By the time desperate borrowers — and they are always desperate — find Allan Sadler, they have already been turned down by banks and credit unions.
Mortgage brokers like North Vancouver-based Sadler deal in the private lending market, sometimes called the shadow lending market, and specialize in arranging loans for borrowers with very poor credit history and little proof of income.
Usually the lenders make loans to home buyers or other residential or commercial borrowers for a short period of time, such as 12 to 18 months, and at higher rates, which range from five to 15 per cent, depending on the level of risk (weighing such factors as whether it is a first, second or third mortgage and how much of the house has already been paid off).
Recently, Sadler’s clients, a 53-year-old woman and her 55-year-old husband, were facing the foreclosure of the Tsawwassen home they share with their 16-year-old son. They had bought, renovated and sold a few homes through their own small renovation company. They had also borrowed and lost “almost $2 million” when a 19-unit town home project they were developing in Langley “didn’t sell for as much as we thought it would,” said the woman, who agreed to speak to Postmedia News, but didn’t want her name published.
And so, even though she had taken on an additional job at a consulting company, they started having trouble keeping up with mortgage payments on their own house.
They tried putting it on the market, but with real estate sales slowing in Tsawwassen, it “isn’t moving,” she said.
They went to banks, credit unions and two private lenders, who all declined their bid for a loan.
Then, the woman got a flyer in the mailbox advertising Sadler’s services. “It said, ‘if you are in bad conditions, call me.’”
Sadler put the couple’s situation to his usual network of 20 or so regular contacts who are looking to lend money. Normally, he said, since the couple already had paid off 35 per cent of their house, and had some other equity, this deal “should (have been) a piece of cake.”
But the landscape for borrowing money to buy homes or refinance has been shifting. In October, Ottawa rolled out higher qualifying rates for mortgages with a down payment of less than 20 per cent and limited the kinds of mortgages that will be covered by government-backed insurance. Both were seen as federal action to clamp down on runaway real estate markets in Vancouver and Toronto. Then, in more recent weeks, some banks started boosting their mortgage rates in response to these new rules and because of rising bond yields since Donald Trump was elected president of the U.S.
All of this means it’s likely that more borrowers are turning to non-bank or private lenders.
In 2015, a CIBC report estimated that mortgage loans by non-banks had doubled since 2012. The Bank of Canada, meanwhile, says private lending accounts for about a tenth of total mortgage loans issued by non-banks.
Sadler, who has been brokering such deals for 39 years, said that more loan applications have been hitting his desk recently. In a hot, rising real estate market, his business holds steady because banks are more willing to lend and a homeowner caught in a bind can easily just sell his or her property to access cash. But now, in a softening market, even private lenders with less of an appetite for risk are saying no more often because they know homeowners cannot as easily sell their property in order to rework their finances.
Brokers and lenders bristle to hear their activity described as shadow lending, as if it were being conducted in some kind of dark alley. They point out that these brokers and lenders are registered by the provincial government’s Financial Institutions Commission (Ficom), which recently released new guidelines that tighten its oversight.
Many see their lending as short-term bridge financing that might help a borrower, say, keep up with payments if they are between jobs or a small-business owner building or rebuilding accounts. The loan can be used for renovations in order to sell, then buy a cheaper home and get back on track to eventually qualify for a bank mortgage. They see themselves as working around a lack of good income or good credit by basing a deal on a borrower’s home equity. In return, they earn a much higher rate of return than they could by investing in stocks, bonds or other investments.
The brokers and lenders may indeed be registered and not be shadowy in any way. But it is also true that despite some ballpark estimates, it’s hard to say how much money might be in this non-bank or credit union lending market.
“The money I lend doesn’t show up in stats,” said one Vancouver-based lender who spent 29 years as a mortgage broker and now has about $3 million in personal retirement funds invested in between 30 and 40 mortgages.
In the end, Sadler cobbled together a solution for the Tsawwassen couple using two separate lenders: one who took on a first mortgage of $600,000, charging a rate of 11 per cent, and another who took on $150,000 of the loan in a second mortgage at a rate of 14 per cent.
For the couple, paying these eye-watering rates means they get to stay in their house. The husband has taken an additional job in the early mornings working as a co-manager at a storage facility to help meet payments and their house is still for sale.
“A house cannot be sold in one moment,” said the woman, who hopes a sale in the next six months will turn around their situation.
There is a wide spectrum of private lending.
There are large mortgage investment corporations or MICs, which pool money from a number of different individual investors to offer mortgage loans. Some of these are publicly traded companies that handle funds in the hundreds of millions of dollars.
Other lenders are just one person. They range from wealthy, higher net worth individuals with personal retirement money in the millions of dollars to invest to players with as little as $20,000 to lend.
Still others yet are borrowing against their own homes to extend mortgage loans to borrowers. It’s this last category that concerns some analysts, including Ben Rabidoux, president of North Cove Advisors, which does market research on Canadian housing trends.
“If every five years, Joe and Jane Canadian refinance their mortgage and their broker says: ‘Wow, since the last time I saw you, your home has increased $300,000 in value. You should renew for a bigger amount and then you could take $200,000 and invest it in a private mortgage.’ They would only pay, say, two per cent interest on that $200,000, but could loan it out to someone (else’s mortgage) and get a return of 8 to 10 per cent.”
That’s fine until the real estate market wobbles. “When I ask private lenders, ‘what would make you not renew a mortgage,’ they say things such as missed payments and mostly, if I get nervous about the value of my collateral.”
For Rabidoux, the real worry would come if these private lenders started to pull back and, instead of investing, the MICs returned funds to their investors.