Opportunity Knocks - Private Investor Alert

One of the consequences of the meltdown of the US subprime mortgage business has been the collapse or withdrawl from the Canadian subprime marketplace by many lenders, especially lenders who depended on floating their mortgage backed securities in the now defunct mortgage bond market. This phenomena has been evident in the Canadian market since the disappearance of both Accredited and Exceed from the subprime markets in the past year.

What is new, however, is the imminent elimination from the government backed insured marketplace of the so-called ALT -A and ALT B markets. It means that a whole range of borrowers will now no longer qualify for insured mortgages, especially those who previously would have done so. Borrowers will a Beacon Score of between 580 and 620 previously would have qualifed for insured loans from a number of lenders under both Genworth and CMHC policies, with certain provisos.

For the immediate future, what this will mean to private lenders is a HUGE opportunity to improve the quality and yield on their mortgage investment portfolios, as well as a major opportunity for making investments in Mortgage Investment Corporations (MICs) on a highly profitable basis.

On a quick survey of Canadian MICs yesterday I determined that on the basis of my relatively unsophisticated and nonscientific survey, most Canadian MICs across Canada are performing pretty well already, with returns ranging between 7% (in Saskatchewan) and 13% (in British Columbia) per year for the past couple of years, with longer term results being in the average range of about 11% to 12%.

For most investors, even in equities, these returns should be startling! An investment in a MIC is similar to an investment in a mutual fund in the sense that it requires little or no hands-on management by the investors, but the advantage of the MIC investments is that there is little or no volatility in the capital value: a dollar invested is always a dollar redeemed except in the circumstance where the MIC actually loses money - a rare event in Canada, it turns out. The variability in the MIC investment marketplace is in the rate of return to be earned.

Even investing in the worst performing of the MICs I surveyed yesterday an investor would have earned 7% in the last year, not bad at a time when the equities markets are down 20% to 30% in both major and minor markets.

This mortgage crisis has relatively few silver linings for the average person, but it has created a significant improvement in mortgage investment returns, both Private and in MICs. Astute investors should be seeking opportunities to invest in this alternative marketplace, and move both RSP and non registered investments to a more stable and more profitable investment than currently available in any other part of the marketplace.