Whether you’re a fellow mortgage broker aiming to elevate your expertise, a potential investor questioning if that deal really is “too good to be true,” or a homeowner trying to navigate your options, there are valuable insights here.
The goal is to guide us all in approaching private mortgage lenders with the same care and precision you’d rely on when making important decisions for you or your family’s future.
Caution when receiving URGENT private mortgage solicitations
Recently I’ve noticed a trend that’s raised my eyebrows higher than interest rates in the 1980s. I have seen some private mortgage solicitations that, well, let’s just say, could use a bit of polishing.
Picture this: comfortably well-off individuals are being enticed to invest substantial portions of their hard-earned savings into private mortgages that have crossed a broker’s desk.
There’s nothing inherently wrong with sourcing potential lenders. However, what raises concern is the quality of information being presented, often accompanied by those magic words: RUSH and URGENT.
It seems like these two words are being used as a free pass to cut corners faster than a race car driver on the last lap. But let’s pump the brakes for a moment and consider the big picture.
Ontario’s new mortgage licensing rules: Raising the bar for private lending
There’s some good news for our industry. Ontario’s financial services regulator, FSRA, now requires that only Mortgage Agents Level II and above can broker private mortgages after April 2024. Personally, I think this is a fantastic move that should be adopted coast to coast.
A Mortgage Agent Level 2 licence authorizes licensees to deal and trade in mortgages with mortgage lenders that are one of the following:
- Financial institutions, as defined in section 1 of the MBLAA
- Lenders approved by CMHC under the NHA
- All other mortgage lenders, such as mortgage investment companies, syndicates, private individuals, agents, brokers, and brokerages
What does this mean? Well, Mortgage Agent Level 2 licence holders can now deal and trade in mortgages with a wide range of lenders, from financial institutions to private individuals.
But here’s the kicker: no matter how many years you’ve been in the game, there are no exemptions from taking the course. This is an excellent regulatory move in an effort to protect the public and better educate all mortgage brokers interested in private mortgages. You’re learning how to protect both borrowers and lenders.
This regulatory change couldn’t be more timely. With a noticeable surge in private mortgage applications in recent years—likely driven by rising interest rates that challenge borrowers to meet stress-tested lender qualifying criteria—it’s now more essential than ever to have knowledgeable professionals managing these complex transactions.
How do you choose the right private lender?
As mortgage professionals, part of our job is to find the best-fitting, lowest-cost mortgage solution for our clients. It’s like being a matchmaker, but instead of finding love, we find the perfect lender-borrower match. And if we don’t think the mortgage is in anyone’s best interests, we will say so.
We always start by knocking on the doors of banks and A-lenders. If those doors seem to be locked tight, we turn our attention to alternative and private lenders. But who exactly are these private lenders?
Who are private mortgage lenders?
Private mortgages can come from mortgage investment companies (MICs), individual investors, or syndicates of multiple investors.
These are often financially savvy folks looking to earn better returns than they’d get from GICs or other low-risk investments. They might go solo, partner up, or join a syndicate.
Lender solicitations: Handle with care
When it comes to sourcing private investors, we need to tread carefully. Remember, we’re not dealing with faceless multi-billion dollar institutions here, but real people with families and responsibilities. Our goal should be to help our investors sleep soundly at night, knowing their investments have been carefully vetted and chosen for their quality and relative safety.
I learned this lesson the hard way back in 2008 during the early days of the Global Economic Crisis.
I was witness to a $50,000 private second mortgage that went sideways immediately after it was funded. The borrower didn’t make a single payment, and by the time the dust settled, the bank in first position had recouped its mortgage, but the investor in second position was left with nothing but a valuable (and expensive) lesson.
A tale of two solicitations: How to spot a bad private mortgage deal
One of my long-term investors is often bombarded by other mortgage brokers with potential private mortgages. This is not necessarily a bad thing, and in fact, he typically sends me any offers he is interested in for my review and assessment.
Each time, I provide candid advice, letting him know whether I believe the deal is solid or not. If there are any pitfalls or red flags, I always bring them to his attention.
Here are two recent examples highlighting why we need to improve our performance in private mortgage solicitations.
Story 1: The rushed and incomplete offer
It’s late Thursday night, and an email marked “URGENT” lands in an investor’s inbox. The sender is looking for a $535,000 first mortgage by Monday. Sounds exciting, right? Well, hold onto your hats because this is where things get interesting:
- The sender’s email lacked a proper signature. There was no last name, brokerage information, or confirmation of their licensing level. It’s like trying to solve a mystery with half the clues missing.
- The property in question was a pre-construction home nearing completion. The LTV was presented as 75%, but this was based on the appreciated value. Is the LTV relative to the original purchase price? A whopping 94%. Talk about selective information!
- The application seemed to have taken some creative liberties with the borrowers’ assets and liabilities. Properties were overvalued, some were omitted entirely, and the borrowers’ net worth was inflated. They only owned 1% of two of the non-subject properties.
- The supporting documentation was sparse, to say the least. When strong mortgage brokers handle files like this, they include dozens of well-organized supporting documents, making them easy to review. This package had only a few, and there was no comfort that these had been reviewed or well understood by the sender.
- The application did not include documents supporting the income. Non-subject properties were all represented as having significant rental income, but no proof was provided.
- The application and credit bureau report came from a different mortgage agent at another brokerage!
- The exit strategy was to refinance to a traditional bank or B-lender.
That may be the borrowers’ intent, but there was insufficient information to determine if that will be doable or not.
My advice to my investor
Given these red flags, I advised my client against proceeding. Without a clear exit strategy, the deal was unsuitable for him, especially as he is solely interested in short-term financing opportunities of six months or less.
Story 2: This was not a smart purchase!
Just when I thought I’d seen it all, another solicitation landed in the same investor’s inbox. This one was short, sweet, and… well, let’s just say it was bold.
The ask? A $400,000 private second mortgage on a $1,100,000 property purchase. Oh, and did I mention the seller already had a $580,000 vendor take-back mortgage?
That’s right, they were looking for an 89% LTV second mortgage in order to complete their purchase. At this point, even my most adventurous investor was ready to hit the “delete” button faster than you can say “high-risk investment.”
Takeaway: Why due diligence is crucial in private mortgage deals
As mortgage professionals, we have a duty of care to everyone we do business with. This means not cutting corners, not rushing through important details, and certainly not presenting incomplete or misleading information at the risk of your own license.
Remember, in the world of private mortgages, haste doesn’t just make waste—it can lead to significant financial losses and damaged reputations.
So, before passing along a too-good-to-be-true offer, slow down and approach each deal with the care and attention we would expect for ourselves and our families. After all, diligent and ethical business practices help everyone sleep better at night.
As always, if you have any questions, feel free to reach out to us at askross.ca.
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Last modified: March 9, 2025