted as such. After these deductions all remaining net profit must be distributed to the MIC’s shareholders at least once a year.

CMT: If an investor asks for the current market value of the investment, do MICs typically quote a NAV on a per share basis, like a mutual fund?
STRANDLUND: I can’t speak for my MIC colleagues, but I’ve never been asked for the MIC’s Net Asset Value. I suspect that NAV is stock-speak. MIC Investors ask about mortgage portfolio mix, mortgage priority (1st or 2nd positions) loan-to-value ratios, types of mortgages (residential or commercial), geographical concentration and so forth, but they don’t ask about NAV as they might when referring to a stock or mutual fund or some other financial construct. Unless a capital loss has occurred – or is imminent – a MIC’s share value ideally equals its original subscription price. Its shares should be worth the market value of the mortgage portfolio divided by the number of shares issued and outstanding.

CMT: Is there any way around the requirement that MICs invest 50% of their capital in residential mortgages or CDIC-insured deposits? I ask this because some MICs purport to invest only in commercial real estate. Are those commercial MICs just letting half their money earn money market returns?
STRANDLUND: No. A MIC must comply with Section 130.1 of the Income Tax Act to preserve its tax-exempt status, so it must hold at least 50% of the cost of its assets in residential mortgages or CDIC-insured bank deposits or credit union deposits or a combination of the above.

I suspect that when MIC reps say they only invest in commercial mortgages they may be using the term commercial referring to mortgage investments in larger multi-family residential complexes such as condominium, town-home, multi-lot residential subdivisions and so forth, as opposed to the typical residential home. In lender jargon these larger projects are often referred to as commercial, but they are classified as residential for MIC regulation purposes. The definition of residential is found in Canada’s National Housing Act (NHA). The definition is broad and includes, for example, mobile home parks, nursing homes and school dormitories.

Click here for the National Housing Act.

CMT: What percentage of capital should a well-run MIC hold in reserve to cover defaults and draws from borrowers? Does this money just sit earning money market rates?
STRANDLUND: There is no legislated reserve requirement for MICs as there is for banks and credit unions. However, a responsible MIC manager should at least have a reserve regime in place that provides for mortgage-specific reserves to cover losses anticipated in specific mortgages as well as a general reserve to cover losses that apply to the entire mortgage portfolio. Although there is no legislated formula for the amount of such reserves, a prudent manager is wise to set aside amounts sufficient to cover anticipated losses. Reserve provision is not a perfect science, but professional managers have a good idea of what loan loss provisions should be, and they provide for such amounts.

A well-run MIC exhibits excellent cash management. From day to day a MIC deals with money flowing in and out of the fund, new mortgages being funded, progressive development and construction draws being funded, dividends distributed, shares redeemed, new share capital coming in, mortgage payments being received, mortgages being paid out. Cash management is critical, and adequate cash-on-hand balances and reserves vary depending on the type of mortgages in the MIC’s portfolio. A MIC that finances development and construction, for instance, must account for unfunded draw commitments, whereas a MIC that carries only fully-funded mortgages does not.

It sounds odd, but ideally a MIC is flat broke all the time, with 100% of its capital working in the market. In my MIC world we strive to be in a situation where we have to raise capital all the time to fund mortgage investments. We want mortgage investments chasing money, not the other way around. Sustaining this balance is a tough job for any MIC, always feast or famine so it seems. Famine is good; too much money in the MIC is a curse – a poverty of riches. “Lina”, a respondent to Part I of our MIC interview on February 10/11, commented most astutely when she suggested it was possible there could be an oversupply of MIC capital resulting in some MICs taking greater risk than they would if they were scrambling for capital. Absolutely. Prudent MIC managers know when to turn off the tap. It’s not something they like to do, but they have to do it; idle money costs money. Take a $40 million MIC earning 8% for instance; $5 million of idle money represents a cost of 1%. That’s a lot when you’re trying to deliver a dividend of even 5%.

Given cash flow dynamics and variation in mortgage mix there is no tidy formula for establishing prudent capital reserves. Basically a well-run MIC must have enough capital on hand – or readily available through a line of credit – to meet its funding obligations. The LOC should also be sufficient to allow the MIC to forward-commit to mortgages it wishes to fund in the future but for which it does not have funds immediately on hand. A reliable LOC is important for the efficient operation of a MIC.

CMT: Should a MIC be concerned about using leverage if a bank can call in its line of credit (LOC) at any time?
STRANDLUND: Yes. Leverage is a powerful tool – and a dangerous tool. The concept of leverage was a major consideration in the legislation that gave rise to Section 130.1 of the Income Tax Act in the first place. Ottawa viewed leverage as a good opportunity for the average person to take advantage of the lucrative investment opportunities in the real estate and mortgage market. Ottawa expected MICs to optimize leverage as a revenue generator, and facilitated the process by allowing the MIC to borrow five times the cost of its assets (provided at least 2/3rds of the MIC’s assets amounted to the aggregate of residential mortgages and CDIC-insured deposits and credit union deposits) or three times the cost of its assets (if the aggregate of its residential mortgages and CDIC-insured deposits and credit union deposits was less than 2/3rds of the cost of its assets). Leverage was a big deal in drafting Section 130.1.

It’s exciting to dream of borrowing five times your assets at 5% and investing that money at 10%. However, banks, credit unions and other institutions who offer lines of credit take a rather more pragmatic view. A MIC that can negotiate a LOC of 25% of its assets, let alone 500% of its assets, is lucky.

Some MICs use leverage as a key revenue generator, but I think most MICs simply use a LOC as a short-term forward-commitment facility. Leverage is good business and used prudently and effectively it can really beef up a MIC’s bottom line, but it takes good knowledge, experience, timing and vision to make it work well. Leverage can make or break a MIC; it is a double-edged sword.

CMT: Do MICs ever pay finders’ fees or commissions to people who refer investors?
STRANDLUND: In the past some MICs have paid finders’ fees to raise capital, but that has changed as a result of recent securities legislation. Regulation NI 31-103 prohibits paying finders’ fees to non-qualified people or companies. Finders must now register under NI 31-103. Since qualifications for registration now include onerous audit, bonding, education, reporting and working capital requirements the industry may expect finders’ fees to be paid only to qualified agents.

CMT: How do you feel about MICs who lend at 90% LTV? In other words, do the high rates and fees offset the risk?
STRANDLUND: MICs are not legislated as to LTV ratios, and loans vary substantially in terms of risk – high risk to one manager may be low risk to another; it’s a matter of opinion and particular circumstance. A LTV of 90% is pretty high risk in my opinion as we know from experience that real estate values can, and have, swung dramatically (in excess of 20%) in uncomfortably short periods of time.

In my opinion charging high rates and fees to compensate for excessive risk is not worth the trouble. But that’s a business decision and judgment call for MIC managers.

We've published a guide for investors who may be shopping for MICs to invest in. Pic-a-Mic covers a number of issues discussed in this interview.

CMT: What is the “average” management fee in a MIC? For every $100 the MIC earns, how much can investors typically expect back, after management is paid its fee, and after the cost of running the fund?
STRANDLUND: There are as many management fee arrangements as there are MICs, so it is impossible to answer your question with any degree of accuracy. I don’t think there is such a thing as an average management fee. From my reading of several MIC offerings I see that some MIC managers charge a fee based on the amount of capital under management. Others charge a fee based on a percentage of profit. Some charge a percentage of profit over and above a base dividend rate. A number of managers who are licensed mortgage brokers also take all or part of the lender fee and/or brokerage fee paid by the borrower. The manager may also take various fees associated with the mortgages in the portfolio, such as discharge fees, progressive draw fees, extension fees, inspection fees, even mortgage prepayment penalty fees. And, of course, some management fees are an amalgam of some or all of the above. And then there’s the usual assortment of additional costs a MIC must take into account such as audit fees, legal fees, security filing fees, mortgage licensing fees, securities (NI 31-103) registration fees, advertising, banking, postage, communication and so forth.

With hesitation, and deference to my MIC colleagues, I would hazard a guess that a prudent MIC investor might consider accounting for 3% as an average cost, including management. Simply put, this means that a MIC that purports to pay 8% net to its investors must be earning 11% by way of mortgage interest and other fees associated with the mortgage portfolio. With some MICs it might be lower (say 2%) and with some it may be higher, I don’t know for sure. After over four decades of lending and investing experience I can assure you that sustaining a secure mortgage portfolio income of 11% is extremely hard to do. More than a few mortgage investment professionals agree with me that in a fund of significant size it is simply not possible without undue risk. Only in exceptional circumstances can borrowers sustain that level of carrying cost.

CMT: What is your opinion on whether MIC managers’ compensation should be linked to profit and/or default rates?
STRANDLUND: No matter how you slice it management compensation will always be tied to dividend performance, which is related to the quality of the mortgage portfolio, which in turn is related to the quality of management. When I say dividend performance I don’t mean only the rate of return, but just as importantly the consistency and reliability of return. MICs are essentially income vehicles so it is important that a MIC not only distributes reasonable returns that reflect current market conditions but also distributes returns that are predictable. In the offering documents I’ve read, typically the Offering Memorandum and the Prospectus, I see a variety of compensation arrangements, each with its own merits, and it’s hard to say which compensation arrangement is best.

My personal opinion is that the manager should be paid a percentage of MIC capital. This type of compensation not only reflects the amount of work and responsibility the manager assumes, but it is also a simple compensation formula that recognizes that capital will walk if it is not satisfied with the manager’s performance in terms of security as well as returns. For every dollar that walks from the fund the manager loses income. To retain capital the manager must prove to investors that they are wise to keep the investment rather than redeem it at maturity. Therefore it benefits the manager to maintain a quality mortgage portfolio that produces reasonable returns without undue risk. This is a compensation formula that investors easily understand. Simplicity is the key to its success.

CMT: MICs have to deal with a lot of regulation it seems. If a MIC has fewer than 50 investors, can it avoid much of this regulation?
STRANDLUND: I will give you my layman’s understanding, not legal advice. The 50-person requirement is not significant. If the MIC has fewer than 50 shareholders, and issues shares only to family, friends and business associates, it doesn’t have to file private placement reports with the provincial securities commissions. The MIC will probably still be required to register as a mortgage broker and be subject to regulatory scrutiny from the mortgage authority of the particular province. To sell MIC shares to the public you must be registered as an Exempt Market Dealer under securities legislation.

I was pleased to read solicitor Jeremy Farr’s recent article (CMT April 6/11) dealing with regulations regarding investment in MICs in various provincial and territorial jurisdictions in Canada, including the Accredited Investor Exemption. Excellent article. Securities legislation is very complex.

CMT: What, if any, are the difficulties and shortfalls of the MIC; and are there any ways the MIC can be improved?
STRANDLUND: The MIC’s greatest attribute is its simplicity. The MIC has a clear business purpose and is easy to incorporate and manage if one takes the time to learn the rules and follow them. It has fair tax rationale, and has clearly weathered the test of time as evidenced by the fact that so few changes have been made to the regulation over the years. This is because the MIC was well thought out in the first place.

Not surprisingly, as years of practice have revealed, modest enhancements should now be considered for MIC regulations. Here are a couple of modifications that may be worth considering:

  1. The MIC, in addition to mortgage lending, is permitted to hold up to 25% of its assets in Canadian real estate property. The MIC’s property investments can be acquired either on the open market or can be acquired as the result of taking title to property through foreclosure.

    The designers of the MIC in 1973 conceived the structure as a combination of mortgage lender and real estate investor with 25% of the MIC’s assets being the limit of its real property holdings – almost a REIT-like position. The real estate provision was innovative but has been used sparingly; underutilized in my opinion. The reason may be that, at the same time as the MIC is permitted to hold 25% of its assets in real estate (typically income-producing property), it is specifically precluded from managing or developing property. This places the MIC in a dilemma; it can own real estate, but it is not permitted to manage it. The MIC can take title to a construction project through foreclosure, for example, but it is not permitted to complete the project to protect its investment, nor to manage it until it is sold. This is an unreasonably awkward situation.

    MIC regulations should be modified to allow the MIC to do what it must do to protect a foreclosed property, managing it until it is sold, and finishing the construction or development if necessary. The many complications associated with foreclosures don’t appear to have been anticipated in the drafting of MIC regulations. The change I propose would simply permit the MIC to develop and manage but only under special limited circumstances, i.e. foreclosure circumstances. The MIC would not become a manager or developer per se..

    I also suggest that the MIC’s manager be permitted to manage the fund’s qualified real estate holdings like any outside property manager.

  2. A person who has invested in a MIC through a registered plan (RRSP, RRIF, TFSA, etc) may not borrow from the MIC without jeopardizing the tax-deferred status of his or her plan. CRA sanctions include penalties as well as setting aside tax-deferred interest. The MIC creators were mindful of potential abuses and recognized that investors ought not to use their registered funds for personal purposes. The prohibition makes sense, keeping borrowers at arm’s length from their registered savings and registered pension funds.

    I wish to advance an idea that would modify this regulation somewhat while maintaining the integrity of the registered plan of the MIC shareholder who is at one and the same time a borrower of MIC funds for mortgage purposes. A reasonable modification would be to restrict a person with registered funds invested in the MIC from borrowing mortgage money from the same MIC except under special limited circumstances, the objective being to ensure an arm’s length relationship between the borrower (the borrower’s registered plan) and the MIC.

I offer a possible modification. Throughout the period the mortgage is outstanding:

  • the borrower must not be a director or officer of the MIC nor have any control of the MIC;

  • the borrower must not hold more than 5% of the MIC’s issued shares;

  • the fully-advanced mortgage must not exceed 5% of the MIC’s capital; and

  • the borrower’s MIC shares must be escrowed – including voting rights – to the directors of the MIC.

Perhaps the above requirements would also have to be met by all parties that are not at arm’s length to the borrower (spouse, partner, children, parents, siblings, borrower-controlled corporations, for example).

Just some food for thought. Perhaps modest modifications would allow MIC investors to borrow from the MIC while remaining at arm’s length to the MIC. The spirit and intent of the MIC would be maintained.

CMT: Those seem like reasonable suggestions. Let’s move now to the firm you started, Fisgard. What is the most common type of borrower that comes to Fisgard looking for financing?
STRANDLUND: Fisgard is a full-spectrum non-bank lender; we consider ourselves primarily special situation lenders. We are not strictly equity lenders. In addition to the value of the property in relation to the loan amount, we consider the borrower’s credit worthiness and ability to repay. We are more traditional and mainstream than most people think. We perform as much diligence as a bank does in terms of qualifying our mortgage loans. To enhance portfolio balance we also carry some low-interest insured loans in our portfolio. We have a title insurance contract and we are a qualified insured lender. We provide large and small residential and commercial 1st and 2nd mortgage financing for the full range of mortgage situations. Fisgard has been referred to as a “B” lender, an “alternative lender”, a “private lender”. All of these shoes fit.

Although we can finance conventional and insured mortgages, this is not our main strength. Most borrowers come to Fisgard for special situation financing: new construction, renovation, development, mezzanine, inventory and equity takeout financing. We don’t receive many applications for ordinary long-term mortgages, but we do underwrite them as well. From time to time we have bought portfolios of mortgages from other lenders and we have co-ventured mortgage loans with other conventional as well as private lenders. Our typical borrower is a short-term special situation borrower. This is Fisgard’s well-established market niche.

If it weren’t for the Fisgards of the world – MICs that specialize in mezzanine and start-up financing – development and construction in Canada would have been much less vibrant than it has been over the past ten years. Canada’s many excellent well-managed MICs have been instrumental in financing numerous projects that would not have gotten off the ground had they relied on conventional mortgaging. The start-up money pumped into the economy by MICs has been huge – and fortunately continues to be so – and MICs are significantly responsible for the robust economic activity related to construction and development.

At present about 90% of Fisgard’s mortgages are originated by mortgage brokers. We value our excellent relationship with brokers; it is a Fisgard hallmark and an integral part of our business plan. Day by day we are developing more partnerships with mortgage brokers. With our hands-on experience in mortgage lending, real estate sales and valuation, property management, construction, development, trust management and project management, we feel we can offer brokers a leg up. We’re a family company that has been in business since 1968. We have lots of experience, and there are very few mortgage situations we haven’t dealt with.

CMT: How big is Fisgard compared to other Canadian MICs?
STRANDLUND: At $250 million spread over about 400 mortgages I think that Fisgard is probably medium-to-large compared to other MICs in Canada. I don’t know for sure.

CMT: May we ask, what is Fisgard’s average LTV?
STRANDLUND: Between 70% and 75% across the portfolio. Our 3,600+ investors are comfortable with that risk profile. Like most MICs we do not work in a box, so the LTV differs from mortgage to mortgage, but we try to keep our overall LTV under 75% to be on the safe side.

CMT: Does Fisgard have any expansion plans nationwide?
STRANDLUND: Fisgard is an established investment fund and lender in Western Canada, where our roots are. We grow at a sustainable manageable pace. Expansion is part of our business blueprint; but we are in no hurry. Expansion comes at a cost, and must be managed carefully. We are good partners, and we expand by building partnerships with established lenders in areas where we do not have a physical presence but our partners do – areas that are economically stable and demonstrate short as well as long-term growth prospects. Quality partnerships are necessary to Fisgard expansion. They help us safely test the water so to speak. We are satisfied with our progress.

CMT: Wayne this is fantastic information for those interested in MICs. Thank you for the time you’ve taken to share it with our readers.

Thursday, April 7, 2011

Dangers of Lending Money on Your Own - A Word of Caution

Recently we’ve received a number of enquiries from Fisgard investors regarding private mortgage money they have lent outside of their Fisgard MIC investment. In these cases the investor lent money directly to a borrower. In short, things did not go well. These mortgages looked appealing at first and it appeared that the investors would receive a higher return than by investing in the MIC. Unfortunately this did not turn out to be the case, and the investors not only lost their interest but a portion of their capital as well. They also experienced a lot of stress through the collection and foreclosure process. Risk and reward were simply not assessed properly at the outset, and technical experience was sorely lacking.

In reviewing the cases presented to us we noted a troublesome trend in the decision-making process. Most investors did not choose the appraiser that valued the subject property; in fact in many cases the borrower had ordered the appraisal! That should never happen. Most investors did not understand the contents of the appraisal, including value adjustments made on comparable properties, nor had they been given an original copy or the authority to rely on the appraisal for legal purposes. In all cases the investors had not reviewed the borrower’s credit report, nor confirmed the borrower’s employment and ability to pay as agreed. In all cases the investors did not understand the enormous complexities and costs associated with the default, demand and foreclosure process. No one likes to talk about what can – and too often does – go wrong when lending mortgage money privately with the expectation of a higher-than-average return. It looks good at the beginning, but all too often turns sour.

There are a number of reasons a borrower cannot get a mortgage from a conventional lender or a Mortgage Investment Corporation such as Fisgard, and it`s usually because the borrower simply does not qualify for the mortgage (cannot service the mortgage debt or has insufficient job security or poor credit) or, most seriously, there is simply not enough equity in the property used to secure the mortgage.

These are just a few important aspects of the mortgage lending process that were missed or not given proper consideration by the well-meaning but unfortunate private mortgage investor; aspects that became very costly oversights in the end, resulting in large losses and enormous stress.

In contrast, at Fisgard your investment is managed by a dedicated team of professional underwriters and mortgage support staff with over 100 years combined experience in residential and commercial mortgage lending, property valuation and assessment of credit risk. Fisgard has financed over 2,500 mortgages and our investors enjoy good security and reasonable returns. We evaluate each mortgage proposal carefully not only with an eye to fair and adequate return for the particular loan, but security of capital. We also have a highly experienced default management team of lawyers, appraisers, realtors and construction consultants in addition to our in-house staff. These people are trained to act promptly and decisively when problems arise.

If you have made a private mortgage loan on your own and have any questions, we will be happy to assist you. Fisgard also purchases mortgages from individuals or companies wishing to sell their mortgages.

More than 4,000 investors have wisely chosen to place their mortgage investment funds with the professional people at Fisgard, where their investment is secure and stress-free.

Friday, February 4, 2011

Inside Mortgage Investment Corporations

To learn about an exciting and fast-emerging investment class, Rob McLister, editor of Canadian Mortgage Trends, interviewed veteran investor and mortgage lender, Wayne Strandlund, who is the founder and CEO of Fisgard Capital, a $250 Million Canadian Mortgage Investment Corporation (MIC). In this wide-ranging interview Wayne shares his thoughts on how the simple, interesting and unique tax-exempt MIC works, how it is managed, its formidable investment potential, and how investors can take advantage of the opportunities the MIC offers.
Intro to MICs

Before we begin, let’s define what a MIC is.

A MIC is an investment that lets people pool their money to be lent out as mortgages. 100% of the net profits from those mortgages flow through to the investors.

MICs have been around since 1973 when federal legislation was enacted to promote private financing and make it easier to invest in mortgages.

MICs are one of the lesser known asset classes, despite yielding solid long-term returns and despite being RRSP, TFSA, RRIF and RESP eligible in most cases.

CMT: To what extent would you say MICs are an undiscovered or underrated asset class in Canada?

Wayne: The MIC was established by federal legislation in 1973 but it didn’t take hold until the mid ‘90s when it really started to take off, principally because it was the most accommodating investment structure to replace mortgage syndication. Mortgage syndication had been damaged by a number of debacles at the time, most notable of which was ‘Eron.’ Eron had lost millions worth of investor money.

Thanks to the MIC, instead of owning a syndicated (often unregistered) interest in a mortgage, investors could now be shareholders in a non-taxed flow-through entity. MICs, with their strict audit and reporting regulations, are a more streamlined, transparent and effective way of investing in mortgages and real estate.

Early MIC managers didn’t give much thought to the MIC structure beyond its facility to raise investment money. Their focus was predominately raising capital not only through cash investment but also through various registered retirement and savings trusts such as the RRSP, RRIF, DPSP, LIF, LRIF, LIRA, IPP and RESP. Today we also have the TFSA and RDSP.

The MIC flourished after 1995. Today there are hundreds of MICs in Canada. Some have as little as $1 million capital, and are essentially “convenience MICs” of maybe twenty or so shareholders. You might find those MICs in real estate offices, for example, where their main function is to facilitate sales for the office’s marketing staff.

On the other end of the spectrum are the larger MICs which are basically mortgage banks with hundreds of millions of dollars and thousands of shareholders.

The MIC is now fairly well established, but underrated as an investment asset class. Not being particularly well suited to public trading, MICs have not been recognized by financial advisors and stock and mutual fund traders who prefer investments that are publicly traded and generate fees and commissions.

This lack of attention has nothing to do with the quality, security and dividend production of the MIC.

CMT: What are the biggest differences between MICs today and MICs 15 years ago?

Wayne: Today there are many more MICs struggling for a share of a market that is not growing in lock-step with the increasing amount of mortgage money available through MICs as well as institutional lenders.

Fifteen years ago it was easier for a MIC to place money in secure mortgages than it is today. Competition for good mortgages is fierce, and growing.

MICs are practicing the same type of lending they were fifteen years ago. Despite the intense competition for quality mortgages and the recent global recession, most MICs have done well for investors. Yet, they have not received the recognition they deserve, despite outperforming many investments in terms of capital preservation and dividends. The MIC is still a niche investment, not well known or understood.

Securities regulation NI 31-103 was introduced in 2008 and made law in September 2010. It is too early to say, but I believe the new regulation will change the MIC industry. It could be that small MICs may not be able to meet the onerous requirements of the new regulation, including increased capital, bonding, disclosure, compliance and so forth, and simply close shop, or merge in order to survive.

The reasons for NI (National Instrument) 31-103 are still being hotly debated and rationalized based on whose ox is being gored, the small MIC struggling to raise a bit of capital or a giant bank’s brokerage house that is not particularly fond of anyone else playing in what the bank sees as its very own sandbox (the world’s investment money). At any rate it appears that the capital-raising field has been levelled by NI 31-103 and MICs as well as their managers and investment referral agents must now meet strict regulatory standards in order to raise capital through public markets. The positive outcome is that qualifying MICs will now become “institutionalized” in the eyes of the public, and will benefit from the legitimacy that comes with achieving new levels of licensing and registration. Short term pain, long term gain.

CMT: From a general risk and return standpoint how would you say investing in a MIC compares to investing in (for example) a rental property, assuming the same dollar investment?

Wayne: A rental property may appreciate in value and may experience the tax advantages of depreciation and other expense allowances. A MIC is a “flow through” investment and, in fact, the MIC must distribute 100% of its net profit to its investors every year. It is not designed to accumulate profit and is not likely to increase in value as a rental property might.

While a rental property is likely to be an active investment involving hands-on management, the MIC is more a passive investment. It simply flows dividends through to its investors, in whose hands the dividends are treated as interest income for tax purposes. The MIC sometimes, but rarely, flows capital gains or losses through to its investors.

A MIC is likely to be purchased at a nominal $1 per share, for example, and end at a $1 redemption or wind-up value. It will provide dividend income throughout the investment period. In exceptional circumstances the MIC might experience a capital gain if, for example, the MIC buys a property or forecloses on a property, takes it into inventory, and sells it at a profit. The MIC may flow capital gains – and capital losses – to its investors, but these are relatively rare occurrences.

As stated, dividends paid to MIC investors are treated as interest income for tax purposes. Income from a rental property is taxed differently depending, for instance, on whether it is held personally or in a corporation. Investors should consult tax experts when choosing between a MIC and a real estate investment, such as rental property.

CMT: Are there any major 3rd party distribution channels for the MIC? For example, do any big banks or investment brokers sell them to clients? If not, why not?

Wayne: To date most MICs have raised capital themselves with negligible support from financial planners, advisors and brokers. Most MICs do not trade on the public market, and therefore do not attract the attention of brokers who make a living through fees based on trading volume.

Also, most MICs raise capital by way of Offering Memorandum as opposed to Prospectus. This precludes certain investment firms from investing in them as a matter of policy.

CMT: Will returns suffer going forward as more investors throw money at MICs, and as more MICs and private money join the fray?

“If there is a crisis of money in Canada, it is not that we don’t have enough, but that there are too few simple, understandable and reliable places in which to invest it.”

Wayne: MIC returns are normalizing. The high private interest rates that have fuelled double-digit MIC returns for nearly two decades are not sustainable in the borrowing world at the present time, particularly with the slowdown in construction and development which is traditionally an active lending market for several MICs.

Not only will MIC returns normalize due – at least temporarily – to a shrinking market for mortgage money, but also because more money is choosing the MIC investment resulting in what might turn out to be an over-supply in some cases.

The MIC’s advantage is that the average investor understands what real estate is and what a mortgage is. Investors appreciate that a MIC investment is uniquely Canadian and secured by real property located only in Canada. These are simple important facts that make the MIC such a comfortable, easy-to-understand “investment” compared to the thousands of impossibly complex financial products being pedaled daily on the public market. Simplicity is one of the MIC’s most popular attributes.

The law of supply and demand will prevail, and borrowing rates (hence MIC returns) will be influenced not only by bond yields but also by the sheer volume of money now seeking the relative safety of mortgages secured by Canadian real estate property. If there is a crisis of money in Canada, it is not that we don’t have enough, but that there are too few simple, understandable and reliable places in which to invest it.

Real estate – the mortgage security – is one of the last bastions of conservative long-term investing, and there is no indication of this changing any time soon. We may look for the MIC to become very popular as a mainstream investment and special purpose lender.

CMT: Do you foresee more distribution channels evolving for MICs in the future?

Wayne: Yes. The world of Exempt Market Products – which includes qualifying MICs – is poised for growth. NI 31-103 will have the effect of institutionalizing MICs and MIC managers that meet the new requirements. As a result a broader spectrum of the investment community will invest in MICs, regardless of whether they are publicly traded or not. The so-called ‘liquidity’ touted by stock and mutual fund brokers is not what it’s cracked up to be, and more and more investors now realize that it’s much too expensive. Good old-fashioned fixed term investments are trumping liquidity in many cases.

Exempt Market Products are about to experience wide acceptance and popularity amongst mainstream investment dealers. EMPs are no longer the poor cousins of publicly traded stocks and mutual funds. The popularity of the MIC as an Exempt Market Product is growing and attracting the attention of institutional investors. The credibility of the MIC is greater than it has ever been.

CMT: What would you consider a high default (impaired loan) rate on a typical Canadian MIC? (e.g. 2%?)

Wayne: MIC lending is private as opposed to conventional lending, so risk and reward must be viewed from that perspective.

The number of impaired mortgages as a percentage of the total number of mortgages in a MIC at any given time is one consideration.

The dollar volume of impaired mortgages as a percentage of the total dollar volume of the portfolio is another.

The level of impairment is also a consideration. For example, an NSF cheque is one level, non-payment of property taxes, insurance or strata fees is another, and non-payment of the mortgage on maturity yet another.

Ten percent of the number of mortgages in a portfolio (e.g. 40 out of 400 mortgages) is probably an acceptable ratio on the impairment scale, erring on the high side.

Five percent of the dollar volume (e.g. $25 million out of $500 million) is also on the high side. Impairment doesn’t mean a loss of interest or capital. At any time a MIC may have 10% of its loans in an impaired state, but that does not mean it will lose 10% of its capital. It may not lose any capital.

Impairment level takes into account the composition and relative risk of a MIC’s mortgages, and risks vary from one MIC to another. Some MICs underwrite conventional 1st mortgages (including insured mortgages), some MICs underwrite more risky 2nd mortgages, and some MICs underwrite the full spectrum of mortgages: 1sts, 2nds, land development, construction, mezzanine financing, and so forth. It is difficult to assign impairment ratios without carefully considering the portfolio mix. It’s the degree of impairment that one must consider.


Part II of this interview will follow later this month. It will focus on a MIC’s internal workings, managing a MIC, and more.

Thursday, December 23, 2010

Fisgard Nominated for Vancouver Island Business Excellence Award

This is a special time of year and we hope you get the opportunity to relax and celebrate with your loved ones. Everyone at Fisgard would like to say THANK YOU for the support and patronage you have shown us over the past years. It is truly appreciated.

Fisgard has been nominated by our peers in the business community for a Vancouver Island Business Excellence Award in the "Financial Services" category. The award is offered by the publishers of Business Vancouver Island magazine.

With over 300 nominations in 20 categories, Fisgard is proud to be a finalist. Nominees are required to fill out an extensive questionnaire of wide-ranging questions for consideration in fields such as customer service, staffing, community involvement, environmental initiatives, and support for arts funding.

The 11th annual Vancouver Island Business Awards take place on January 27 at the Vancouver Island Conference Centre in Nanaimo.