The mortgage rule changes of October 2016 and the liquidity crisis of Home Trust
have led to an incredible run for private mortgage lenders. At Mortgage Architects
alone, we’ve seen a doubling of growth in the number of private mortgage transactions this year. With the new mortgage rule changes introduced in October 2017, this segment will continue to see further expansion.
If you doubt this growth, look at the evidence of reputable and long-serving private lenders such as Fisgard
and Alta West, who are making inroads into new markets like Ontario. They have bet big by bringing on seasoned veterans such as Reaza Ali and Mike Forshee. These are but a few examples of the many veteran lenders that are seeking opportunities in the private lending world. There’s also been a surge of new mortgage funds, limited partnerships and mortgage investment corporations seeking to benefit from private lending.
This has been the one clear opportunity from all the rule changes, but we need to manage our responsibility and duty to customers and investors. I have noticed of late what I perceive to be a gouging of customers at a time of vulnerability, along with others who appear to be dabbling in a complicated business where they have little to no experience.
Investors should be mindful of new private mortgage opportunities. They should look closely at the pedigree of the management team, experience and track record of these new entities to ensure they are making good investment decisions. Many of these inexperienced new private lenders have never managed through a market downturn, managed the complexity of mortgage administration or had to navigate the challenging road of foreclosure.
Large, private first mortgages are also in high demand, but brokers and lenders should be cautious: As mortgage rules tighten and home valuations soften, there may be no immediate exit strategy for these deals. Lenders need to be prepared that these large first mortgage transactions may become longer-term investments as exit strategies disappear.
Brokers who are inexperienced with private mortgage transactions should be aware that 60% of all errors and omissions claims are centred on private mortgage transactions. If you are not brokering a deal through a large, reputable private lender or a private lender that can provide assurances that they can fund the transaction, then you are putting yourself, your brokerage and your client in harm’s way. There is a premium to be paid for certainty that the lender has the means to fund the mortgage transaction. If you aren’t familiar with private mortgages, then partner with someone who is and avoid the potential headaches of costly and time-consuming E&O claims.
Having been at the helm of a national brokerage, I’ve navigated many private mortgage claims and have even been asked to serve as an expert witness on other E&O claims. I’ve witnessed firsthand the damage caused to businesses when inexperience leads to giving bad advice to investors and customers.
Those who think this is an opportunity to gouge customers in a time of vulnerability should think twice. Your actions are misguided and short-sighted. If you want to build a career in this industry, then do the right thing and charge fair prices.
We’ve all seen the impact of regulations on our business. If we can’t manage and control ourselves, then be prepared for even more regulatory oversight. Someone once said to me that the mortgage brokerage industry today is what the financial planning industry looked like 20 years ago. Look what’s happened to the financial planning industry with respect to regulation and oversight. If we want to remain a strong, self-governing, principle-based industry, then we need to do the right thing.
As we make the turn into the new year and digest the latest rule changes, there will be increased demand for private mortgage transactions. We all need to do our part to continue to put the best interest of the client and investor first by making sure we’ve provided proper disclosure, ensured comprehension of material risks and assisted in making suitable product decisions. Only by doing the right thing will we all benefit from the opportunities.
Dong Lee is president of Mortgage Architects. He has more than 21 years of experience in residential mortgage financing and financial services, and has held senior positions at brokerages, banks and a mortgage insurer.