Brokers cautioned on private lenders

Brokers cautioned on private lenders

Brokers cautioned on private lenders

One broker is cautioning colleagues on private lenders, which are gaining popularity among borrowers shut out from banks by the new mortgage rules.

“In the last two months we have seen a sudden increase of clients interested in private and syndicate lenders,” said James Loewen, broker at Loewen Group in Burlington, Ont. “Sometimes there’s a sense of urgency or rush, but brokers need to be careful in picking a reputable private lender in order to protect their clients.”

He’s urging brokers to practice the necessary due diligence and look closely into the background of potential lenders before referring their clients.

Many are already applying that kind of scrutiny, especially as property values in some markets edge downward and seasoned investors become more selective.

“A colleague reported doing eight to nine private lending deals in the last week and said they we’re likely doubling down on such transactions in the next few weeks,” said Loewen. “But he’s also being careful because private lenders do not go under the same scrutiny and guidelines as banks.”

Clients also need to be reminded that such investors are lending their money to borrowers who have typically been rejected by banks and may overlook issues such as poor credit, bankruptcy and zoning issues. Still, the focus on property value comes at a price in terms of more restrictive terms and higher borrowing costs.

Every investor is different in the amount of money they are able to provide, the rates they charge as well as the options and combinations of benefits and terms they offer a borrower, said Loewen.

Interest rates that borrowers pay on private mortgages are also typically higher than what a bank would charge. The length of such mortgages, are typically one to three years.

“Just as they do in dealing with banks,” Loewen said. “The task of the broker is to find the private lender that offers the best terms for the client and make sure their interest is protected.”

 

22 Comments
  • Paolo Di Petta | dipettamortgage.com 2012-11-06 5:34:30 AM
    As someone who represents a good number of private lenders, I find this article to be quite sensational.

    Private lenders aren't out there to kill the borrower - they're there to offer a solution when no one else can. They rates and terms are relative to the risk - that's their business model.

    More importantly, though their rates are higher than institutions, they often take deals that no one else will. In the end, they just want their investment to work out - their goal is to ensure repayability by offering a fair deal for the circumstance.

    More importantly, many just want to help people get back on their feet, and often like to see exit strategies that involve institutions.
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  • Dale Koeller 2012-11-06 5:39:42 AM
    As mortgage brokers, it is always our job to work in the best interest of the clients, and brokering to private lending is no different - except with the variety and smaller company sizes in private lending doing your due diligence can be more difficult.
    Securities regulations on private lenders are in place in many provinces: ensure you deal with an entity that is compliant, which can be evidence of their commitment in the business and their professionalism. Talk to brokers who have used that private lender in the past, ask how their clients were treated in negotiation, signing and closing. How were they treated upon renewal? How were they treated if problems or delinquency occurred?
    A good private lender should be able to give you referrals of brokers they deal with, find one you know and trust to talk to.
    Don’t let due diligence stand in your way of dealing with a private lender: if you just send them away they may end up being more poorly served than if you took the time to find them a reputable company or private individual to deal with.
    Remember that private lenders serve a need in the market place, and if they can help your client get in better shape so you can refinance them into a lower rate mortgage in the future you’ve done both your client and your book of business a favour.
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  • John Ribalkin 2012-11-06 5:40:50 AM
    I have been an agent for individual private lenders longer than some of you have been alive... and the caution to all is that you had better understand the risk tolerance of the lender(especially an individual private(maybe a senior) investor)before you ever even give that investor confidential information of a consumer who is requiring funds. Also fully understand PIPEDA rules.If you don't and the proper disclaimors are not done..and even if they are done.. you may be opening a "can or worms" . Please also insure that your E and O insurance covers you to act for a Private Investor.
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