MORCADO MORTGAGE INVESTMENT
Risk Disclosure
Here are the risks involved in direct mortgage investment with Morcado Trust to consider how it may impact your investment goals and to help you make informed decisions.
Risk level can be mitigated based on the mortgages you select.
Our high-yield mortgages are curated using stringent requirements. We assign Grades A, B and C to our mortgages based on several factors, but even Grade C should be considered medium risk.
You can select to build your lower-risk (Grade A) or medium-risk (Grade B or C) profile — or a balance of grade levels. Lower risk may come with lower return rates.
We don't do high-risk.
Morcado doesn't offer high-risk mortgages, which are loans that come with a significant chance of default.
Not for short-term investment needs.
Our mortgages serve medium to long-term investment horizons and are not suited to those seeking short-term opportunities or needing quick access to their funds.
Investors need to be comfortable with the potential investment period dictated by and tied to the mortgage lifecycle.
The Renewal Risk of Mortgages
For each mortgage invested, your amount is locked in (you won't be able to access it) until released from the mortgage lifecycle:
- Locked in for the current term, unless it's paid out early. In this case, your funds will become available to either reinvest or withdraw.
- Locked in for as long as renewals continue, at the same return rate or higher, never for a lower rate. If the rate is lower at renewal, the mortgage is bought out and your funds will be released.
Many homeowners use a high-yield mortgage as a 'short-term' financing option, typically for 3-month to 3-year terms. Most of these mortgages are eventually paid out by the borrower in favour of lower-rate, longer-term options.
However, there is the potential risk that renewals could continue for several terms if the homeowner is comfortable paying a higher rate for longer (for example, if they have complex income sources and can't qualify for a 'traditional' mortgage).
We encourage potential investors to consider their liquidity needs and investment horizons carefully.
The Default Risk of Uninsured Mortgages
High-yield mortgages are uninsured and, therefore, come without government backing, secured only by the property's resale value.
Despite stringent conditions in offering these mortgages for investments, uninsured mortgages carry a higher risk when there is default (i.e. missed payments), in that the property needs to be sold (in foreclosure) in order for creditors to receive a payout and, therefore, relies on the sale value to recoup investment amounts.
The default risk to investors includes:
- Missed instalments. If the borrower misses payments, investors won't receive their monthly returns until collected. In the event of foreclosure, returns may be recouped if enough funds are generated by the liquidation of the property.
- Loss or partial loss of invested amount. If the borrower goes into foreclosure, there's a risk of not receiving the full investment amount back from the proceeds of the liquidated property.
In the event of mortgage default, we take several actions to collect missed returns and help avoid foreclosure, working with the homeowner to bring their payments back into good standing.
Read about Morcado Trust's mortgage track record here.
More About Risk
If you still have questions after reading through these details, please contact your Investor Advisor who will be happy to help.
What are the additional risks associated with high-yield mortgage lending?
We believe in full transparency. Despite our uncompromising efforts, investing in high-yield mortgages on the Morcado platform can involve additional risks.
Borrower's Ability to Repay the Mortgage. If the borrower encounters financial difficulties and cannot make timely payments on the mortgage, it may impact your investment's performance. You won't receive your monthly return until the mortgage payment(s) are collected. Please see more about how mortgage default is handled in our FAQ section.
Inadequate Due Diligence or Underwriting. Potential investment loss can occur if the mortgage lender fails to conduct proper due diligence or adequately underwrite the mortgage. Inadequate risk assessment can lead to a higher rate of default. Morcado Trust works hard to vet any issuers (lenders) allowed on our platform.
Complex Financing Terms. High-yield mortgages often involve complex financing terms and conditions, which may be challenging for investors to fully understand. We strive to simply and clearly outline the details, but this complexity can lead to unforeseen risks.
Insufficient Insurance Coverage. If the property is not adequately insured and experiences damage or loss, investors may face potential losses on their investment. Morcado Trust maintains comprehensive blanket fire insurance coverage as a safeguard — in the unlikely event that one of the mortgaged properties is either uninsured or inadequately insured against fire or similar hazards.
Errors or Fraud in Property Appraisals. Property appraisals are essential for determining property values and loan-to-value ratios. Errors or fraudulent appraisals can impact the accuracy of these assessments.
Fraudulent Discharge of the Mortgage. There is a risk of mortgage fraud, where the mortgage may be discharged fraudulently by another party, potentially leading to financial losses for investors. We ensure that each mortgage is registered in the name of Mercado Trust Company and that the borrower attains title insurance to protect the investor in the rare event this fraudulence occurs.
Property Depreciation and Loss on Sale. If the property's value decreases significantly, investors may incur losses if the mortgage is sold for an amount less than the outstanding balance.
Expenses Related to Mortgage Recovery. In cases of borrower default or foreclosure, expenses may be incurred that are associated with the recovery process, such as legal fees and property management costs. These costs are not borne by the investor, they are covered by the original issuer (lender) of the mortgage. However, the cost of fees may reduce the amount left over to pay out to investors and creditors.
Lack of Liquidity. As mentioned above, mortgage investments typically lack liquidity, meaning that investors cannot easily access their funds until the mortgage reaches maturity or is paid off.
Limited Control Over Collection Activities. Investors have limited control over collecting overdue funds, as these are managed by Morcado Trust.
Other Unforeseen Risks. There may be unforeseen risks associated with high-yield mortgage investments that are not explicitly listed, making it important for investors to conduct thorough due diligence and be aware of potential unknown risks.
What 'risk' measures do we have in place?
Morcado Trust takes risk assessment and mitigation very seriously. We continuously strive to uphold the highest standards of safety and reliability for our investors, with several measures in place to ensure due diligence.
Loan-to-Value (LTV) Limitation. We strictly limit the LTV ratio of the mortgages we accept on our platform to a maximum of 80%. This conservative threshold helps ensure a substantial equity cushion, reducing the risk of loss in the event of a default.
Independent Property Appraisal. Before funding a mortgage, we ensure that a full, independent property appraisal is performed — to accurately determine its value, which forms the basis of our LTV calculations.
Borrower Exit Strategy. We thoroughly review the borrower's exit strategy for paying down or paying out the mortgage. This step is crucial to ensure that the borrower has a feasible plan to fulfill their mortgage obligations.
Comprehensive Borrower Vetting. Our issuers' due diligence process involves an in-depth vetting of the borrower and their documentation. They meticulously evaluate the borrower's creditworthiness, income stability, and other relevant factors to ensure they meet stringent lending criteria.
Robust Legal Documentation. Our issuers use best-in-class legal documentation to protect our mortgage rights, for a legal framework that is essential in safeguarding our investors' interests.
Proven Track Record of Parent Company. True North Mortgage, our parent company, has been a CMHC-approved lender for over 7 years. They possess a proven track record, having funded over 17,000 prime mortgages in this period. Our team's experience and expertise are integral to our risk mitigation strategies.
Can the economic environment affect your investment risk?
Higher Rates and Recessionary Risk
We're currently in a period of higher rates intended to tame inflation and slow down the economy. The multiple rate hikes from the Bank of Canada during 2022 and 2023 also bring a higher potential for a recession to occur.
Both higher rates and a more retracted economic downturn (e.g. job losses) can increase financial pressure on borrowers, which can lead to a higher incidence of mortgage loan defaults.
At Morcado Trust, we continuously monitor market conditions to navigate these challenges. Our stringent mortgage vetting process helps to consider future conditions for borrower repayment.
Mortgage Portfolio Advantage
High-yield loans offered by Morcado Trust are considered shorter-term (though renewal may increase the time invested), allowing you quicker access to manage your risks and returns for success, compared to investments locked in for longer terms.
Our mortgage platform aims to offer a favourable balance of risk vs. reward, keeping your investment as stable and profitable as possible.
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