Monday Market Minute | Jul 25, 2022

Mortgage investment corporations face their first real stress test as rates double and housing corrects

What Moved

With the BoC rate at 2.50% and climbing, Canada's mortgage investment corporation sector faced its most challenging environment in over a decade. MICs — which pool investor capital to originate private mortgages — were caught in a vice: variable-rate borrowers faced payment shock, declining property values reduced collateral coverage, and investor redemption requests began ticking higher as GIC rates approached MIC yields. The quality spectrum within the MIC sector widened dramatically between conservatively managed funds and those with aggressive loan books.

Why It Matters

For HNW investors who had allocated to MICs for yield, the stress test exposed a critical distinction: well-underwritten MICs with low loan-to-value ratios, geographic diversification, and proper reserves were navigating the environment capably. Those with concentrated books, high LTVs, and pre-construction exposure faced mounting challenges. The Bridging Finance precedent loomed large — investors were far more attuned to governance and transparency signals than they had been two years earlier.

Signal to Watch

MIC quarterly reporting on arrears rates and loan-to-value ratios — any meaningful deterioration would signal that the rate-hike impact was reaching the real economy.

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