My Private Network

Why Invest in Mortgage Investment Corporations?

• Private Debt and Equity • Season 1 • Episode 9

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Hosted by Bob Simpson, today we shift the focus to answering the question "Why Invest in  Mortgage Investment Corporations?".

Learn from our host Bob Simpson and our expert guest, Will Granleese, Director and Portfolio Manager at Antrim Investments.

Today's questions of interest:

0:00 - Intro
4:03 - Where were you back 50 years ago and what has led you to join in on Mortgage Investment Corporation work?
6:28 - Who borrows from private lenders? If they need a mortgage, why don't they just go to the bank? 
9:43 - What does a typical mortgage in your portfolio look like? 
11:09 - With 2000 plus mortgage's,  tell us where are you now and what's your latest number? 
12:46 - Tell us how you differ from a bank when you work with borrower's who are going through a rough patch. 
15:43 - Can you talk about secured lending as opposed to unsecured lending?
16:35 - We're reading reports that banks are having major write offs, could you touch on that?
19:45 - How do you differ from private lenders who offer minimum holding periods and have early redemption penalties. 
21:57 - How long is your typical mortgage and could you explain the mortgage market?
22:33 - Have you had over the last 30 years, how many negative months? 
24:34 - What is you fund's current return rate?at compare to what the returns would have been over the last couple of years? 

If you enjoyed this episode, please subscribe and visit our website at https://www.privatedebtandequity.ca/ for any questions or to learn more!

Bob Simpson:

Greetings fellow seekers of investment wisdom and early adopters. I'm your host Bob Simpson and you are tuned into Another exciting episode of My Private Network. We're absolutely thrilled to have you back with us today. Now on today's podcast, we do more than just scratch the surface of the investment world. Each week we swing the doors open and introduce you to some truly exceptional individuals. These are not just specialists in the investment community. They're disruptors, pioneers who have fearlessly embraced uniqueness. In a world that is increasingly defined by constraints and regulations Our ultimate goal is to empower you to achieve financial success That which you deserve and desire for yourself and your loved ones So stay tuned as we embark on another enlightening journey through the world of investments innovation and financial freedom. Welcome To my private network. Today's guest is Will Grandleese. Will is director and portfolio manager of Antrim Investments out of Vancouver. He last joined us in episode three, why allocate funds to private real estate debt, and he is the channel manager for the concept mortgage investment corporations. So Will, welcome after a long introduction. Sorry to do that to you.

Will Granleese:

Thanks very much. Happy to be here.

Bob Simpson:

Yeah, welcome and we're glad you're able to find the time to join us today. So just to take it a step back, Will, over our lives, one of the things that we all know is that we've all paid hundreds of thousands of dollars in mortgage payments and we probably have cursed, you know, it's like being a Leaf fan. Uh, you know, we, Will and I were just talking about this as we were getting started that, you know, as living in Toronto, we always cursed the Leafs when we're in the playoffs. Uh, and now he is. He's living the life with the Vancouver Canucks having a good season, but you know, we, we tend to curse the amount of interest that we paid over our lives. It's actually pretty amazing numbers. I think it would be. Interesting for most people to think about, you know, aside from taxes, we spent a lot of money on interest on mortgages and that sort of thing. And as baby boomers, we all remember back in the, you know, I know 14 and a half percent mortgage rates. And, you know, every time we made a mortgage payment, very little of it really went to paying down the principle of the mortgage. So if you, our listeners, have successfully made the transition from borrower to investor, maybe it's time that we turn the table and be one of the beneficiaries of today's higher interest rates to help us generate income and build wealth. So, let's see what we can do today. Start out by just introducing yourself, uh, to our audience. You know, I know that your family's been involved in the mortgage business for decades. Yeah, we have. So, Uh, Antrim Investments is, has been in business now for over 50 years. Uh, during that time, we haven't sort of strayed out of the mortgage space. We've strictly stuck to the mortgage space. And as you say, we're sort of bringing this new investment or this, this, uh, this new era of investing in mortgages to, to the regular Canadian people that, uh, Maybe you're not high net worth, maybe that have a little bit of savings and want to invest in a mortgage, but how can I, I don't have a couple of hundred thousand dollars. Well, with something like a mortgage investment corporation, we can take your funds and group them with other investors. And so something similar to a mutual fund, but instead of investing in stocks and bonds, we just invest in regular First and second mortgages and um, it's worked very very well. Yeah, so business started 50 years ago Where were you back 50 years and what has led you to? Join into the family business.

Will Granleese:

Yeah, that's interesting So so growing up, of course mortgages was was all the talk of the house But as a youngster, I can't say I was really that interested in mortgages. I liked the investing side and I really liked, uh, stocks and bonds. And I thought I was going to be this hotshot stock trader. Well, after my undergrad degree, I joined Toronto Dominion bank and I became a financial advisor. And I really saw what the reality was, which was, you know, it's not every stock you pick, you make money on. Some stocks win, some stocks lose. And, uh, what you're looking at. That is what you average earn over a period of time. Back in the day when I was looking at those old Andex charts, I said, you know, Antrim, my father's business, they do it better than the stock market. There's no volatility with Antrim and we're earning very similar rates of return to the stock market. So after I completed my MBA, I came back to Antrim and I said, you know, dad, we've got to tell more people about this story. We've, we've got to let people know that other alternatives exist, right? The world is not just stocks and bonds. And so that's how it really, really started.

Bob Simpson:

You know, and it's very similar to my own path where I started out as an advisor back in the early eighties and interest rates. You know, I remember the first thing that I, uh, I was assigned to go out and sell. And that was Canada savings bonds at 19 and a half percent, uh, interest. And, you know, it was funny back then, cause everybody thought rates were going to 22. So they didn't want to lock in at 19, um, you know, where they could have doubled their money every few years. But, you know, what I found was the same thing. You know, equities were interesting, but many people out in, in the investment landscape are looking for security. They're looking for certainty. They want to use the power of compounding and with equities where you have up 20 down 10, up 15, you know, you kind of lose some of that compounding. So. So having a solution like yours, I think is, is really interesting and you know, it didn't take long for you to discover that maybe dad was on the right path, which is a difficult thing to accept at times, isn't it? Indeed. Yeah. Indeed. Yeah. So really you fit into the category of private lender, right? So the question I think that a lot of people would ask is, you know, who borrows from private lenders? You know if they need a mortgage, why don't they just go to the bank?

Will Granleese:

Well, the interesting thing is when I used to think about private lenders, I thought oh people weren't aren't approved at the banks So those must be Sort of less secure loans and it's not the case at all The people who actually borrow from private lenders are high net worth individuals looking for Solutions based So high net worth individuals, what does that mean? Well, in order to get a loan from someone like Antrim, you need to have at least a 25 percent deposit. So for any young person that's just graduated university and they're buying their new house, very, very few of those types of people have 25 percent down payment. We're typically dealing with people that have been successful in business, sort of between the ages of 45 and 65 years old, they're now wanting to buy something. They. Gone to the bank because they've seen their dream house is up for sale down the street and the bank says well Yes, it's a very lovely property But I I am looking at your notice of assessment or your or your most recent Pay stub and it doesn't look like you can afford to buy this and they say well, what are you talking about? I mean 200, 000 last year. Well, you might have, but you wrote off your car expense. You wrote off meals and entertainment and everything, and because they're self employed, they can't prove that they can actually make the mortgage payment. Now, this was not such a big deal 20 25 years ago, but after the financial crisis, When the government went in and looked at the banks and said listen We've got to make sure that that we don't have any more bank failures or mortgage failures in particular. They made income confirmation Sort of their top priority. So if you can't literally prove that today find your mortgage rate is five and a half percent Plus the 2 percent stress test. If you can't qualify for that, then you just can't get the loan. So people we lend to, great credit, they just have some income confirmation issues on, on their loan.

Bob Simpson:

Kind of makes me think that somebody has a conversation with their accountant and their accountant says, now you can do, there's two ways. One is we can make it that you pay very little tax, but you're going to have trouble getting a loan at the, at the best rates. Which way do you want to go? Right? So, so these aren't dead beats that you're lending to. These are people who are, who are well off, you know, they can do it. They can make these payments. It's just that they can't show to the bank that they pass all the tests.

Will Granleese:

I would argue that, uh, 75 percent of our borrowers don't only own one property. But own multiple properties and they might be buying another property. They might be buying a revenue property and the bank says, you know What we just can't see that you make enough money to be able to afford all of these properties. That's what we see

Bob Simpson:

Yeah, what happens if one of your tenants moves out? You know, now you're in trouble. And, and then if you're in trouble, we're in trouble. So, you know, you talked about 25 percent down, you know, one of the things that I know we've talked a lot over the, over the past few years, but you're very disciplined in your lending, aren't you? What does a typical mortgage in your portfolio look like?

Will Granleese:

So I think what differentiates Antrim from the rest of the mortgage investment corporations is that we only focus on residential properties. We don't even do construction mortgages, right? It's no commercial, no construction, no industrial. But how we also restrict ourselves is we only lend in major centers. So British Columbia, Alberta, and Ontario, we only lend in major centers, nothing outside of town. And that's just because what we've found in the past is that we might lend quite conservatively on a property that's way outside of town. But when a recession hits, You're dealing with a lot fewer buyers and you might have no one out there that's willing to actually buy the property. So Um, what we found is that our shareholders are looking for a good rate of return with excellent levels of security So they're they're willing to take a slightly lower rate of return but know that they're investing in what everybody wants which is Typically a detached house in a suburban location in a major center of Canada.

Bob Simpson:

Yeah. You know, it really comes down to if you have a house and you're in, you know, a small town, there may only be a couple of buyers and you know, you're not in the business of owning the homes and you do have in your portfolio, your, your portfolio is quite broad. 2000 plus mortgage range, right? Where are you now? Um, What's your latest number?

Will Granleese:

We have got about 2, 400 mortgages on individual properties.

Bob Simpson:

Yeah. That's kind of flattened out over the last couple of years. I remember you were growing that more quickly, but yeah, 2, 400 is probably a good number. Yeah. Um, yeah, so it's, uh, broadly diversified, but within those 2, 400, you do have some mortgages that don't work out and that you have to take action on.

Will Granleese:

We do. Absolutely. Yeah. So I think, um, the percentage of mortgages right now that we might have issues with would be maybe around one and a half percent. So for people, for whatever reason, you know, maybe they, um, spent too much at Christmas or their car broke down or whatever many reasons they didn't make, um, their last mortgage payment. But, uh, those people, uh, typically make up their payment within the next 30 days. There's very, very few people that we actually have to foreclose on, extremely few. So of those 2, 400 mortgages, I think we've got about, uh, about three files that we're currently foreclosing on right now. So that's very, and no lender wants to foreclose on it. Um, no, no one wants to go through that. So, um, yeah, we're very happy that, that the market is, is so strong that, uh, the belief in, in residential real estate is, uh, rock solid.

Bob Simpson:

Yeah. And even within your portfolio, I think you've told me before that from time to time, you will work with your borrowers, you know, if they go through a bit of a rough patch that. You know, you're not going to nail them up against the wall and say, you know These are the rules like a bank would you're...

Will Granleese:

Right.

Bob Simpson:

You know, you tend to be a bit more flexible Is that is that still the case?

Will Granleese:

Very very fair to say you see when If a person stops making their mortgage payment with antra and we take we take the file to court the judge will look at the file and say Okay, so this house is, let's say, worth a million dollars and Antrim your loan is 600,000. There's no chance that you're gonna lose any money on this. So the judge will typically give the borrower a ample amount of time to sort themselves out one way or another. So yes, we are, we're, we're, we work with our borrowers should they have any issues. Um, but of course, you know, we, we, we have rules in place as well that we have to, we have to proceed. Uh, with our security, but, uh, in general, dealing with a private lender, you should have more lenience, I would argue, than dealing with the bank, in which case you miss that first payment with the bank. The bank might have a loan, it might be secured by CMHC, the Canada Mortgage and Housing Corporation, in which case CMHC says if they miss the payment within 30 days, you've got to start that action. But they're dealing with people that have maybe only put down 5 percent down payment. Whereas we're dealing with people that have put down on average, let's see, 40%. Yep, there are very few homeowners who are going to walk away from. 40 percent equity in a property. That, that just makes sense. Now we're talking about the numbers just to talk technical for a sec. You know, there's a phrase loan to value. Can you just talk about loan to value and kind of your metrics around that? And I think you've already talked much about it, but, uh, yeah, just spend a second, talk about loan to value. So when we talk about loan to value, what we're referring to is the percentage of the house's value. Our loan represent, so for a 75 percent loan to value, the loan would represent 75 percent of the home's value and the borrower would come up with the additional 25%. So we're allowed to lend up to 75 percent of the value of any particular mortgage loan that we have. But we find our borrowers typically don't require that. And the average, uh, the weighted average loan to value on our portfolio at Antrim is only 58 percent as of, uh, as of today. So if you can believe it, it means that the average loan we have at Antrim has a borrower with a over 40%. down payment. This is why over the past 30 years of us managing mortgage investment corporations, we've never had a single year of negative rate of return. We've averaged over 8 percent during those 30 years and our share price has never changed.

Bob Simpson:

Yeah. And, you know, I would assume that if you have lots of collateral, That your return should be fairly stable. Yeah, so talk about secured lending as opposed to unsecured lending. We're reading reports that banks are having major write offs right now. Uh, can you address those couple of items?

Will Granleese:

Yeah, well, I mean, the concept of secured lending is very simple. We, we lend someone some money. And they provide us security of something in, in our particular case, they provide us the security of a mortgage on their real estate. That's a very, very different product than just writing someone a check and hoping fingers crossed because they paid everyone else back in the past that they'll pay you back generally with unsecured lending. So there is no security. The loan amounts are quite small. So you might be able to borrow, let's say up to 30, 35, 000 on an unsecured basis. But when you go beyond that, the banks that typically offer that are going to be looking for some kind of, uh, security. And typically it's going to be either a car or a house in our particular case.

Bob Simpson:

Yeah, so something that they can Send the tow truck in grab it carry it to another spot sell it to somebody else get their money back?

Will Granleese:

Now your second point which I didn't refer to was saying I hear the banks are increasing their write offs or their loan loss reserves Yes, they are However, if you actually dive into the numbers you notice that the banks are expecting to take much higher losses on visa cards mastercard on unsecured lines of credit On car loans, I think Bank of Montreal just said, we don't want any more part of this and they've actually left the car loan industry. Oh, is that right? Yeah, absolutely. So, what, um, but if you actually take a look at the mortgage amount, so the amount of delinquency or the amount of NSF payments on the odd mortgage. It's literally at a historic low, uh, among the major banks. And that even goes with the increase in interest rates, because the banks now with this, uh, mortgage charter that the federal government has introduced, the banks are, are able to work with their borrowers to extend the amortization period, i. e. to extend the amount of time it takes people to pay off the loan, so that they can, they can actually afford these rates in our new rate.

Bob Simpson:

Yeah. And we're also seeing, I went on a tour in the U. S. And, you know, with a company that does housing developments and what they're saying is that the builders are writing down the mortgages so that, you know, Hey, we'll give you a 5 percent mortgage on this for the next three years. That should get you, you know, that should get us through this period of high interest rates and then you should be back on onto something normal.

Will Granleese:

Well, I just, one point, one point I would add is that we're not in a high interest rate environment. I mean, initially to start this whole presentation, you talked about the 1980s with 19. 5%. That historically is a high interest rate environment, but a mortgage rate starting with a 5 percent is not high at all. It is very normal. Uh, when I started writing mortgages at TD Bank in the late nineties, I was doing five year mortgage rates at. 5%. That's what the rate was. So what we're just doing is we're coming out of an extremely artificially low interest rate environment into something that's more normal. And yes, it's stressful for some borrowers, but um, we need to get a more normalized, uh, the market place.

Bob Simpson:

Yeah, I always find it funny when people talk about us being in a high interest rate environment. Yeah. Yeah. Yeah. You know, compared to where we were. That's right. Where you could have bought a strip bond that yielded 22%. In your RSP for 30 years, which would have been a good investment, right? Wow. Yeah. That was crazy times back then. Now, whenever we talk about private lending, it, you know, one of the things that everybody talks about is liquidity. And I am speaking at a conference beginning of March, the same one that you and I attended. Uh, a couple of years ago when we, uh, when the Leafs were in the playoffs briefly, briefly in the playoffs. Um, but liquidity is usually a problem on the private side. Um, private lending often has periods of, you know, minimum holding periods. They have early redemption penalties. In your case, how are you different?

Will Granleese:

Well, we're different because we offer liquidity on a best efforts basis of T plus 2. Which means, uh, two days after you request your redemption, uh, you've got your funds. And, uh, how are we able to do that? Well, we, we have a line of credit that is syndicated by Toronto Dominion Bank and, uh, the Royal Bank of Canada. So we have a line of credit that we dip into with, with our redemption requests. More importantly than that, it's the product that we have in our pool, and what we have is 2, 400 individual residential loans. And do those people want to continue to pay Antrim, let's say, 9 percent when they can go to the bank and they can pay 5%? No, they don't, right? They want to pay us off. And so, what we find is with our loans, the, the average loan stays with Antrim for about Two and a quarter years that, that's about it. So we have about 35 to 40% of our portfolio paying us off on a daily basis. And so we use those funds, uh, for any redemption requests that come in. And, uh, yeah, the, the, the liquidity for us has never been an issue. There's never been a time where. Uh, we've had to tell people, sorry, we, we, we can't, uh, we can't redeem at this point in time. However, likely right now in Canada, there are a few mortgage investment corporations that, uh, have a different line of business. They might lend on commercial properties. They might do very large loans, hundred million dollar loans. And some of those loans on development properties, well, the development right now is not going, uh, according to plan. Or they might have lent on, uh, a, uh, an office space that, uh, well, it's taking longer for people to come back to the office. Yep. And, uh, on those particular properties, you can run into, uh, liquidity issues. In which case, if you ask for your funds back, the fund might say, Hey, you know what? We just can't do that right now because your funds are invested in this project. As soon as this project is complete. Then we'll go ahead and do that. But because Antrim doesn't look into, um, any, any of those types of loans, uh, we, we, we tend not to.

Bob Simpson:

Right. So your typical mortgage is a one year mortgage.

Will Granleese:

One year. Every mortgage we do is a one year term. Yeah.

Bob Simpson:

One year term. And so one 12th every month.

Will Granleese:

You know, what's interesting is that, um, the mortgage market is cyclical. So we tend to have a little bit more, uh, mortgages in the spring. And in the fall, but yes, like they're like every month that we've got, uh, you know, 30 or 40 million worth of, worth of mortgages paying us off that we have to find a new home.

Bob Simpson:

Yeah, you have to find a new home. Yeah. So you've talked about, you know, your share price has limited volatility. Have you had over the last 30 years, how many negative months?

Will Granleese:

Never. We've, we've, we've never not paid a dividend. We've never had a negative month. And, uh, when people buy Antrim, they look at it and we're not saying we're a guaranteed investment, but when you look at Antrim over the longterm, it's, it's sort of this. Very smooth graph going up and that's because we don't have what's called now volatility or net asset value volatility Which means our share price is constant. It stays the same every day. You just when we pay a dividend We just pay you more shares. It's not as if our value increases and and how do we do that? Well, we do that because Antrim is actually created out of the income tax act So, in 19, don't hold me to this, but I think 1972 or 71, the Income Tax Act was adjusted to create mortgage investment corporations. And mortgage investment corporations were designed to help influence, uh, or provide more capital to the home building, uh, residential home building construction industry. And we were set up as what's called a flow through investment. So, there was no retained earnings in Antrim. Uh, we, we make interest by, by lending to people. So, we, we earn all this interest and then we have to flow through all of that interest to our shareholders annually. So, because we don't have, um, any retained earnings, there's no There's no way for the value to go up and down. You might say, oh, well, Will, what about when interest rates go up and interest rates go down? Doesn't that affect the value of the underlying investment, which is mortgages? And yes, it does. However, we reset our interest rates on an annualized basis. So the duration or the average length of any mortgage in abtrom is, is really only seven months. So it's so interest rates can move around and it doesn't really change the value of the portfolio itself.

Bob Simpson:

Yeah, so it's easy enough to do so. Yeah, so we've talked about volatility. Let's talk about returns for investors purchasing Your fund today. What would the current return be? How does that compare to? Uh what the returns would have been over the last couple of years?

Will Granleese:

We've already talked about it in there during this podcast. It's The rate of return is increasing on a daily basis because interest rates are are increasing and we're taking the older mortgages that we had at antrum that Were set at older rates a year ago, and we're renewing them into the current rate environment. So, uh, our expectation for the next 12 months is to be paying out approximately 8 percent over the next year. And then, over the next year, we'll have everyone, um, renewed into this current interest rate environment. And so the following year, we're predicting a 9 percent rate of return. And I would argue that we'll probably sit there for a couple of years, and then we'll probably Fall, I don't know, maybe, maybe a half a percent. We'll see what actually happens in the mortgage interest rate market, but But that's what we're predicting over the next couple of years.

Bob Simpson:

Right, but your crystal ball is in the shop, right? So yeah, it's difficult. It's difficult to to predict. It is. Yeah, so, you know kind of in conclusion if we look at things that you know If we compare your returns to some of the other private lending That have less liquidity, they have more penalties on early redemption, that sort of thing. It rates a little bit lower, but it's in the ballpark. But it comes with much better liquidity and, and probably lower volatility, lower risk of having, having your fund locked up.

Will Granleese:

I mean, I'm sure many people watching this podcast will either have invested in mortgages privately themselves or will have known someone that's done it in the past.

Bob Simpson:

Yep, don't do that.

Will Granleese:

Sure they're saying, right? Yeah, do that eight or nine percent. Oh, I know Johnny is getting 14%. Well, you know, he probably is but guess what he's investing in. It's a construction project that's an hour out of Toronto and it carries with it a tremendous amount of risk and not only that there's no liquidity Because he's got to wait until this one project completes and then he gets all his funds back. So there is, to my knowledge, I am aware of say 10 or 20 of the largest mortgage investment corporations in Canada. There is no mortgage investment corporation that provides the T plus 2 liquidity that we have with the size of our fund, with the liquidity, um, Uh, that we present and our interest rate. Yes, you can earn more, but you're taking on, you're taking on a lot more risk than you are with, uh, with Atrum.

Bob Simpson:

Yeah. No, the returns, the returns can be better, but you, it's all related to the liquidity and the risk of that. Exactly. Yeah. So Will, do you have any, uh, any final thoughts before we close things up today?

Will Granleese:

I don't, I think you've done a good job of, uh, asking all these diligent questions.

Bob Simpson:

You know, we try our best. So, Will, thanks for joining us today. We always, you know, I always enjoy our conversations. You bring great insight and, uh, and thanks for being here.

Will Granleese:

Anytime, Bob, always appreciate, uh, answering any questions and teaching more people about, uh, about the mortgage market.

Bob Simpson:

Yeah. And that's, that's really what we're here to achieve is we're here to educate. Um, we're not here to push products, you know, if it's right for you and you understand the investment, then, then we, you know, we've helped you to move in the right direction. Now, this podcast will be available on private debt and equity. ca as educational content for mortgage corporations for the concept. mortgage investment corporations before making any investment decisions. It's crucial to consult a professional financial advisor to determine suitability. Full disclaimers are available on private debt and equity. ca. Now also don't forget to subscribe to our YouTube channel to stay updated on new episodes. So in closing, I'm Bob Simpson. It has been my pleasure to guide you through this. In the lightning conversation with Will, please remember knowledge empowers you to make informed investment decisions and progress towards your financial objectives. Until we meet again, stay focused and disciplined on your financial journey. Thanks for joining us today.