A 400-per-cent increase in business for a rent-to-own lender is raising concerns among brokers, worried the industry is opening itself to future litigation by placing clients in those deals.
“I think every mortgage broker in this country needs to think very carefully about referring a client to essentially ‘quit claim’ their home and start paying the new homeowner, or landlord, rent with a plan to get the house back,” mortgage broker Ron Butler, with Verico Homeguard Funding, told MortgageBrokerNews.ca. “The fact the broker receives a referral fee pulls the mortgage broker in to something that may result in litigation in the future. Let's face it, when we arrange a mortgage, it is a transaction with a 100 years of history, case law and disclosure behind it. This kind program needs another two years before anyone actually knows the results. Tread carefully.”
The comments follow news that year-to-date, Home Owner Soon Inc. realized a “400-per-cent growth in the value of its funded deals,” compared to the year-ago period, company president Guy Lew told MortgageBrokerNews.ca this week.
The two biggest drivers of that growth spur, he said, “have and continue to be that we are gaining name recognition and a following with brokers, but also that the economy continues to present a challenge to many Canadian families. The truth is so many of us are only a paycheque away from losing our homes.”
Lew and his team of six BDMs, scattered from coast to coast, are actively promoting their rent-to-own model as an alternative to eviction, relying on brokers to hawk their wares – a requirement set down in legislative changes both in Ontario and other regulated provinces.
The strategy is paying off, said Lew, pointing to growing broker buy-in for his refi buy-back – accounting for 80 per cent of his business. Under the terms of that agreement, brokers access 100 basis points in finder’s fees for referring clients, who, in turn, agree to sell their homes for “fair market value” to one of Lew’s private investors.
Those types of programs aren’t new to the industry, said Butler, who gained his insights from past work with a similar company no longer in business offering a similar plan. “It seems to me that while a very small minority of the clients came out the other end happy, the vast majority – 80 per cent to 90 per cent – were financially damaged and angry with the company. I learned this early with that company and ended my relationship with them years ago.”
That doesn’t necessarily match Lew’s albeit limited experience, given the company's relatively short time in the marketplace.
“Our default rate of about 10 per cent speaks to the success of our program,” he told MortgageBrokerNews.ca, suggesting higher security deposit requirements translate into higher down payments, which, ultimately, make his rehabilitated clients more attractive to A-lenders.