Broker worried rent-to-own gains may cost industry

Broker worried rent-to-own gains may cost industry

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 “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 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, suggesting higher security deposit requirements translate into higher down payments, which, ultimately, make his rehabilitated clients more attractive to A-lenders.

  • Joe 2011-07-30 3:27:32 AM
    I'm led to think that the broker who showed the fear may have dealt with some private lenders in the past who may have had second intentions with their clients and now he may be putting everyone in the same category... it would have been wiser for mr butler to educate himself on the details of these transactions, and then speak up...
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  • Amuzed Broker 2011-07-30 5:12:36 AM
    LTO or RTO has been around for years. The past companies that Mr. Butler is referring are likely doing Sandwich Leases or Leases where contracts are not air tight. I agree with Mr.Butler...LTO has been around for years and given his background it is surprising he is taking the stance he is...maybe Mr. Butler lets his client's lose their home when they have a life changing event...all I know is I have had 2 people out of 4 graduate from Home Owner Soon's program...Maybe Mr. Butler is just lookig for some free advertising...promoting yourself while publicly challenging someone else's buiness says enough about the source...We are a 180 Million dollar brokerage and use Home Owner Soon as an alternate Sub Prime lender. My recommendation is get the facts from the source. You might be pleasantly surprised.
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  • Home Owner Soon 2011-07-30 7:45:45 AM
    I am so glad this article has garnished a lot of attention, and rightly so. Since the Home Owner Soon program was introduced into this market about five years ago, we have saved many families from eviction and the lost of dignity of losing their home during a power of sale situation.

    We studied the competitive landscape for rent to own providers throughout Canada. Most were small groups of investors looking to fill an existing property, small developers stuck with inventory and even property managers looking for an angle to attract new tenants. Most of these files aren't underwritten with today's underwriting lending policies. Income was ignored and deposit's were light, or whatever they had in their pockets at the time and these deals generally don't go anywhere since there is an absence of a sizable down payment that a bank lender will require in the future. Another major obstacle was the bruised credit, they were generally low, untouched and these files would normally get declined.

    With the reduction of sub-prime lenders in Canada, families with bruised credit, only option is to sell their home or possible use a predator-like private lender and pay really high rates with lender fee's. At Home Owner Soon, we saw there was a void in the market between existing sub prime and private lenders.

    We wanted to make a difference for families looking at losing their homes instead of facing 10% lender fee's and 18% interest rates. Our lease rates are generally half of that and in many cases we have reduced their monthly living cost.

    We try to build a file with 15% equity at the end so the mortgage agent can at least have options to bring their client into a bank lender and not to another private with high fees. To further enhance our program, we suggest they pick one of the five credit rebuilding teams that will help fix the problem that brought them to Home Owner Soon in the first place. We try to control the results, hence why we have a excellent switch transfer rate.

    The mandate for Home Owner Soon (HOS) is to help families in need and give back to the community instead of imposing a glass ceiling for home buyers. Our industry measure success by the amount of dollar's we fund, we measure it by the amount of homes we can save. I think this makes the mortgage agents that refer us files...hero's to their client.
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