‘Shadow’ lending article frustrates brokers

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Brokers believe all this “shadow” mortgage lending talk amounts to little more than fearmongering.
“The good that private (lenders) do is vastly underrated and misunderstood; they are not helping Canadians get into homes that they cannot afford,” Dustan Woodhouse, a B.C.-based broker with Dominion Lending Centres told MortgageBrokerNews.ca. “Privates help clients; stay in a home for an extra year or two, buy a knock down house and renovate then refi, buy raw land, complete challenging builds, buy ‘unique’ properties, allow many clients to make significant profits themselves.
“I could go on.”
Talk of “shadow” lenders – a scary name for private lenders – has ramped up in the wake of a CBC article that drew attention to an increase in the number of private deals.
"The risk arises if the unintended consequence of regulation is to push out the risk profile of the less regulated sector, and to encourage it to grow quickly at the same time," Finn Poschmann, vice-president of policy analysis at the CD Howe Institute was quoted saying in the article. "In dollar terms, it is not a huge part of the economy (but) my concern is that we pay attention, because small problems sometimes get unexpectedly large, and quickly so."
The underlying thesis of the CBC article seems to be that house prices – which have risen 36 per cent over the past six years – are forcing clients to turn to the private sector for financing.
CIBC Senior Economist Benjamin Tal told the CBC that “shadow” lending market makes up 4-5 per cent of the market.
"This is something that is growing very fast, because many borrowers are not having access to banks because the banks are highly regulated," he said.
  • LanceH on 2015-07-13 9:37:01 AM

    The Lefty Socialists are looking to regulate private lending, and this rhetoric is "laying the groundwork". I for one, write those responsible for such articles whenever I see them and shout them down, and I suggest everybody else do the same. Brushing it off, in my view, is a huge mistake!!

  • Sue on 2015-07-13 10:05:51 AM

    Media Fear mongering may very well be a good word for this "shadow" BS. Not just poor credit clients, but...Really solid clients NEED private lending, because guess what, the government has made it impossible in many situations for professions like a doctor or even a lawyer (or politician), to put less than 20 or 25%, in some cases 35% down, because they are self employed, and may need to state their income, use declared dividends, or are in an elected position etc...
    Not all of them will fit the stated, or high ratio self employed programs that are left, and honestly why should they pay a jacked up insurance premium on their ENTIRE mortgage when they can split into a first and second and pay a fee on the smaller second mortgage portion with a PRIVATE (Shadow) Lender ???

    SHADOW is a ridiculous term that the media must have conjured up, especially given that the disclosures required for lending private funds are extensive, at least in BC, and the client is FULLY aware of the cost and has the knowledge that this portion of their mortgage should be their first target for paying off asap. The Lender is also fully aware of all aspects of the borrower and their situation...

    What I also find interesting from recent experiences with politician and high end executive clients (not unlike the ones looking to change Private lending) who didn't qualify with the desired lenders, that most politicians and high end execs, in temp or elected positions, that are having to borrow more than 65% maybe 75% funds to purchase their homes are often having to resort to "Shadow Lending Funds" WHY? Not that they are not solid clients with massive salaries, but because, lenders often do not like to lend to politicians, and elected position execs, and with the b20, b21 and all the other cutbacks and tightening changes to high ratio and specialty product lending, guess what, they don't fit the mould.
    So they may have to resort to borrowing from that local private lender or MIC to bump themselves up to the 75 - 80 - or even 85% loan to value that they need.
    Just my thoughts, not designed to engage in BS arguing, just a broker who does the majority of Alt A and Private A and Private Credit repair lending, thinking how ridiculous the "Shadow" term really is.

  • Ron Butler on 2015-07-13 1:05:06 PM

    Shadow Banking is a term that has grown in use in the last several years, it does not mean shadow as in "dark" it means shadow in that these lenders exist in the shadow cast by huge financial institutions. It has come to mean any lending source that is subject to less regulation than huge institutions. So there is no fear mongering it is just terminology.

    Any concerns governments and "think tanks" have about "Shadow Banking" are NOT focused on the borrower, the concerns are focused on the investors. Non-institutional investing has grown on a vast scale in the last 7 years and it is perfectly reasonable to ask questions about whether those investors in MICS and other syndicated lending vehicles are totally aware of their risk exposure and the nature of their investments. There have been a number of MICS that have done a superb job of protecting investors interests over the last several decades, these are long standing companies that mortgage brokers know well, however there have been MICS that have come into existence in the last 2 to 5 years or even last Tuesday that no one absolutely knows are reputable, careful or intelligent in there operations. That fact is worth worrying about.

    I know it is popular to say "those investors signed off on disclosure, all free enterprise is good, no one is to blame but themselves if the investors lose money blah, blah...... borrowers need a funding sources, yada yada" but honestly if your grandfather lost all his savings on a MIC that went south if and when property values drop you would all say: "granddad was deceived, there should have been more regulation"

    There is nothing wrong with talking about better oversight of shadow lending as long as it is sensible and recognises that some private lenders have done a superb job for a long time.

  • LanceH on 2015-07-13 1:21:59 PM

    ". . . as long as it's sensible . . . " Really Ron? You're that naive? At your age? And even if it did start out reasonable, once in, it's much easier to increase said oversight when the inevitable complaints (justified or not) come along. OK, friendly bet, say $10 and bragging rights?? What time frame shall we give it? 2yrs?

  • Ron Butler on 2015-07-13 1:30:41 PM

    @LanceH, you are likely right, there could easily be over-reach on regulation once investigation process starts rolling but I return to my point: how can we expect that the huge growth in this area will be completely ignored by regulators? I can only hope the regulators will be "sensible" perhaps not but it is simply unavoidable. Don't duck the key point: your grandfather loses a ton of money; no one is a happy camper when that happens. No one wants that to happen, that is why this must be watched and talked about.

  • Gary W. on 2015-07-13 6:15:55 PM

    I've been a "shadow lender" for decades, scurrying around the barnyard picking through the debris and droppings of the institutions for the golden kernels they've overlooked. Like the $150K per annum young lawyer short on his downpayment. The over 70s. The self-employed. New immigrants.

    According to the Dominion Bond Rating Service evaluation of second lien mortgages, 100% of our assets are subject to a loss severity of over 100%.

    The nerve of my investors being subject to such risks! (And earning 17% along the way.) Unconscionable! Anti-democratic!

    Time for the Regulators, selflessly acting in "the public interest" don't you know, to run this foul exploitation of mankind into the ground! Out of the shadows and into the sun! Indeed.

  • Ron Butler on 2015-07-13 6:25:03 PM

    @ GaryW there are really no changes in store for individuals with their own money or a small stable of investors they have been working with for years. The focus is on those who are actively soliciting for new money to lend out, those who are pouring new investor money into a recently formed MICs and chasing risk to create yield. That is out there right now, I assure you.

  • Gary W. on 2015-07-13 6:28:40 PM

    "First they came for the Socialists and I did not speak out...."

  • Ron Butler on 2015-07-13 6:34:19 PM

    Lord GaryW, that is quite a leap taking me straight from being a guy thinking that more attention should paid to policing upstart MICS right to being a Nazi.

  • Gary W. on 2015-07-13 6:43:16 PM

    It's a metaphor.

    And what special rules for an "upstart" MIC vs. an "established" MIC do you suggest?

    Perhaps the Schedule A banks could come up with some apt guidelines, in the public interest of course.

  • Bob on 2015-07-13 8:13:33 PM

    It's about pure and simple taxation, in my estimation. The rest is all window dressing and positioning.

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