52 Private Capital Markets | Spring 2014 | www.pcmacanada.com
brokerage was able to accept the investor and made a subjective
determination as to the suitability of the investment.
The reality is that our 55-year old investor’s objective is
security of capital and a stable stream of interest income. The MIC
was the ideal investment vehicle. The 14% second mortgage is far
too aggressive and could put the investor’s capital in jeopardy –
but that was the end result for this investor.
It is evident that FSCO and the OSC do not have an open
dialogue on how to effectively regulate the mortgage investment
industry. Consequently there is a dangerous void in consumer
protection. Investors who do not clear the significant hurdle to
invest in a pooled MIE and who still want to participate in a private
mortgage investment are only left with one option: a syndicated
mortgage. This is a rather unfortunate outcome as a pooled MIE
has certain fundamental advantages over syndicated mortgages:
a. The opportunity to participate in a diversified pool of
mortgages that are managed by a professional team;
b. Insulation from the impact of default of any one particular
c. Consistent stream of income - unlike a syndicated mortgage, capital
is not returned to the investor each time a mortgage is discharged.
Mortgage syndication existed for many years before
the popularity of private mortgage funds. There are
some highly professional and experienced mortgage
syndicators who are able to structure investments that
are entirely suitable for those with a low risk tolerance.
There are also some prominent syndicated mortgage
promoters who structure complex investments that are
secured by subordinated charges on large development
projects. These products, some of which offer deferred
fees to investors are entirely inappropriate for anyone
other than accredited investors, yet they are not subject
to oversight by the OSC.
Who has it right? FSCO or the OSC? I would
submit that they both have it wrong.
The OSC has overlaid the regulatory environment
of exempt market products on pooled MIEs. While
As for FSCO, I do not believe they have paid attention to the
plethora of recently created syndicated mortgage products that are
magnitudes greater in complexity and risk than those that existed
just 5 years ago. There is no doubt that regulation of all syndicated
mortgage products by the OSC would be an undesirable outcome.
The mortgage industry was successful in staving off such an attempt
after National Instrument 45-106 was released for public comment in
December 2004. However, the time has come for FSCO, the OSC
and industry stakeholders to have a frank discussion about how they
can cooperate to achieve a level playing field with respect to the
regulation of the diverse array of mortgage investment products.
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