Full steam ahead

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With a shift in the stated income lending space, suddenly private lenders are looking forward to a very busy year, and brokers that utilize their services will now be able to help more potential clients

When news came from the Canada Mortgage and Housing Corporation in January that its $600-billion insurance liability cap was closer to being reached, you can be sure many lenders took note. Surely, it meant some tightening was bound to happen somewhere.

Then, word got out that the Office of the Superintendent of Financial Institutions was worried about “liberal” lending to the self-employed and recent immigrants based on stated income, comparing these types of loans to “non-prime loans in the U.S. retail lending market,” as MortgageBrokerNews.ca reported.

Lenders such as FirstLine, TD and Street Capital exiting from the stated income space followed, and when that happened, private lenders’ eyes, as well as their phone lines, lit up.

Rather than telling stated-income clients that they were out of luck, brokers were reaching out to the private lenders in their networks. And for those brokers who had yet to deal with a private lender, it seemed like the opportune time to start.

“From a private lender’s standpoint, I can’t help but be a little happy,” says James Pell, underwriting manager at Spectrum Canada Mortgages Services in Burnaby, B.C.

It’s a sentiment echoed from private lenders across the country that CMP spoke with, but while it may point to a banner year for business, tighter regulations on stated-income employees — traditionally a quality client who truly understands the value of maintaining a strong beacon score — it was a mixed blessing.

“From an entire perspective, I am a little concerned,” added Pell, explaining that in the last five to eight years, big banks suffered from a “disconnect between risk and pricing. They were putting everybody at rock bottom prices. What I’m afraid of now is a slight swing too far the other way, where they tighten up the money flow too much and it impacts the market as a whole.”

While he hopes a happy medium is reached, others are a little more frank.

“I don’t think they should be focused on mortgage change rules at all,” says Hali Strandlund, president of Fisgard Capital in Victoria. “We live in a country where there are entrepreneurial people and I don’t want to say they’re being penalized, but the focus shouldn’t be on them but on consumer credit.”

That said, she stresses that it’s also important to make clear that this only affects lenders that insure through CMHC. Lenders that self-insure or go through private insurers such as Genworth or Canada Guaranty won’t necessarily be leaving the BFS space.

Dale Koeller, vice president of business development at Calvert Home Mortgage in Calgary, thinks that while it may be good for private business in the short term, he has “more fears that it could hurt our business in the long term because of real estate values and the economy,” especially for BFS Canadians and people like pensioners who rely on their home equity. “If you’ve used your home as leverage to run your business, you might find yourself under water. It could have a tailspin effect,” he says.

That said, he’s not surprised because it is “the one lever the government has to fight the concern about Canadian debt.”

“CMHC is still working within its mandate,” agrees Adam Korbin, president of Instafund Financial Services in Vancouver. Besides, “banks are keeping a close eye on their books and many have seen a big increase in BFS and new immigrants. It’s good that the banks are keeping within the limits of their portfolios.”

Regardless of whether the growing concern over stated-income borrowers is justified or not, there’s one thing that is for certain: it will be a busy year for private lenders, and brokers that utilize their services will find themselves more able to help a larger portion of clients.

To be exact, 15.6 per cent of employed Canadians (2.63 million people) are identified as self-employed in the first quarter of 2011, the most recent period that Stats Canada has data for.

And if there is any misconception that BFS clients are riskier than first-time buyers, for instance, Strandlund is quick to shut it down. “We love the entrepreneurs,” she says, referring to them as Fisgard’s bread and butter. “They treat a loan like a business. Instead of getting an NFS, they’re the first ones to call and say, ‘Hey, can you hold that cheque?’”

Where the government and some lenders see stated-income clients as higher risk, private lenders see an opportunity.

“Generally, the tighter the banks and credit unions are on their credit, the more opportunity there is for the professional private lender,” says Brian Moskowitz, president of Moskowitz Capital Management in Toronto, adding that BFS clients probably account for 50 per cent of his business already. “We’re filling the gap,” he says.

And while it’s too soon to report facts and figures of actual growth, most private lenders can definitely feel things are starting to get busy already.

Fisgard, for example, had to bring in an extra mortgage administrator from another part of the office to help with the increase in inquiries. At Spectrum, Pall is “seeing deals today that I wouldn’t have seen three or four months ago,” he says. “Ones that are surprisingly clean, too, so I’m surprised they wouldn’t have been picked up by an alternate lender or bank. And it’s not the odd deal here and there that just happened to fall through the cracks. It’s a noticeable amount.”

PREPARING THE DEAL, AND THE CLIENT

With so many self-employed Canadians out there, even a broker who only focuses on first-time buyers is bound to see such a client come across their desk. In cases like that, it would be wise to bone up on what it takes to deal with a stated-income client, as well as working with a private lender.

“When income is no longer the main criteria for qualifying a client, brokers must educate themselves about the private market and learn where to get the best financing available for their clients,” says Instafund’s Korbin.

One way is to check the private lending tab on D+H Expert or to visit provincial regulators and broker association websites. Another way is to simply call a broker that already deals in the private space and ask for a reference to a dependable lender.

“Brokers have to look under some rocks to find out who the privates are in their area,” says Koeller.

But the best way, adds Moskowitz, is to get out of the office and put in some footwork. “If I was a mortgage broker,” he says, “I would go to the different lenders and meet them, show myself, show that I’m capable of assembling a professional package.”

From all the lenders CMP spoke to, the impression is that they always have time to pick up the phone or meet face-to-face to answer questions.

“Just ask, ‘can we meet you?’ ” says Moskowitz. “Absolutely. We’ll even go to their office and meet them. In the past, if someone shows initiative we’ve even provided joint-marketing money for them to advertise the funds. The good brokers are proactive.”

Strandlund adds that picking up the phone should be the first thing a broker does if their client is declined from another lender. “If they get a decline from an institutional lender they need to give us a call right away. We can quickly tell them the scenario,” she says.

As for actually dealing with a private lender, there are some notable differences, particularly where there is plenty of equity involved. In fact, brokers may even find the parameters more flexible, says Koeller. “But where there is less equity, it might be more difficult.”

Private lending, after all, is not insured, so “by that virtue there is more risk, and there is a definite risk threshold,” he says.

Most privates will have two criteria they need to meet: Is it secure, and can mortgage payments be made? And answering these two questions takes more than just the previous year’s notice of assessment.

So perhaps before a broker picks up the phone, there are a few things to consider.

“One of the most important things is to have an absolute complete and comprehensive understanding of their client,” says Moskowitz, stressing that accuracy of information is critical.

Another thing is prepping the clients’ expectations, as most privates lend for up to a period of two years, have a lower LTV and rates tend to be higher (sometimes as low as 6 per cent, but also as high as 12 per cent and above).

“Some people are not always prepared to pay the premium,” says Spectrum’s Pell. “They are going from four to five per cent to getting quoted six to seven per cent in lender fees. I wish I could quote lower but we’re a private lender and the brokers should have warmed them up to this ahead of time.”

He also says that brokers don’t realize many privates are using the older two-lawyer system, and knowing small subtleties like that can help brokers be prepared for what to expect.

Another big difference when dealing with privates is their ability to think outside the box, especially when it comes to getting borrowers the LTV they need.

At Fisgard, it can be a little more complicated when LTVs get over 75 per cent, but it’s something Strandlund says they can help with by finding a smaller second, which could still be less expensive than having a client do one big refinance.

And if a broker is having a hard time explaining to clients how paying a higher rate on a second mortgage can actually save money, private lenders are more than willing to help.

“We can provide tips on how to deal with clients, how to sell it,” says Pell. “Even though the rate may see high, when you look at long-term options it can be a benefit if the broker knows how to approach it. Compare this rate to credit card debt, for instance, and you’ll quickly see what the client will be saving.”

While working with a private lender takes more than just gathering and submitting, establishing relationships now will help business flowing, even when institutional lending gets tighter.

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