Private lending continues to play an increasingly important role in Canada’s mortgage financing market—a fact that has been further underscored by the Covid-19 pandemic. As traditional assets struggle to generate yield in the current environment, private mortgages are becoming a more viable option for investors.
Investors are increasingly turning to private mortgages for diversification benefits as well. Becoming a private lender means you are investing in a segment of the economy that is uncorrelated with the broader financial market.
When it comes to investing in private mortgages, transparency is key. In the investing sense, transparency refers to the ability of the investor to go through a portfolio to gauge compliance with its underlying investment objectives, guidelines, and risk parameters. A transparent investment process allows investors to see exactly what the manager is doing with their money. It’s the same standard you would expect from any other type of managed investment.
In private mortgage investing, transparency also refers to the lending process itself. The process by which a lender identifies, evaluates, underwrites, and administers a mortgage must be conveyed to the investor.
Although the request for transparency seems like a reasonable one, it’s not a uniform practice across the private mortgage industry. For an investor, transparency means receiving a full package of due diligence documents about the borrower and financing terms. This includes key legal documents, borrowers’ income and credit profiles, as well as full visibility on the status of the loan through the life of the mortgage.
Because mortgage investing can be considered a hedge against traditional market cycles and volatility, investors need to be able to track their performance over time. In this sense, transparency also applies to reporting on a portfolio’s performance. Investors need to be constantly informed about how well their assets are performing so they can make an informed decision about whether to stay invested or seek opportunities elsewhere.
The best portfolio managers run extensive reports and conduct in-depth market research to present you not just with the facts, but also the story behind the numbers. These reports, often produced monthly or quarterly, provide key metrics like return on investment, loan-to-value ratios, geographical distribution, and a snapshot of the current lending environment.
When it comes to transparency, working with the right mortgage lender is vital. An “all cards on the table approach,” where investors get all the information that the portfolio manager receives, is the best way to ensure transparency from start to finish.
The topic of transparency in mortgage investing will become more prominent over time as investors continue to diversify into this alternative asset class. Private lending has played an important role in keeping the Canadian mortgage market humming along during the pandemic. It’s now estimated that private securitization accounts for roughly 1.1% of Canada’s mortgage funding mix. This figure is likely to grow as the market responds to new federal guidelines on mortgage debt.
CMI is one of Canada’s most reputable mortgage lenders, offering full transparency across a range of investment products. Learn more about CMI’s mortgage securitization process and contact us for a free consultation.