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Investor Information - including documents for download

Investing in Private Mortgages and MICs

Mortgages are simply a debt instrument secured by a registered charge on real estate. Typically a mortgage provides for payment (usually monthly and by post-dated cheques) of an agreed on payment amount – part of which is payment of interest and part is payment of principal. Usually an amortization schedule is produced which provides a detailed statement of each payment allocated.  A mortgage is registered in the Land Titles Office closest to where the property is located and cannot be removed other than with the consent of the mortgagee or by court order. You are the sole owner of the mortgage unless you invest through a vehicle called a Mortgage Investment Corporation (MIC) which pools funds from different investors and lenders (much like a mutual fund) and then invests the pooled money in different real estate mortgages. In this case, the mortgage will be registered in the name of the MIC (in our case Alta Pacific) and not yourself.  The mortgage and all administration is managed by Alta Pacific and its Manager.

How Alta Pacific protects your investment

Mortgages are generally safe investments in a stable or rising real estate market. If you are very cautious in nature the best way to hedge against unpleasant surprises is to restrict your investment in mortgages to those with low Loan to Value (LTV) ratios. This means the total mortgage charges divided by the appraised value. Usually under 75% LTV is considered safe. Of course each situation is different depending on the location, type of property and strength of the borrower. To assess the LTV ratio you will need a professional appraisal. Alta Pacific follows strict guidelines in its investment criteria in order mitigate risks to our investors.  Full details of Alta Pacific's investment criteria are found in the Offering Memorandum.

As well as the LTV ratio, Alta Pacific, as the lender, must consider the present and past financial circumstances of the borrower. In short, there are 3 basic areas to look at when considering investing in a mortgage.
1 - Collateral
2 - Cash Flow
3 - Character

Mortgage Servicing

Alta Pacific services all of mortgages until expiry or payout. This includes collections, verifying and keeping proper insurance on mortgaged properties, renewals, serving tenants with rental assignments, and administration for foreclosure and resale proceedings if necessary.

A mortgage also provides for a term (can be any length of time but typically is from 3 months to 12 months) following which the mortgage must be paid off either through sale or refinancing or by extending the current mortgage on such terms and conditions as can be agreed on by the parties.

Mortgage Liquidity

Mortgages are not considered liquid investments when compared to GIC’s, public stocks or bonds. However they can be sold for cash sometimes quite readily using the services of a mortgage broker.

Mortgage Defaults and Remedy

If the mortgage has matured and we cannot reach an agreement to extend or there has been a breach of any other term of the mortgage agreement, the lender may initiate foreclosure proceedings to have the property sold or the title transferred to the lender.

The mortgage document itself spells out in great detail what happens in case of default. However, many options outlined in the mortgage document require court sanction before implementation. In the case of minor defaults such as a bounced cheque, failure to renew on time, or produce post-dated cheques, there are “liquidated damages” clauses which provide for sums of money to be added to the mortgage amount. While the lender has the legal right to foreclose usually such defaults are handled through informal means through the assessment of penalties (in court parlance called liquidated damages). These can be collected immediately on default or on the maturity date.

On major defaults such as extended non-payments, cancellation of insurance, or failure to pay on maturity the lender may initiate foreclosure proceedings. The legal costs of such foreclosure proceedings are added to the mortgage amount.

The first step is for our lawyer to send out a collection letter followed by a foreclosure Petition which results in an “Order Nisi”. This usually takes from 1 to 2 months. Once we receive an Order Nisi we have a judgment against the borrower for the total amount of principal, interest and costs. However, the borrower will be granted a “redemption period” (usually 6 months) in which he can redeem the property by paying off the mortgage. If there is little or no equity in the property the redemption period can be shortened to as little as one day.

If we are the owner of a second or subsequent mortgage we have the right to make the first mortgage payments to keep them current and add the advanced amounts of the first mortgage and charge interest at our rate currently applied on the second mortgage. If we receive a copy of a Petition for Foreclosure on behalf of another mortgage holder, we have the right to start our own foreclosure action.

At the end of 6 months if the property has not sold, the lender has the right to apply for “Order Absolute” which means the lender can take over title to the property subject only to the rights of the higher ranking charges against the property which would include such things as taxes, condo fees and prior mortgages (if any).

Summary Of The Security Of A Mortgage Investment

As in any Investment, an important issue for investors is how do you preserve capital and enjoy good returns without a lot of risk. Mortgages in stable real estate markets provide this opportunity by relying on equity (that portion of a property that is paid for) as security.

The following is an example of the costs faced in a worst case scenario foreclosure, on a $200,000 residence in Calgary with a $50,000 2nd Mortgage Investment at 18% and 1st Mortgage of $100,000 at 7 ½% (Equity available as security $50,000). We’ve allowed 12 months to foreclose and sell the property to pay off the mortgages.

Appraised Value of Property $ 200,000
1st Mortgage Balance ($ 100,000)
1st Mortgage Arrears (12 payment of $731.55) ($ 8,778)
2nd Mortgage Balance ($ 50,000)
2nd Mortgage Arrears (12 payments of $733.19) ($ 8,798)
Legal Costs (Foreclosure and Sale) Approx.($ 5,000)
Realtor Costs (Commissions) ($ 10,700)
Property Taxes ($ 2,300)
Balance (Equity Remaining after costs) $ 14,242

The Equity remaining allows for some market adjustment for resale and serves as a source of contingency funds if additional costs, such as utilities may come in to play. It is rare that a foreclosure runs the full distance as most borrowers want to protect their equity and either refinance or sell the property to ensure that they are the recipients of the remaining equity.

If you have any questions regarding our mortgage placements and/or investments, please contact us.

Document list - download links available throughout the Alta Pacific website