Shadow lenders gaining ground but is it a bad thing?

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While the low interest rates will be good news for many homebuyers for those that are not able to obtain a mortgage through traditional lenders the ‘shadow’ banking sector is an increasingly popular choice. Last year the Bank of Canada warned that unregulated lenders are a risk due to the lack of regulation and the high rates of interest they charge, sometimes as high as 20 per cent. However not everyone agrees that the non-bank lenders pose a problem; Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals told Bloomberg that they play an important role in the market and that some of the lenders are very good at what they do. Meanwhile CIBC economist Benjamin Tal says that with home loan from the shadow lenders growing by 25 per cent a year there may need to be more involvement from the regulators to mitigate the risk. Read the full story.
  • Daryl French on 2015-01-22 11:40:38 AM

    Careful what you wish for, more regulation in this area usually leads to higher costs and less flexibility. It's our job as mortgage brokers to help our clients make fully informed decisions in regards to their mortgage options. Most people go to the alternate market because it's easier and faster, so if we add more regulations we may loose some of these advantages flexibility. If there are bad lenders we need to stay away from them and focus our business on the good ones, of which there are a lot these days.

  • Toronto Broker on 2015-01-22 1:31:50 PM

    If you are a mortgage broker or agent placing your client with one of these lenders the responsibility is yours to investigate the lender on behalf of your client and find out what they will charge for service fees, as an example. Or dig around with other broker to see what their experience with the lender was. Most of the mortgage companies have standard charge terms which specifically list the fees they will charge and if they don't and are not forthcoming then select a lender that does.
    However if your client complains about the lender YOU selected, don't blame the lender - blame yourself.

  • Trevor Slyte on 2015-01-22 2:17:39 PM

    Mortgage Broker News is putting its credibility at risk by implicitly suggesting that Jim Murphy's opinion could possibly be a counter-weight to Benjamin Tal's opinion.
    I don't always agree with Mr. Tal but I do respect that his opinions come from a position of considerable knowledge. It is impossible to say close to the same thing about Mr. Murphy. There is nothing one can point to to indicate that Mr. Murphy has even the first clue when it comes to knowledge about the business of mortgages, mortgage brokering or related matters.
    Being the CEO of CAAMP does not somehow equip him with knowledge. A position title is nothing more that, a position title. It does not equate to having knowledge.
    If MBN is going to use people in the business as sources, they need to be more selective.

  • Ron Butler on 2015-01-22 6:53:23 PM

    I think the key concern with the growth of MICS and Syndicated mortgages is the possible negative outcome for the investors. At least the borrowers got their money, we could debate whether or not they should have taken the money in the first place but they got what they asked for. My fear with the growth of alternate lending is the everyone is opening a MIC, I trust MICS that have been around for 10 or 20 years but the ones that started 10 months ago give me pause. What will happen to the investors if real estate market takes a big turn in 2016. If everyone is jumping into creating MICS; how strong is the background of the folks running the MICS? I have heard about 4 MICS starting in Ontario in just the last year with managers that have only been mortgage brokers for a couple of years. They solicit funds from folks in their own communities and I have no clue what level of understanding those investors have of what they are actually putting their money into. Yeah, I get they all gave KYC info and signed Disclosures but what exactly were they told, what is the actual quality and value of the real estate asset? Bottom line is that no one wants to be leveraged at the end of a cycle and with a MIC a Month opening I think I am inclined to Ben Tal's view.

  • Ontario Broker on 2015-01-23 9:45:29 AM

    The "B" market is needed plain and simple. They have been around for decades. Where else are people to get their mortgage when the BANKS turn them down. Why blame the Private lenders, they serve a critical niche. "Ridiculous fees" only occur when a borrower does not follow their contractual obligations. If fully disclosed by the lending company, then there should be no complaints and if not fully disclosed then it's the brokers fault for not gathering the right information and informing their clients. Furthermore the ILA lawyer would have read through the schedules and advised the borrowers accordingly. Nobody comments on the Trust Companies fee schedules or their closed mortgages, paying huge penalties when paid out during term. Or for that matter their NSF or enforcement fees for "every little thing". How about Bank collateral mortgages or step mortgages making it impossible to free up the homeowners equity when in a cash crunch and have no intention of advancing a single dime thereafter to the borrower while holding their home hostage when the borrowers fixed income will never allow them the ability to access built up equity and we talk about $250.00 fees from the private sector? The variety of Mics allow to help borrowers obtain the right mortgage when they are not qualified. So why not look at the positive side of the Private Sector instead of the negative (direct result of the borrower not paying their mortgage payments). It is hopeful that the Broker educates and guides their borrower to repair their Credit and or Income so they can place the mortgage with an A type Bank down the road. Does anyone see the Private Lenders losses? Like the credit card companies, I assume, the fees offset losses. You don't see the MICS or Private Lenders criticising outrageous broker fees when the MICS are taking on all the risk. Get educated with your comments before bashing MICS...they are an integral part of the mortgage business that continue to help borrowers in many ways...fees or not.

  • M2 on 2015-01-23 10:34:54 AM

    Personally I think John D’s comments are a bit out of line…Check what the A lenders charge for a bounced payment.
    Private lenders and MICs have much higher fees because their risks are much greater. Their niche are those folks who cannot get financing elsewhere, generally don’t have great repayment records etc.
    Those types of lenders have to mitigate their investment risks and their administration costs are higher on that type of book.
    That said, I agree there’s an argument for some additional regulation for Private lenders as there are some bad actors in that group. Some guidelines on rates and fees are likely prudent so long as they aren’t prohibitive and make the business unprofitable for the better MIC's and privates.
    I also agree with Ron on the investor side however. If there’s going to be regulations applied to the sector then I believe the first step is with slightly increased scrutiny on how these portfolios are being presented and sold to investors.
    Back to John D’s concern about “fees”...I might argue the way the big banks are calculating discharge penalties is far worse than any NSF fee at a private.
    There was a time not too many years ago the rule was the greater of IRD or 3 months interest which was fine when the “posted rate” was within a ¼ point of the market rate.
    Now we have a fiction between posted rates and market rates. No bank client (whether branch or broker originated) ever pays anything near the posted rates yet when the discharge is calculated, the client is tagged with a differential against that fictional posted rate which results in tens of thousands of dollars to each customer. That's a huge windfall for the big FI's.
    Bottom line?...If more regulation on lenders is required, I would humbly suggest some of the practices of the major banks should also come under some scrutiny.

  • Oikos on 2015-01-23 6:14:23 PM

    Jon D., for your totalitarian opinions, I'd only want to add that nobody is going to tell me how to deal with my own money. Here it is. Take it or leave it but if you do take it than you will comply with rules and if you break them here is the list of consequences for all wrong doing. There is no less of or more basic rule than the agreement and NSF fees are here to deter nonperformance. Period, all discussed and agreed beforehand and registered along with the charge at the registry office to avoid misconceptions. Whining is just another expression of failure.

  • John D. on 2015-01-22 8:09:25 AM

    I agree, these lenders are very neccessary these days. BUT...some are predatory lenders and the government does have to regulate them. They charge ridiculous fees for every little thing. I don't think any 1 person should be allowed to lend on a mortgage just for the hell of it. Too many brokers use these individual people/private lenders. All 'shadow' private lenders should have to be regulated. Ask them to hold a check for 1 day, $250 fee. No company should be allowed to charge what some of these lenders charge but again we need their basic services. With lenders tightening up, companies not paying fair wages; many people cannot get by and keep their credit clean.

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