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Mortgage Broker News | 31 Mar 2014, 11:08 AM Agree 0
Syndicated mortgages are becoming an increasingly popular alternative revenue stream and one broker has made this type of investment his number one source of revenue.
  • Ron Butler | 31 Mar 2014, 11:30 AM Agree 0
    I think it would be a great idea for CAAMP and IMBA and other provincial associations insurance carriers to take a close look at their E & O programs and assign a special premium to those brokers deriving most of their income from referrals of client's monies to these types of ventures. Let's face facts: investment recommendation as the major source of broker income is not what our E & O insurance was designed to cover.
  • Glenn May-Anderson | 31 Mar 2014, 12:54 PM Agree 0
    Ron - What you are speaking of already exists. When our brokerage renews our E&O annually, we do so disclosing the total numbers of investors we have acquired in different mortgages, and our premiums are adjusted accordingly.

    I would argue that, at FDS, our brokerage E&O premiums are probably in the "highest in the industry" category. Any broker who derives the bulk of their income from arranging private second mortgages on behalf of residential borrowers and their investor pools would fall into the same category, and have their E&O premiums adjusted (upwards) accordingly. So, there is no need for a "special premium" - we already pay one.

    To clarify as well - Nayan and Centum Future (mentioned in the article above) have a co-brokerage arrangement with FDS, meaning they take on this risk and liability under their own E&O policy and must disclose it annually to their provider and on their AIR just like any other private investor mortgage they arrange. We have trained them intensively on how to properly present the Fortress product to investors, including all disclosure, suitability, and risk elements associated with an investment in a mortgage, but it is their brokerage where the transactions are being processed on behalf of the lender/investor.

    However, the bulk of our business is, as you say, "by referral," in that we process the transaction through our brokerage and deal with the client directly, due to the complicated nature of the transaction. This is a mortgage investment, and our licensed Agents and Brokers (within FDS) are specially trained on mortgage investment suitability guidelines, know-your-client guidelines, and the details of each unique development mortgage investment they offer to clients. Mandatory independent legal advice is also required for each transaction, to ensure clients are fully aware of what they are investing in.

    In working with the E&O insurers, I can tell you that the policies they issue are designed to cover the entire mortgage industry, including what we do at FDS. This product is a mortgage product, offered by mortgage brokers in Ontario and Atlantic Canada, and our premiums appropriately reflect the risk associated with the activities we conduct. To this point, we have yet to make a claim on the policy, which I believe is a testament to our company's commitment to transparency, suitability, disclosure, and establishing the proper business model and policies and procedures for how we conduct ourselves.

    In the end, it is our goal to ensure investors get access to a better rate of return with more security of principal than they can achieve with their traditional investments. I strongly believe that, in order to ensure long-term survival of our industry, Mortgage Agents and Brokers are going to need to adjust their images and offerings, in order to be seen as part of an individual consumer's overall trusted financial services team, not just the transactionally-focused individual a consumer contacts when they need a mortgage loan. Products such as Fortress allow them to do just that.
  • Ron Butler | 31 Mar 2014, 01:23 PM Agree 0
    Glenn and I are friends but we talk about this all the time. I don't worry very much about the insurance premium at FDS because I believe the insurer understands the nature of their business. But the truth is if a mortgage brokerage re-orients their practise to just chase the referral of investment clients (which on it's own sort of amazes me) that it may take up to 14 months before the insurer ever catches on and adjusts the premium properly.

    Bottom line is we have a ton of mortgage brokers going about their business of arranging "A" mortgages for "A" clients and we pay a certain premium for what is essentially a very low risk business. We have a much smaller group of mortgage brokers who specialize in private mortgages and they are known to the insurer and they pay more. Off to one side we have a tiny percentage of mortgage brokers making a living referring their client's money towards a certain type of investment for which they are paid referral fees which far exceed any such referral fee a bank pays us to broker an "A" mortgage. These fees also far exceed what "B" lenders pay as a finders fee. This small group of brokers likely only started doing this referral business within the last year or two years or perhaps very recently.

    Something tells me if (and it's just an IF) these investment recommendations ever hit the proverbial fan there will be lawsuits on an epic scale. I would hate to be the mortgage broker going in front of a magistrate and trying to explain why they re-oriented their practise to earn 200, 300 or 400 bps of referral fees to push my clients toward a particular kind of investment. It will not be a good result and it will be the E & O that pays out. The claims will so large that everyone's premium will go up.

    That is my concern.
  • Robert Gascon | 31 Mar 2014, 01:37 PM Agree 0
    I agree will you Ron.
  • Catherine | 31 Mar 2014, 02:10 PM Agree 0
    I am a securities educated broker who was a stock trader for over 7 years before becoming a mortgage broker/agent. Having friends still in the securities business I know how tough it has become for them when it comes to clients blaming everyone in their air space when their portfolios under perform.
    I have looked at this model ("referring" or selling syndicate mortgage instruments) and have taken a pass. I feel that it is crossing too many lines; are you an IA or a Mortgage Professional? The insurabilty component is not transparent enough for me.
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