Mortgage Trusts Explained
A mortgage trust is a diversified pool of mortgages that can hold conventional mortgages – both first and subsequent-security. The Tri City Group Monthly Income Mortgage Trust focuses on residential mortgages in urban liquid markets where values tend to be more stable and reliable. The objective of mortgage trusts is typically to provide relatively high yields while preserving underlying capital of the investors.
When Tri City was first formed in the early 60s, Ruth and Henry Goodman used to invest in individual mortgages. At the same time they played duplicate bridge and met a lot of people through their hobby. People used to ask what they did for a living and when they explained how much interest they earned, their friends began to ask if they could get them a mortgage or participate with them in funding a loan. These people quickly came to understand the security of mortgage investing by way of low loan-to-value mortgages. During this period they would put all of the investors names on the mortgage.
Depending on the mortgages selected for funding, mortgage trusts can be a lower-risk investment than equity funds, and can offer superior, more predictable return. Mortgage trusts can provide diversification to traditional equity and fixed income portfolios, and are a means to participate in real estate markets without directly investing in property. Michael Goodman and his parents have had a mania to look after his own money and as such wanted to be in control of which exact mortgages they invested in.
Over time, an informal arrangement of investing with the bridge partners got more and more complicated and the senior Goodman’s essentially set up an unofficial trust where they co-invested with a notary at the center who was co-managing parts of the activity of which Henry and Ruth were at the center of. When Henry passed away, Ruth became the center of the activity, with Michael helping out in selecting the mortgages to be funded. As this middle class group of friends got older and wealthier they all began to travel for extended periods and that got more complicated as once you fund a mortgage, you need to discharge it, if the lenders names are on title. They solved this problem by getting a notary involved, which they all came to trust. The notary would hold the discharge documents, which were signed in advance; the notary would receive the incoming payouts, and then hold the funds until the next mortgage could be found to invest in.
Ruth and Michael operated the informal lending circle of friends from 1972 until Ruth’s death in 2013. The beauty of the business was that the friends and Ruth never lost any interest or principal for all that time. Ruth had a nickname, Ms. Blunt, and in her typical fashion, she passed on her trade secrets of success to Michael. It revolved around this sage piece of advice: “Michael don’t be a pig, leave the riskier mortgages and high interest rate and fees to the other guys, just do bread and butter houses on streets with low loan-to-equity values. Let the mortgage brokers keep the fees, just get them to bring us the good mortgages”
And as mortgages got bigger and competition increased, they wanted to insure their money was never sitting idle in the notaries trust account.
So the origins of Tri City Trusts date back to the mid-1960s. As mortgage lending became more regulated, and more people started to come on-board, a true regulated trust made sense.
Essentially the Goodman family has found the secret of the mortgage business – having a very large flow of mortgage opportunities so you can pick the low loan to value mortgages. Another secret of how to succeed in the mortgage business is not letting your funds sit idle because when they are, you are not earning a return.
As Ruth got older, Michael knew that he wanted to carry on investing his money into the same type of mortgages his mother and her friends had been funding since he was young. Essentially as the mortgages got larger, and to satisfy Michael’s passion for picking the loans he was investing in, it became obvious that he would need a sophisticated office and team of people that looked for the loans, sent the money out to the lawyers and collect the money in event the borrow did not pay on time.
Over the years mortgage lending has become much more complicated from a regulatory stance, and this is true of operating a trust or MIC (Mortgage Investment Corporation) as well. It has become harder to lend as a private person as one off investments and you actually need a team to lend and invest in order to meet all governmental requirements. These days if you are even an individual lender you are supposed to be licenced.
A trust also resolves the problem of who holds the mortgage i.e. whose name is on title at the land title office. The trust can invest the money on behalf of the investors and it can conduct all business necessary to look after the process of getting the money out to the lawyers and back from the borrowers. In effect it simplifies the process of sourcing the mortgages and managing the loans, furthermore small losses will mean less to a large pool of capital then it will to a single investor. It relieves the pressure to get the funds out, which a private lender is under if they want to keep their capital working. From many different perspectives the trusts allow small investors to reap the rewards that they would not have access to as an individual.
Ruth and Henry came from very poor families and they knew what it was like to work hard. So when Michael set up the trusts he wanted to follow in his parent’s footsteps who always felt that the little guy without much money should get a chance to make some money. In the vein, he set the threshold of investment at 10,000 dollars so that anyone with a small amount of savings could get a return equivalent to what the richer are able to access.