Scale Your Mortgage Fund In 2024 - A Series - Part 1

First, I want to start by saying that 2024 has been off to a strong start for the entire mortgage industry. Positive real estate headlines, the dangled carrot of rate decreases on the horizon, and consumers' familiarity with current higher rates have all made the industry (and the public at large) more optimistic about the rest of the year.

Now, there have been some ugly headlines this past year that are worth mentioning. I find that transparency and context will serve us going forward.

First, we have three notable fraud/collapse news stories that can leave certain investors with a poor taste in their mouth. First Swiss went into receivership and ultimately, bankruptcy at this time last year. Greg Martel, a disgraced BC mortgage broker and "investment guru" left town with over $300 million in one of Canada's largest ever Ponzi schemes. And lastly, just this month the Windrose Group made the papers with tens of millions in losses on poorly underwritten construction loans secured with nothing but prom notes.

Sheesh...

Despite the bad press, every quality MIC and MIE that I've spoken to has triple checked their SOPs, spot audited their portfolios, and ensured liquidity and capital reserves are more attractive this fiscal year. This is despite continuously low default and loan loss rates which is a promising sign.

But have the industry's capital sources run stagnant?

I believe that they have. Every MIC in the country typically draws from the same three capital sources:

1. Friends and family. I'd also include HNW clients and other private investors they pooled into the fund.
2. Investment advisors. There are only so many MICs that an IA network will keep on the shelf, so the 60+ MICs with a sizeable enough AUM play musical chairs for the limited number of spots on shelves.
3. Family offices. If you're lucky enough to work with one, odds are they're all-in and they cap out at the 25% ownership limit.

If this sounds familiar, I would argue it's because Canada has always been an afterthought for larger-scale global investment. Our own pension funds can't even be bothered to invest more than ~5% of their allocations into Canadian assets and that's including oil and gas, mining, and grain exports. Yet the government will try to twist their arms...

That's for another day and another post.

Meantime, we have roughly $15 billion worth of alternative mortgage lenders in Canada. This number is expected to at least double in the next year for two main reasons:

1. We don't have enough housing in Canada. Even if immigration completely halted today, we still need to build millions of homes simply to keep up with the domestic demand for housing. Those homes are going to require mortgages and are likely to retain their value given the constraints of the market. This means lots of dollars on lots of houses.
2. The prime (A) space has gotten tighter every second of every day since the B20 guidelines really started to take hold in 2017. In fact, since the beginning of this paragraph, hundreds of potential mortgagors have been disqualified from getting an A loan. I'm kidding. Or am I?

There is undoubtedly going to be huge demand for alternative mortgage lenders in the coming years. That's true of B lenders as well as MICs and credit unions. But the biggest issue facing the space is that we have a high number of actors, competing for a finite amount of investor dollars, and everyone's doing it $100,000 at a time. The mechanics don't exist for larger institutional players to enter the space at any meaningful level.

To put it bluntly, MICs are small fish in a medium-sized pond at best.

To make your fund more appealing and capable of 2x, 3x, and even 10x growth in the next few years, you're going to have to start playing nice. Besides one or two sizeable commercial funds, MICs or "alternative lenders" oftentimes max out around the $250 million to $350 million mark. Consider $500 million the natural limit based on the last forty years of evidence. But together, as mentioned above, the space accounts for a whopping $15 billion in AUM - and that's in its current disjointed state.

What needs to happen over the next 12-18 months is cooperation on a larger scale. And I don't mean booths at the same trade shows. I mean:

• Standardization of underwriting buckets
• Portfolio liquidity (can you sell a tranche easily?)
• New debt facilities (the Big 5 don't want to play in our sandbox, they know it, we know it)

This is but a small subset of what I'll be discussing in the coming instalments of this series. But the overwhelming fact is that it's time to increase the level of sophistication, both in product offerings and infrastructure in Canada.

If anything above has resonated with you, I'd be honoured if you share it with your network. Then, hit the follow button. Then let's get coffee.