If your clients are looking for fixed income investments with returns of 5%-12% or even more, mortgage pools are worth a look. Risk, of course, is part of the deal: the borrowers tend to have credit issues, their loans are not insured by Canada Mortgage and Housing Corp. and these deals are not to the taste of banks that make lower-interest loans.

Mortgage pools and specialty lenders have moved into this market, offering investors participation in diversified bundles of mortgages. But, unlike the mortgage impresarios in the U.S. who had securitized mortgages on inflated property values, the Canadian sector writes mortgages on conservative fractions of appraised value and keeps the mortgages on its own books, limiting terms to a few years.

Mortgage investment corporations have existed since 1973, when federal legislation was created to encourage private home-mortgage lending. Today, there are hundreds of MICs, many with as little as $1 million in capital and just a handful of mortgages under administration. Pooled mortgage investments qualify for RRSPs, RESPs, TFSAs and other registered plans.

Pooled mortgage lending is not well known in Canada, says Wayne Robinson, who manages $80 million in mortgage portfolios for Frontenac Mortgage Investment Corp. and affiliates from Sharbot Lake, Ont.: “Bay Street has passed us by and left us in a cocoon. Most of the Canadian mortgage pools are private and do not price their assets daily. The private mortgage’s industry assets are less than $2 billion, which is a wisp compared with what the chartered banks and insurance companies have on their ledgers.”

Financial advisors treat mortgage pools with cautious respect. Says Caroline Nalbantoglu, a registered financial planner with PWL Advisors Inc. in Montreal: “This is on the risky side of fixed-income. If I recommended an MIC to a client, it would be for just a small part of the fixed-income portfolio.”

Placing money into this niche market needs to be done with care. Clients must be selective, for players in the mortgage business can raise money through pools and then leverage it with commercial loans, adding substantially to their risk, Robinson warns: “That’s how some mortgage pools can pay out double-digit interest to their investors.”

Thus, risk and liquidity are factors you need to evaluate.

There are no secondary MIC markets for those who invest in most private mortgage pools. The only way out is through redemption of units by the pools under varying arrangements. Says Kurt Wipp, a director of Ryan Mortgage Income Fund in Vancouver: “When a deal is done, the pools like to hold both borrowers and investors to their commitments.”

Ryan asks for 90 days’ notice for requests for money, Wipp says, then usually pays out capital within a week.

The majority of mortgage pools are not publicly traded and limit liquidity to quarterly redemptions, by contractual agreement at the term of an investment or at the discretion of the board of directors.

A few mortgage companies, such as Toronto-based MCAN Mortgage Corp. , are traded on the Toronto Stock Exchange and offer common shares that investors can trade at will. Returns on mortgages are passed through to inves-tors, says Tammy Oldenburg, the MCAN’s chief financial officer.

In the hierarchy of mortgage pools, there are large, established firms. One of the granddaddies of the business, Toronto-based Romspen Investment Corp. , does only commercial and industrial mortgages. Predating MIC legislation, Romspen has almost five decades of performance. With $680 million in assets under administration, the firm does first mortgages only — no seconds or thirds, no debt-consolidation loans, no residential deals — and has paid its investors a total of 155% of their investment in the 10 years ended Dec. 31, 2010.

Broken down by years in the decade, Romspen’s returns have varied from 10% in 2001 to 8.7% in 2010. There is no upside for price appreciation. The investor can never get more than a return of capital invested.

But that potential fault is really a virtue, argues Ron Lloyd, Romspen’s managing partner: “In 2008, we were up 9.9% while the TSX lost more than 30%.”

In fact, in a survey of returns from 1993 to 2009, the statistical correlations among mortgage pool returns, the S&P/TSX composite index and bonds are almost non-existent. And that, in Lloyd’s view, makes mortgage pools a unique asset class. IE