Over the past 12 months, mortgage broker Mark Mitchell has heard of a growing cohort of homeowners who want to join the booming private mortgage business, despite the inherently higher risks.
“I was surprised when it started happening, for a while it was two or three a week,” said Mr. Mitchell, a London, Ont.-based mortgage broker with Real Mortgage Associates. Inc., which almost evenly cuts mom’s requests. -and-pop potential lenders. He arranges private mortgages with a small group of wealthy households he’s worked with for years, but he’s not looking for inexperienced new capital.
“The new guys who have called me say they’re accessing their home equity through a home equity line of credit and they want to loan it out at 12%,” Mitchell said. What does he think happens when he refuses them? “I think they go through the listing on Google and look for a broker that will support them. It’s going to end well,” he says wryly.
The Financial Services Regulatory Authority of Ontario (FRSA) has also seen enough growth in private mortgage lending to step in and propose a stricter licensing regime for the first time for the 11,826 mortgage agents and 2,592 mortgage brokers ( in 2020) that it regulates in the province. The new rules, announced last week, would prevent any newly accredited brokers from arranging private mortgages from April 2023, and there will be a two-year phase-in period where, by 2024, all existing mortgage brokers or agents wishing to negotiate mortgages privately will need to undergo extensive training in the subject and pass a second level of FSRA certification.
According to the FSRA, $164 billion in mortgages were taken out in Ontario through agents or brokers in 2020, of which about 8.2% were private mortgages worth about $13.5 billions of dollars. Data collection on private mortgages is incomplete, but Huston Loke, executive vice president of market conduct at FSRA, says he has no reason to believe private mortgages have declined in proportion. loans in the province given the rapid rise in house prices in 2021.
“Private mortgages fill a very important need,” said Loke, who nonetheless says FSRA reviews of the estate from 2020 have yielded mixed results with poor record keeping and documentation. “I think borrowers deserve to know exactly what they’re paying for. … These products need to be treated differently,” he said.
There are several categories of private mortgages and not all are created equal. The main advantage for someone buying a residential home is that a private lender may not require a financial stress test, and much of this activity is conducted by credit unions and mortgage investment companies such such as Homequity Bank or Fisgard Capital. In 2021, CMHC described MICs as the fastest growing segment of the mortgage market.
But there is another part of the private mortgage business that is riskier for both borrower and lender. Brokers in this space say the category includes everything from bridging loans — designed to cover a gap between closing periods when you sell one home and buy another — and people needing a second or third mortgage to consolidate their debts following an adverse event.
“I call it fortune financing,” said Paul Tsigaris, broker at Mortgage Brokers Network Inc. in Oshawa and Whitby, Ontario. Mr. Tsigaris advertises his services on sites such as cheapmoney.ca and diverted.ca and says the domain is not for everyone. “Private mortgages are not designed to be long-term; they’re supposed to fix your credit — let’s say you lost your job and your wife is on maternity leave — until you can roll it into your home loan,” he said. Sometimes borrowers need money to settle tax or credit card debts that have gotten out of hand, and that’s where the trouble can start.
“Many brokers see private mortgages as a reason to mark up 200 basis points and pocket the extra income,” Mitchell said. He describes a market where the average MIC lends at 7%, and an individual private lender will want 10 or 12%, with charges of 2 or 3% which can add up to nearly 16% interest. And some deals are even worse than that.
“Bad second lenders, and there are certainly a few, will charge fees of around $26,000 on a $70,000 mortgage. the most desperate [borrowers] are, the more they pay,” Mr. Mitchell said.
With FSRA now poised to change the rules over the next couple of years due to these potential risks, some believe much of the damage may already have been done as the real estate market is finally showing signs of signs of cooling in 2022.
“We’re going to find that a lot of people didn’t understand their private lending, a lot of investors and clients are going to say ‘I was misled.’ … It’s classic low tide,” said Ron Butler of Butler Mortgage Inc. “The number of calls we get from people saying, ‘I can’t sell my house, I need a private deck. ‘ … These calls have increased by 400% in two weeks.
Mr Tsigaris is in favor of any rules that weed out “night runners” in the industry, in part because he thinks there is too much private lending when it is not strictly necessary.
“Often there is no reason to make private loans; for the most part PRI and B lenders will do the job,” he said. “There are people who go into space who do it as a part-time job. … It will start to weed out people who don’t have experience in managing private funds.
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