MIE portfolios can include residential mortages, commercial mortgages and land mortgages.
Mortgage investment entities, or “MIEs,” are mortgage-financing businesses that pool money from investors to lend to people who may not be able to obtain a mortgage from traditional lenders like banks or credit unions.
MIEs provide loans to borrowers using money that’s been pooled from investors. These loans form the portfolio of an MIE and can include residential mortgages (such as single family houses, townhouses and condominiums), commercial mortgages (such as office buildings, warehouses and retail properties) and land mortgages.
MIEs pool money from investors to lend to people who may not be able to obtain a mortgage from banks or credit unions.
MIEs earn income from the mortgage interest, financing fees, mortgage renewals, cancellation penalties and other fees that they charge to borrowers.
As an investor, you purchase a security issued by the MIE, typically in the form of shares, limited partnership units, or trust units. These securities get their value from the value of the underlying pool of mortgages that are often secured by the real estate properties. You are eligible to receive income from the revenue earned by the MIE through its portfolio of mortgages.
Most MIEs are private and do not have their securities listed on an exchange, making them difficult to trade and value.
Some common risks of investing in MIEs
Lack of liquidity
Since many MIEs are private and not publicly-traded, they may be difficult to value and cannot easily be resold. You may have to hold onto your investment for longer than you might have planned.
Some MIEs claim to offer high annual yields and promote investments that are ‘secured by real property.’ Secured does not mean guaranteed, and while a mortgage may be backed directly by the real estate, your investment is not secured and you have no rights to the property that secures the mortgage. If a borrower is unable to make payments on a mortgage, this can affect the ability of the MIE to maintain payments to investors and will impact the value of your investment. There are also many factors that can impact the success of and returns from an MIE; past performance is not a prediction of future returns on your investment.
High risk loans
MIEs typically provide mortgages that are higher risk than mortgages made by banks or credit unions. If too many borrowers fail to make their mortgage payments, the value of your investment can decrease and the MIE may not be able to provide you with any income.
MIEs typically provide mortgages that are higher risk than mortgages made by banks or credit unions.
Decline in investment value
Borrowers may default on their mortgages or repay them sooner than expected, either of which can affect the value of your investment or the amount of income that gets paid out to you.
Low priority of rights
MIE mortgages can be a borrower’s second or third mortgage, which are typically riskier. If a borrower fails to make mortgage payments and the property is liquidated, the lender that provided the first mortgage will be first in line to receive its money back. An MIE that provided a second mortgage will only receive its money back if and when the first mortgage is fully paid off.