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SUMMER 2020 $6.95

THE MAGAZINE FOR PROFESSIONAL MORTGAGE BROKERS

LESSONS LEARNED Mortgage professionals discuss their COVID-19 experiences p.36

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Bikers & Brokers: Hells Angels court case that could benefit the mortgage industry p.14 How and why brokers should avoid becoming a fiduciary p.42

PM No. 41297283

Growing demand for private mortgages p.21

CMBA-ACHC.CA


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inside VOLUME 5 ISSUE 3 SUMMER 2020

cover

36

THE COVID EXPERIENCE: MORTGAGE PROFESSIONALS DISCUSS LESSONS LEARNED For those who often depend on making personal connections with clients, it has been a time of challenge and discovery. BY LISA GORDON

features 10

Fighting deficits by reforming and reducing spending would likely produce better outcomes

Increasing transparency in the insurance purchasing process

BY TEGAN HILL AND BEN EISEN

‘CREATIVE DESTRUCTION’ CAN HELP CANADA RECOVER FROM COVID-19 RECESSION

42

BY RUSSELL S. SOBEL AND JASON CLEMENS

QUEBEC MORTGAGE BROKERS TRANSITION TO AUTORITÉ DES MARCHÉS FINANCIERS Prospective mortgage brokers must successfully complete specialized training

21

WHY EVERY MORTGAGE BROKER NEEDS A PRIVATE LENDING PARTNER Canadian brokers contend with a sharp drop in number and value of deals – and prepare for more private mortgages

24

REAL ESTATE RECORDS IN NEW BRUNSWICK Realtors in Atlantic Canada see sales and prices rise in the region BY AIDAN BATTLEY

32

NEW CONCEPTS FOR THE MORTGAGE BROKERS ACT CMBA-BC submits proposals on exemptions and licensing requirements for financial institutions and their employees BY SAMANTHA GALE

39

NO PLANS FOR A NEW FEDERAL HOME EQUITY TAX Housing equity tax is really an “imputed rent tax”

REDUCE LIABILITY RISKS BY AVOIDING ACTING AS CLIENT’S FIDUCIARY How to minimize the risk of a broker becoming a fiduciary BY RAY BASI

The three keys to fostering entrepreneurship and prosperity

18

TRUDEAU GOVERNMENT SHOULD TARGET HIGH TAX RATES DURING COVID RECOVERY

CONDO INSURANCE CRISIS PEAKS BY AIDAN BATTLEY

12

41

44

PLAYING TO POTENTIAL A lifetime sportsman, Wes Sudsbury is focused on helping others achieve their best performance, both on and off the field BY LISA GORDON

departments 8 Editorial summary 46 Advertisers Index

columns 14 Legal Ease: A Hells Angels court case could result in better protections for mortgage investments BY RAY BASI

26 Off the Clock: Welcome aboard – renovating a floating fixer-upper with a storied history BY KATHLEEN FREIMOND

28 Guest Column: Investor prudence, strong fundamentals keep real estate on course BY JOHN CLARK

BY SAMANTHA GALE

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VOLUME 5 ISSUE 3 SUMMER 2020

THE CANADIAN MORTGAGE BROKERS ASSOCIATION CO-CHAIRS:

Rob Regan-Pollock (CMBA-BC), Kim McKenney (CMBA-Ontario) DIRECTORS:

Sylvain Poirier (CMBA-Quebec), Wes Sudsbury (CMBA-Ontario), Meg O’Leary (CMBA-Atlantic) EXECUTIVE DIRECTOR:

Samantha Gale CMBA - ONTARIO INDEPENDENT MORTGAGE BROKERS ASSOCIATION OF ONTARIO 7 - 40 Winges Road, Woodbridge, ON L4L 6B2

CMBA - BC MORTGAGE BROKERS ASSOCIATION OF BRITISH COLUMBIA 902 - 777 West Broadway, Vancouver, BC V5Z 4J7

CMBA - ATLANTIC MORTGAGE BROKERS ASSOCIATION OF ATLANTIC CANADA 12 M - 7095 Chebucto Road, Halifax, NS B3L 0A1

SPECIALISTS IN INNOVATIVE MORTGAGE SOLUTIONS

CMBA - QUEBEC L’ASSOCIATION DES COURTIERS EN HYPOTHECAIRES DU QUEBEC Email: info@achquebec.org CANADIAN MORTGAGE BROKER magazine is produced by the Canadian Mortgage Brokers Association (CMBA) EDITOR: Samantha Gale STAFF WRITERS: Samantha Gale, Ray Basi MANAGING EDITOR: Kathleen Freimond ART DIRECTOR: Scott Laing CONTRIBUTORS: Ray Basi, Aidan Battley,

John Clark, Jason Clemens, Ben Eisen, Kathleen Freimond, Samantha Gale, Lisa Gordon, Tegan Hill, Russell S. Sobel IMAGES: Adobe Stock, iStock, Carloline Rapson,

Cory Van Ieperen BILLING: Debra Hiller CANADIAN MORTGAGE BROKER © All rights reserved. The views expressed in CANADIAN MORTGAGE BROKER are those of the respective contributors and are not necessarily those of the publisher or staff. Publications mail agreement 41297283. Please return undeliverable Canadian addresses to 902-777 Broadway W Vancouver, BC V5Z 4J7 Printed in Canada by Transcontinental Publishing.

Web: mandatemortgage.com Email: info@mandatemortgage.com Phone: 604-731-2899

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Everybody has a story

A mortgage application is just a snapshot Let’s partner and ask the right questions to truly understand your client’s story. Together, we can develop the right financial solution. To see the whole picture, visit hometrust.ca/realstories


editorialsummary

PRIVACY BY DESIGN

Making privacy a key pillar of mortgage brokers’ businesses will avoid legal problems and gain clients’ trust BY SAMANTHA GALE

T

echnology has proven its worth during the coronavirus pandemic. Business travel has been replaced by Zoom conference calls. Children have shifted from classrooms to computer screens, filing essays and assignments online. People are checking on elderly parents via FaceTime and placing online grocery orders. The word “unprecedented” has certainly been the COVID-19 buzzword, but that doesn’t make it any less true that the world has undergone massive changes during the last six months or so. Technology has filled the gap in many places, allowing us to stay connected while remaining physically distant. But, as with most things, there are two sides to this coin. While various apps have

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no doubt remedied business and personal isolation, it’s also true that those connections could come at a steep cost. That price is our privacy. From uninvited “Zoombombers” who invade video calls to online shopping scams and ransomware masquerading as a COVID-19 contact-tracing app, it’s a digital jungle out there. As we move through that jungle, we leave tracks to show where we’ve been and what we’ve done along the way. Those virtual tracks – called cookies – can reveal a lot about us, including our browsing preferences, favourite online shopping sites and taste in music. And while cookies (especially third-party cookies that track online activity and build up detailed personal profiles) have always been a concern, the issue of

online privacy has taken on new importance thanks to the pandemic. Increasingly, we are sharing details of our personal and professional lives online, via apps that allow the collection of our unique data.

CANADA’S DIGITAL CHARTER Last December, just as the coronavirus was starting to spread in Wuhan, China, the Canadian government announced plans to reform online privacy regulations. Data privacy is a key concern, as is the use of data collection tools. Canada’s Digital Charter lists 10 key principles, including that “Canadians will have control over what data they are sharing, who is using their personal data and for what purposes, and know that their privacy is protected.”

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editorialsummary

As disruptive technologies transform the way we live and work, the government has recognized that many Canadians are concerned about their personal digital data and how it is accessed and used. While there is no doubt we must embrace our collective digital future in order to remain competitive and relevant in the global economy, personal privacy concerns are both natural and valid. According to Statistics Canada in 2017, 89 per cent of Canadians are connected to the internet. While they are living and thriving in an increasingly digital world, they want more transparency and control over how their information is being collected and used. Once personal information has been seen by the wrong eyes, it can never again be private. This makes it an exceedingly precious commodity. Accordingly, these concerns are being taken seriously by the biggest names in the business. Google, which controls roughly 69 per cent of web browsing through its Chrome platform, said in January that it was moving to phase out third-party cookie support within two years. Similarly, Apple’s Safari and Mozilla’s

Our clients trust us to safeguard their most personal information. If privacy is a key pillar of your business, you will certainly avoid future legal problems – but more importantly, you will gain your clients’ trust.

Firefox are already blocking third-party cookies through anti-tracking technology. New technologies are being investigated that would allow advertisers to track the success of online campaigns without drilling down to an individual’s specific data, but details are still scarce. In the meantime, the Office of the Privacy Commissioner of Canada and five other nations sent an open letter to all video teleconferencing (VTC) platforms in July 2020, “reminding them of their obligations to comply with the law and handle people’s personal information responsibly.”

MORTGAGE BROKERS AND PRIVACY The global pandemic has required companies to adjust their business models as they look for opportunities to migrate various practices online. Many mortgage brokers who previously conducted in-person client meetings have switched to video conferencing or phone calls. As the business model necessarily pivots, however, there is increased risk. Brokers collect a great deal of personal information on mortgage applications and must ensure it is protected from unauthorized access. It is important to make clients aware of how their digital information will be used, obtain their consent for its collection, and make appropriate policies to destroy unapproved mortgage applications and other files that are no longer needed. As the Privacy Commissioner’s joint letter to video teleconferencing providers stated: “You should ensure that you take a privacy-by-design approach to your VTC service. This means making data protection and privacy integral to the services you provide to the customer. Always consider, as a starting point, the most sensitive information that could potentially be shared on your platform, and adopt the most privacy-friendly settings as default…” That's good advice for mortgage brokers, too. Our clients trust us to safeguard their most personal information. If privacy is a key pillar of your business, you will certainly avoid future legal problems – but more importantly, you will gain your clients’ trust. With that trust comes repeat business and future referrals, both during the pandemic and beyond. CMB MAGAZINE

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S K A E P

IS

IN SU CO CR RANNDO IS CE

stratainsurance

B.C. Ministry of Finance moves to increase transparency in the insurance purchasing process BY AIDAN BATTLEY

T

he unaffordability of strata or condo insurance in British Columbia, Alberta and Ontario has escalated in recent years, with the crises almost certainly reaching a peak during the current COVID-19 situation. As discussed in the Winter 2020 issue of Canadian Mortgage Broker, obtaining affordable strata insurance is a substantial challenge in the modern-day housing market. Astronomical strata insurance premiums, accompanied by hefty deductibles, have made insurance nearly unattainable for many strata corporations and their owners. The challenge for the mortgage industry is twofold: mortgage borrowers who have no or insufficient building insurance in place will be in breach of their mortgage terms, potentially triggering default proceedings, and secondly a lack of building insurance makes a strata unit unmortgageable – owners will be unable to sell their strata lots at current market prices without buyers being able to finance their purchase. For the most part, the mortgage industry has taken a back seat on taking any significant default action, as it awaits

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solutions. Recently, CMBA-BC was pleased to provide input to the provincial government on the subject. The B.C. Ministry of Finance recently announced it will deploy an arsenal of measures intended to make the process for obtaining strata insurance more transparent and conflict free. These measures include: n Prohibiting the payment of referrals fees from insurers and insurance brokers to strata managers. n Setting out clear guidelines on required elements of strata insurance to ‘help strata councils make informed decisions on their insurance policies.’ n Requiring strata corporations to inform owners about policy or coverage changes and allowing them to use funds from the contingency reserve fund to pay for unexpected increases in premiums. n Protecting ‘strata unit owners against large lawsuits from strata corporations if the owner was legally responsible for a loss or damage, but through no fault of their own.’ Additional regulatory changes include: n Fortifying depreciation report requirements. n Beefing up the minimum required

contributions made by owners and developers to the contingency reserve fund. n Requiring insurance brokers to disclose the amount of their commission, which ‘has been reported to be at times in excess of 20 per cent’. With increased transparency in the insurance purchasing process, equipping strata corporations with more tools to manage strata insurance and letting strata owners sleep peacefully knowing that they are protected from some deductible recovery law suits, the crisis will hopefully be alleviated over time. Aidan Battley is an undergraduate student at Carleton University in the Faculty of Communication and Media Studies and a contract writer. His academic research includes but is not limited to: the effect of public policy on economic equilibrium, the influence of regulatory bodies, and understanding regional microeconomic issues.

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economicrecovery

U T DE R C

‘CREATIVE

S

CAN HELP CANADA RECOVER FROM COVID-19 RECESSION 12

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economicrecovery

The three keys to fostering entrepreneurship and prosperity BY RUSSELL S. SOBEL AND JASON CLEMENS

A

I

s more and more Canadians, and indeed people around the globe, focus on how best to foster economic recovery from one of the deepest recessions in history, the ideas of economist Joseph Schumpeter should be front and centre. Joseph Schumpeter is best known for popularizing the term “creative destruction” – the process where new innovations arise and cause the old way of doing things to disappear. This perennial gale, as Schumpeter described it, is the foundation for economic progress. Simply put, the creativity, innovation, ingenuity and diligence of entrepreneurs is at the heart of prosperity. For economies to grow and prosper requires the decentralized efforts of entrepreneurs, in the pursuit of profit, experimenting with new combinations of productive resources including raw materials, labour and perhaps most importantly ingenuity. This process of trial and error, with the profit and loss system providing feedback on the quality of the entrepreneurial ideas, is the engine leading to a brighter and wealthier future. There are three keys to fostering entrepreneurship and the prosperity that accompanies it. First, societies must value and view entrepreneurs for their enormous positive contributions – quit villainizing wealth, successful entrepreneurs and business people. Aspiring to be a successful entrepreneur should be as worthwhile a dream for a child as being a doctor, engineer or a political leader. Second, ensure markets are contestable, meaning they are open to competition from new and existing firms. This means avoiding or removing government-erected barriers that protect incumbent firms from the entry of new competitors. Third, let the profit and loss system work – don’t subsidize failing firms or play favourites with certain industries. These barriers to entrepreneurship

O

and innovation are significant in Canada, but this offers an opportunity for reform now to foster economic growth. Economist Vincent Geloso recently estimated that more than one-third of the Canadian economy is protected from competition through a variety of government mechanisms including limits on foreign firms, government monopolies and licensing requirements, to name but a few. One such barrier – government restrictions on companies in one province selling into other provinces – should be top of the list for reforms. After all, one of the reasons for Confederation was to promote trade within the new country. University of Calgary economist Trevor Tombe has studied interprovincial trade barriers extensively and concluded that removing the barriers and allowing firms to compete across provincial boundaries could increase the Canadian economy by between $50 billion to $130 billion annually. Other examples of barriers to entrepreneurship include preferential tax treatment, direct subsidies from government, and beneficial regulations for particular sectors and industries. As Josef Schumpeter first realized in the 1920s, limitations on entrepreneurs will have costly implications for both short and long-term economic growth and prosperity. The lessons of Schumpeter are perhaps more timely now than ever given that Canada and the world desperately need economic growth. The answer is not more barriers (which include subsidies) but rather opening up markets to entrepreneurial competition.

’ N Russell S. Sobel is professor of Economics & Entrepreneurship, Baker School of Business at The Citadel; Jason Clemens is executive vice president, Fraser Institute. This article was originally published in the Financial Post. For more on the Fraser Institute go to: fraserinstitute.org

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K YOU N A H T

G N A E L S S L ! L ? !? E H

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legalease

How a Hells Angels court case could result in having the law better protect mortgage investments BY RAY BASI, J.D., LL.B., STAFF, EDUCATION AND POLICY REVIEW

Hells Angels assisting real estate owners, lenders and mortgage brokers? Indeed, British Columbia (Director of Civil Forfeiture) v. Angel Acres Recreation and Festival Property Ltd., 2020 BCSC 880 (Hells Angels case) is such a circumstance, albeit the assistance is provided indirectly. The 361-page decision is also a rare circumstance where a court limits the scope of draconian provincial civil forfeiture law (PCFL), law that puts real estate owners and lenders at unfair risk of losing their investments. The case is of nationwide interest as all provinces except P.E.I. and Newfoundland and Labrador have enacted PCFL legislation. None of the territories has done so. Before proceeding to read this article, please pause to fully appreciate the irony that it took a Hells Angels court victory to limit a statute long justified by the

government as being intended to control organized crime but widely enforced in far less serious circumstances.

BACKGROUND Federal laws have long been in place to strip proceeds of crime from criminals. Granted, they have been difficult to enforce

because of high standards all criminal laws must meet (such as concerning due process, the presumption of innocence and proof beyond a reasonable doubt). PCFL avoids having to meet these criminal law standards by being cast as civil law rather than criminal law. As well, the PCFL does away with even some of the

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legalease

protections provided in civil law, such as the accusing party bearing the burden to prove its case and the consequence being proportionate to the wrongful conduct. In the streamlined civil approach, the provinces for example: n Substantially lower the bar for the type of conduct that attracts forfeiture – such as by providing for forfeiture of property connected to unlawful activity (the specific term varies across the provinces), rather than it being available to recover only proceeds of crime.

requiring that the property has been substantially, rather than only incidentally, connected to the unlawful activity. n Substantially lower the level of proof of the facts that trigger forfeiture – the facts need only be proven on the balance of probabilities (the allegation is more likely to have occurred than not), rather than proof beyond a reasonable doubt. n Substantially shifts the burden of proof onto the person whose property is the subject of the forfeiture – rather than the civil forfeiture office having to prove its

The Court stated at the outset that its decision was based on admissible evidence only, without consideration of unproven allegations. That evidence did not prove the Hells Angels to be a worldwide criminal organization and did not prove the clubhouses would in the future be likely used to enable criminal processes. n Substantially lower the level of

knowledge needed to seek forfeiture – such as by allowing the civil forfeiture office to go after property where it has reason to believe that unlawful activity has occurred or will occur, rather than the higher threshold of having reasonable and probable grounds to believe it. n Substantially reduce the legal process that must have occurred before forfeiture is triggered – such as by allowing forfeiture to occur without a charge being laid, let alone a conviction having been obtained, concerning the unlawful activity. In fact, civil forfeiture is allowed even where there has been an acquittal concerning the unlawful activity. n Substantially reduce the connection of the property to the unlawful activity – allows forfeiture to occur without 16

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entire case to justify forfeiture, it is given the benefit of facts in some circumstances being presumed to be true unless the person whose property is the subject of the forfeiture proves the presumption to be false. For example, it is presumed that property is the proceeds of unlawful activity where the person: • participated in unlawful activity that is likely to have resulted in the person receiving a financial benefit, and • later acquired an interest in property. n Do not require that the consequence of forfeiture be proportional to the unlawful activity – the forfeiture of highly valued property can be triggered by trivial unlawful activity. For example, expensive real estate can be subject to forfeiture due to its connection with an existing or likely future, small marijuana grow-operation.

As a practical matter, the structure established by PCFL makes it difficult for anyone to fight a claim for forfeiture; most people lack the skills to do it themselves and the finances to fund expensive litigation. Even the righteous can find themselves forced, by their circumstances, into ill-advised settlements. Hence the importance of the Hells Angels case. The Hells Angels were able to engage in 13 years of expensive litigation to fight off attempts to have three of their clubhouses forfeited. The decision in the Hells Angels case is a big step forward in altering PCFL to bring it more in line with what one might expect in a free and democratic society respectful of civil rights. It is a big step in protecting the rights of anyone whose property becomes the target of forfeiture claims.

HELLS ANGELS CASE DECISION The B.C. Civil Forfeiture Office (the Office) sought forfeiture of three Hells Angels clubhouses, one since 2007 and the other two since 2012. The Office claimed that since the Hells Angels is and will continue to be a worldwide criminal organization, the clubhouses will likely be used in the future to enable criminal purposes. The Office asked the Court to infer a number of facts to support these contentions.

MERITS The Court stated at the outset that its decision was based on admissible evidence only, without consideration of unproven allegations. That evidence did not prove the Hells Angels to be a worldwide criminal organization and did not prove the clubhouses would in the future be likely used to enable criminal processes. Had the Court stopped there, it would have been a matter of the law being valid but the evidence having been inadequate to obtain forfeiture. However, the Court went further and assessed the interpretation and validity of the law. The Court decision made conclusions on some points of key interest to real estate owners, lenders and mortgage brokers.


legalease

KEY CASE LAW CREATED THRESHOLD OF PROOF: Forfeiture proceedings are quasi-criminal in effect. The Office must satisfy the legislated balance of probabilities standard of proof with compelling evidence in accordance with the stakes involved. DEGREE OF CONNECTION: To have been used to engage in unlawful activity, the use of the property must have been integral, rather than incidental or peripheral, to the activity. PROPORTIONALITY: The Court has the ability to provide relief under the B.C. statute where the forfeiture of the property would be disproportionate to the penalty that should be attracted by the level of responsibility in criminal law. FORFEITURE FOR PAST UNLAWFUL ACTIVITY: PCFL is a property-based program allowing for forfeiture and redistribution of property tainted by crime. It is meant to suppress crime, including by preventing the use of property to unlawfully acquire wealth or cause bodily injury, compensating victims of crime, funding of crime prevention and providing for remediation. PCFL sections dealing with forfeiture based on unlawful activity that has already occurred are valid law. The unlawful act that has already occurred and the property used to engage in the act are directly connected, and so the forfeiture primarily concerns property law and only incidentally concerns criminal law. Under the Constitution, provinces can enact property law legislation but not criminal law legislation. FORFEITURE FOR FUTURE UNLAWFUL ACTIVITY: PCFL sections dealing with forfeiture based on unlawful activity that has not already occurred but is likely to occur in the future are invalid law. It is criminal and not property law. Only the federal government can enact criminal law. That law is not based on there being a connection between property and a future act but rather on the person’s propensity to engage in an unlawful activity. Those laws, in effect, create a new propensity offence for which the penalty is forfeiture of property. As well, they interfere with criminal sentencing in that they do not recognize the possibility of rehabilitation. This is not just incidental to criminal law but is criminal law. The province has no right to enact it. This is of significance to our industry because but for the Court’s order the PCFL office could seek forfeiture of real estate based on the owner’s record. For example, an owner with a record of operating grow-ops could be required to forfeit their owned and mortgaged real estate based on the argument that they are likely to use it in the future for grow-op purposes.

APPEAL It should be noted that at the time of writing, the parties have the right to appeal the decision. This may not be the last word.

TAKEAWAY Whatever else real estate owners, lenders and mortgage brokers might think about the Hells Angels, they can be pleased that they caused the Court to make the PCFL fairer. As well, they can say thank you to them for having the law better protect mortgage investments. While still far from perfect, there are now fewer circumstances in which real estate owners and lenders will face the choice of having their investments forfeited to the government or incur expensive litigation costs in protecting them. CMB MAGAZINE

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financialsector

Quebec mortgage brokers transition to

AUTORITÉ DES MARCHÉS FINANCIERS Prospective mortgage brokers must successfully complete specialized training

A

long with the challenges wrought by the COVID-19 pandemic, mortgage brokers in Quebec have also recently transitioned to a new regulatory body, Autorité des marchés financiers (AMF). In May 2020, the Organisme d’autoréglementation du courtage immobilier du Québec (OACIQ) transferred supervision of the mortgage brokerage sector to the AMF, the regulatory and oversight body for Québec’s financial sector. OACIQ will continue to be responsible for protecting the public in the real estate brokerage sector. The transition is the result of an act that came into force on May 1, 2020 aimed at improving the regulation of the financial sector, the protection of deposits of money and the operation of financial institutions. This 18

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was also the day on which new regulations made by the AMF came into effect. “The AMF welcomes this new mandate from the government,” said AMF president and CEO Louis Morisset. “For the past several months, we have been in constant contact with the various stakeholders in the mortgage brokerage sector and have developed a robust and effective framework aligned with the one previously established for other sectors involved in the distribution of financial products and services.” In a statement, the AMF says it is aware that, for mortgage brokers, the changes resulting from the new provisions represent a significant challenge, particularly when coupled with the difficult situation caused by the COVID-19 pandemic. To address any concerns, the AMF has implemented a structure to provide personalized assistance. “We’ve worked hard to gain a solid understanding of the mortgage brokerage industry, its participants and its specific characteristics and provide a framework that draws on best practices,” says Frédéric

Pérodeau, AMF superintendent, client services and distribution oversight. Along with the transition comes the requirement that prospective mortgage brokers must successfully complete specialized training with an organization recognized by the AMF before they can practise as mortgage brokers. The coursework is based on the Mortgage Broker Qualification Program and training is currently offered at Académie de l’entrepreneurship québécois and Collège CEI, both in Montreal. For those who choose to study online both these training bodies offer online courses and programs. Mortgage Professionals Canada is also authorized to provide online training. The courses (minimum qualifications training is currently not available in English) cover the wide range of competencies required by mortgage brokers from the basic concepts related to the mortgage market to distinguishing the provisions of the Civil Code of Québec (C.C.Q.) that apply to the sector. For more information: lautorite.qc.ca

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privatelenders

WHY EVERY MORTGAGE BROKER NEEDS A PRIVATE LENDING PARTNER Canadian brokers contend with a sharp drop in number and value of deals – and prepare for more private mortgages Submitted by Canadian Mortgages Inc. (CMI)

W

ith housing sales set to drop 25 per cent over 12 months, it’s increasingly important for brokers to partner with private lenders to maximize the number of available deals and address growing consumer demand for private mortgages. Since the 2008 financial crisis, federal mortgage rules have progressively mandated tightened lending regulations for banks, with credit unions voluntarily following suit. Due to this conservative regulatory framework, various borrower segments have been categorized as high risk

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despite having high equity in their property and otherwise sound financials that indicate a low likelihood of loan default. As a broker, you’ve dealt with enough clients who are rejected for traditional loans simply due to their low credit score. You’ve most probably experienced first-hand the increasing number of self-employed or gig-economy workers who don’t qualify for traditional loans due to non-traditional or unverifiable income sources. Most likely, you’ve also had clients who, although they qualify for all mortgage requirements, are unable to meet the standards for stress tests, and are thus rejected for a mortgage solely based on a

hypothetical and highly unlikely scenario. And then, of course, there are the deals you haven’t been able to close simply due to short-term loan requirements or unconventional properties that conventional lenders are unwilling to finance.

BORROWERS FLOCK TO PRIVATE MORTGAGES AS A-LENDERS BECOME INCREASINGLY INACCESSIBLE These restrictive A-lender guidelines have excluded large segments of borrowers who are, in fact, well-equipped to pay back their loans, which has resulted in droves of Canadian mortgage consumers turning to private lending options. CMB MAGAZINE

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privatelenders

and ask only for the necessary information. Private lenders are also able to meet the demand for shorter loan periods. Given the increasing restrictions and red tape introduced since the financial crisis, it’s hardly surprising that demand for a private mortgage has skyrocketed. According to Statistics Canada, the demand has grown by 924.2 per cent between 2007 and 2018. Since private lenders are not federally regulated, they aren’t subject to the stricter rules governing how banks and credit unions can underwrite high-risk loans. Instead of focusing on narrow standards related to the borrower’s credit history, private lenders take into account a property’s overall value and marketability, and the individual’s ability to carry a mortgage.

MAXIMIZING DEAL VOLUME: BROKERS ADDRESS DEMAND FOR PRIVATE LOANS To maximize the number of available deals and meet client demand for private financing, a rapidly growing number of brokerages now offer private financing, with private mortgages accounting for a significantly higher percentage of brokerage deals.

Many private lenders offer borrowers fair and competitive pricing, reasonable terms and conditions, and transparent renewals. Partnering with a private lender can ensure more closed deals and flexible solutions that can greatly benefit unique client needs. Apart from servicing the growing number of Canadian borrowers who are rejected for loans by banks and credit unions, private lenders can offer a range of advantages that traditional lenders cannot. Private lenders are able to offer far faster and more flexible financing, with times for approval, loan processing and fund release significantly shortened, in some cases to a single day. And instead of the extensive and time-consuming documentation required by banks, private lenders typically cut out the red-tape 22

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The 2019 data from Ontario’s provincial regulator indicates that private mortgages accounted for around $10.6 billion, or 8 per cent of the $132-billion mortgage brokerage market, nearly doubling from $6 billion in 2014. With the current Canadian real estate market in a COVID-19-driven paralysis and the demand and value of mortgages expected to plummet, mortgage brokers can no longer ignore the lucrative market opportunity represented by the growing number of consumers seeking private loans.

BROKERS CONTEND WITH FEWER DEALS BUT MUST PREPARE FOR MORE PRIVATE MORTGAGES As a direct impact of COVID-19, the total number of deals available to mortgage brokers has fallen dramatically: National sales data shows the volume of home-buying and selling has dropped precipitously compared to the same time last year, despite the Bank of Canada’s multiple recent rate cuts. The foreseeable future looks even bleaker. As stated by the Canada Mortgage and Housing Corporation (CMHC), as of late May 2020, sales are expected to drop 25 per cent over the next 12 months. Deal values are also predicted to fall steeply in this time period, with a 9 to 18 per cent expected drop in average housing prices. Simply put, Canadian mortgage brokers are faced with a double whammy – reduced number of potential deals and lower deal values. However, while the consumer mortgage market contracts, the alternative lending sector is expected to see a surge in demand due to new measures imposed by CMHC. As the national housing authority and Canada’s largest and only public mortgage insurer, CMHC’s new criteria for insured mortgages (federally mandated for any mortgages with a down payment of less than 20 per cent) will have a significant impact on the number of buyers who qualify for traditional loans. These guidelines will effectively make it more difficult to qualify for a mortgage or refinancing from A-lenders, resulting in a new cohort of Canadians seeking out private mortgage financing. This offers brokers a lucrative opportunity to increase the number of available deals, despite reduced demand. As a mortgage broker, it is important to consider private mortgages as a product to offer clients. There are many advantages and benefits, but each private lender is structured differently. Many private lenders offer borrowers fair and competitive pricing, reasonable terms and conditions, and transparent renewals. Partnering with a private lender can ensure more closed deals and flexible solutions that can greatly benefit unique client needs.

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Here: Residential sales in New Brunswick as a whole were up 25.4 per cent from June 2019. Top: Saint John, N.B., set records in June with sales up 4.7 per cent compared to June last year.

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atlanticmarket

REAL ESTATE RECORDS in New Brunswick

Realtors in Atlantic Canada see sales and prices rise in the region

M

uch to the surprise of many people in the industry, the residential real estate market in Canada as a whole seems to be holding up well in spite of earlier concerns that the COVID-19 pandemic would depress demand. According to the latest data from the Canadian Real Estate Association (CREA), both sales prices and listings were up in June compared to June last year, with the national average sale price recording a year-over-year increase up 6.5 per cent with listings up 4.8 per cent over June 2019. The pandemic negatively impacted sales in April and May, but they rebounded strongly in June, registering a 150 per cent increase over April and a 63 per cent jump over May. In a news release accompanying the June data, CREA chair Costa Poulopoulos said realtors across Canada are increasingly seeing business pick back up. “With sellers and buyers returning to the market, we continue to make sure clients stay safe by complying with government and health officials’ directives and advice, increasingly using technology to list and show properties virtually while providing secure methods to complete required forms and contracts,” he said. CREA’s senior economist Shaun Cathcart said the market has recovered faster than was expected and July was on track to be even better. (See p.28, Investor prudence, strong fundamentals keep real estate on course) And that’s exactly what realtors in Atlantic Canada are looking forward to following June sales that saw prices reaching levels not recorded for several years in most of the region, with the exception of Newfoundland and Labrador.

BY AIDAN BATTLEY New Brunswick was the real standout in the region, where June sales in Fredericton rocketed up by 53.3 per cent from June 2019, setting a new sales record for the month of June and recording the highest sales level for any month ever. The average price of homes sold in June 2020 was a record $217,722, up 15.2 per cent from June 2019. In Moncton, N.B., residential sales increased by 21.2 per cent in June from June 2019, setting a new sales record for the month of June. The average sale price of homes in Greater Moncton in June was up 12 per cent from June 2019. Greater Moncton REALTORS du Grand Moncton president Parise Cormier said with sales coming back even stronger than new listings, the market has moved further into seller’s territory, which is putting upward pressure on price growth and boosting prices to record levels.

“New listings continued their recovery from recent months but still have not yet returned to pre-COVID levels,” he added. “Given the imbalance between demand and supply at the moment, the market is very much in seller’s territory.” Sales in New Brunswick as a whole were up 25.4 per cent from June 2019 – also a new sales record for June – and was the highest level for any month ever. The average sale price in the province was a record $199,327 in June 2020, rising 14 per cent from June 2019. On Prince Edward Island, sales were down 5.7 per cent in June compared to June last year, but the average sale price was up 5.8 per cent to $254,510. Nova Scotia sales increased by 10.4 per cent over June 2019 – and set a new record of 1,428 units for June, but listings were down 6.8 per cent. Overall supply is at the lowest

The pandemic negatively impacted sales in April and May, but they rebounded strongly in June, registering a 150 per cent increase over April and a 63 per cent jump over May. Saint John, N.B., was also setting records in June with sales up 4.7 per cent compared to June last year, the highest level in a decade. The average sale price reached a record $200,961, rising 13.6 per cent from June 2019 and passing the $200,000 level for the first time ever. Saint John Real Estate Board president Corey Breau said home sales in June were the second-best numbers for June on record.

levels in more than 15 years and continues to fall. The average price of homes sold in June 2020 was $286,227, up 10.1 per cent from June last year. Newfoundland and Labrador was the outlier in the region, with sales dropping 5.3 per cent over June 2019 and the average price of homes sold across the province down 9.8 per cent from June last year to $227,132. CMB MAGAZINE

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offtheclock

... if Caroline Rapson has her way, in their retirement years they could find themselves taking the storied boat through the Panama Canal, or sailing in the Caribbean, potentially revisiting some ports the boat first visited in the early 1930s.

This interview with Caroline Rapson continues our series BROKERS OFF THE CLOCK. In every issue, we ask a mortgage broker to tell us what they like to do when they’re not behind a desk. Be it working with animals, gardening, travel to exotic places or researching your family roots, we want to know how you unwind. Would you like to be profiled in a future edition – or suggest a fellow mortgage broker? Contact info@cmba-achc.ca

WELCOME ABOARD Renovating a floating fixer-upper with a storied history BY KATHLEEN FREIMOND

R

um running, Queen Elizabeth and Christmas cookies are words that don’t often make it into the same sentence – but they sum up the history of Ma Cherie, a 75-foot boat that is home to CMBA-BC director Caroline Rapson and her husband Geoff. When Caroline, director of operations at Centum Financial Group Inc., leaves her downtown Vancouver office, she goes from work to vacation mode in the 40 minutes it takes to get to Ma Cherie, anchored at the Sather Marina alongside the quiet streets of the Queensborough neighbourhood in New Westminster, B.C., where a small group of live-aboards comprise a laid-back and friendly community. The couple acquired the boat – the equivalent of a fixer-upper home with good bones in need of a facelift – about six years ago. But living on the one-time rum runner built in 1929 by the famous Quincy shipbuilding yard in Massachusetts for a prominent steel industry executive wasn’t in the original plan, explains Rapson. “When the weekends came, we went boating in our other boat and not much was getting done on Ma Cherie,” she says. “Coincidentally, a friend was looking for a condo and liked my place in Lower

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Lonsdale [North Vancouver], so we decided to rent it to her and live on the boat.” According to Antiques Afloat by Peter Vassilopoulos (published by Panorama), the boat – originally called Bob O Link – was used to transport rum during the prohibition years in the United States. During the next few decades it served as a pleasure cruiser, a charter boat and a live-aboard home. Ma Cherie’s next brush with history came in the 1960s when Queen Elizabeth is said to have been on board while the boat was docked in Victoria, B.C. Rapson explains the boat’s construction, a double-plank mahogany hull, makes it very durable, and besides one small drip – “one can’t even really describe it as a leak” – on the garboard seam (where the turn of the hull meets the keel), the renovation is more about comfort and lifestyle than any significant structural repairs. “It needed a lot of work,” says Rapson. The results of previous renovations – such as the bad installation of laminate floors – needed to be removed. “The demo was pretty quick, but renovation is a slow process. I’m pretty handy, my husband is very handy and has previously restored a boat, so we have spent a lot of time working on it,” she says.


offtheclock

“We’re not planning to restore it back to its original appearance, rather to make it into a comfortable home space,” she says, adding one of those renovations includes raising ceilings where possible. “Geoff is 6 foot 2, but there are places he can’t stand, so we’re trying to make it so he can stand comfortably everywhere.” Rapson says the first project was to make the mid-front end comfortable – they included some built-ins and a cosy bar that often has a bottle of rum on the shelf as a reminder of the boat’s early years at sea. Currently the couple are focused on the front – or bow – that is in the process of being renovated to create a master suite, says Rapson, noting the helm is now the workshop. Over the years, other projects have included replacing single-pane windows with double-panes, adding insulation and, of course, painting. The couple have stuck with a simple design palette, white with black trim and wood finishes to echo the exterior colours of the floating home. “The kitchen is great, and we still use the stove that came with the boat when we bought it – a three-burner propane stove with oven,” she says. While the oven is small (she is limited to one cookie sheet at a time), it hasn’t stopped her making hundreds of cookies at Christmas time, a long-held tradition. “I make the sugar cookies, Geoff makes the gingerbread, and I ice them all and package them up to give to friends and take into the office,” she says. While the couple did pare down their possessions to fit their new home, they were able to keep some much-loved furniture by renting the North Vancouver condo semi-furnished to friends. Rapson says the space on the boat is about 750 square feet, the size of a small condo, but its length gives one the impression of a larger area. “Closet space is a challenge, and I quickly learned that in winter I need to switch off the electric heater before I blow dry my hair – otherwise it blows all the breakers,” she says. Detail-oriented, Rapson recognizes that skills honed in the workplace are useful for a long-term project like renovating Ma Cherie.

CAROLINE RAPSON

Patience and organization – thinking things through – and keeping the big plan in focus are the strengths that she identifies as particularly useful. It will probably be a few more years before Ma Cherie will be looking her best. Then, if Rapson has her way, in their retirement years they could find themselves

taking the storied boat through the Panama Canal, or sailing in the Caribbean, potentially revisiting some ports the boat first visited in the early 1930s. And in the long term, the boat will likely end up at the couple’s oyster farm in Desolation Sound, where they intend to live one day. But that’s another story.

Opposite: Caroline Rapson aboard Ma Cherie. Above: While Ma Cherie is currently tied up in Queensborough, B.C., the boat will likely end up at the couple’s oyster farm in Desolation Sound. Here: Once white with blue trim Ma Cherie now sports a white hull with black trim, with the same colour palette applied to the interior.

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fateandfundamentals

Investor prudence, strong fundamentals

keep real estate on course The fortunes of the commercial real estate market in the time of COVID-19 are largely dependent on pre-pandemic fundamentals

N

o, the sky hasn’t fallen. It did look quite dark and stormy there for a spell, but generally speaking, whether we are looking at the residential markets or the commercial, the pandemic didn’t lead to any kind of real estate crash, which should not come as a surprise. Human beings are creatures of habit. We crave the familiar and a sense of normalcy.

THE COMMERCIAL MARKET It’s challenging to quantify just what is happening in commercial real estate (CRE) across the country right now due to a lack of recent data. But in Ontario, we have RealTrack.com, a subscription database of CRE transactions. I pulled the March-to-June data for 2019 and 2020 for what I consider investment-grade transactions of note – $10 million and above. Here is what I found: n Total dollar value, 2019: $6.61 billion, with 215 transactions n Total dollar value, 2020: $5.475 billion, with 128 transactions So, a year-over-year decline in dollar value for this four-month period of about 17.2 per cent (hardly catastrophic), and a 40 per cent decline in number of transactions.

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It’s clear that some investors chose to take a pause, most notably in April and May, while others forged ahead, and there was a return of some of the transaction volume in June. Sure, many of these deals may have already been in motion before the pandemic struck, but not all of them. Ontario is one of the most diversified economies in Canada, which cushions it against exposure to, say, the volatility of commodity industries like agriculture or oil and gas. Other provinces obviously may not have fared as well, but that has less to do with the pandemic itself and more with market factors that have been problematic for some time now. Alberta’s CRE markets, for example, were already struggling due to the volatility of oil. Edmonton’s office space vacancy was already at an all-time high when pandemic lockdown measures took effect. It bears noting that, despite all these pressures, there has been no “crash” of the CRE markets in either Calgary or Edmonton as of late July. In Winnipeg, a colleague reports that “while there was a definite pause in late March to early/mid-April, since then I feel it has been business as usual in the market … as far as projects go, there is nothing that I am aware of that has been directly paused, and developers still seem bullish.”


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fateandfundamentals

Another colleague in British Columbia finds the Vancouver market’s situation still rather murky: “Check back in six months; we should know more.” New branch operations by U.S. tech firms had been driving an office market boom, though to what degree that will continue remains to be seen. Five proposed high-rise office buildings are reportedly now on hold. Speaking to a partner of one of Canada’s largest law firms, my colleague was told that, in five years, the firm’s Vancouver location may simply be conference rooms and an office hotel. Head out to Newfoundland and Labrador and another colleague told me, “The impact of COVID on the St. John’s commercial real estate market has been to make a bad situation worse. Before COVID, most commercial real estate was declining in market values with high vacancy rates.” Which comes back to a point I have been making all along – the fortunes of CRE in the time of COVID-19 are largely dependent on pre-pandemic fundamentals. This viral event doesn’t create problems so much as deepen existing ones. Adaptability and a willingness to change (provided change is possible) are the most telling indicators of survivability. This is evident in retail, where the situation for brands that were already struggling before the pandemic has become dire (for example, the recent news stories about DavidsTea and Mountain Equipment Co-op). The battle between online and traditional brick-andmortar retail has been going on for years, with casualties on both sides.

THE RESIDENTIAL MARKET Regional disparities arising from pre-pandemic market forces also apply to residential real estate. But ample and current market data indicates that COVID-19 won’t keep housing markets down for long. Even with the slumps we saw in AprilMay, it’s important to note that markets in general remained balanced even as sales

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activity dropped – buyers and sellers in roughly equal proportion decided to temporarily bench themselves. As a result, we didn’t see much in the way of price volatility. To quote CRE’s July report on Canadian home sales and new listings from the Canadian Real Estate Association: “While June’s housing numbers were mostly back at normal levels, we are obviously not back to normal at this point,” said Shaun Cathcart,

CREA’s senior economist. “I guess the bigger picture is one of cautious optimism. The market has recovered much faster than many would have thought, but what happens later this year remains a big question mark. That said, daily tracking suggests that July, at least, will be even stronger.” Housing starts in June were also up more than expected, by 8.3 per cent. The Canada Mortgage and Housing Corp. attributed most of that increase to Toronto and Montreal, while most other centres continued to log declines in June. TD Economics economist Rishi Sondhi in a note to clients, however, wrote that, “Homebuilding has thus far been resilient through the pandemic. This is a much different result from some of the more bearish forecasts out there and represents a stark change from most other industries.” The greatest risk facing the housing market in general right now is what comes next. “Through July, August and September, we’ll see very strong numbers and housing starts will remain elevated,” said CIBC World

Markets managing director and deputy chief economist Benjamin Tal during a July 13 Canadian Real Estate Forums webinar. “My fear is that October, November and December will be a very confusing period for the economy as a whole because the virus may be in its second wave and will coincide with the flu season and the cold season.” During that webinar, Tal also raised legitimate concerns about the impact of COVID-19 on immigration – a key driver of housing activity in Canada. I don’t disagree, but my immediate concern is more related to the people already here. The risk of a “second wave” very much of course depends on our diligence to continue practising mask-wearing, social distancing and common sense in general (which has proven to be a tall order for some). How well residential real estate markets across Canada continue to recover and how quickly relative to one another is very much dependent on human behaviour.

IN CLOSING We are creatures who crave normality. This can be a bit of a double-edged sword. On the one hand, we are driven to find ways to achieve some sense of normality that will enable us to safely resume regular activities as soon as possible. We have seen this at work in how both commercial and residential real estate began to rebound after dips in April-May. On the other hand, this can also prompt some of us to grow complacent with, or even hostile toward, social distancing, mask-wearing and other pandemic response measures. This leads to behaviours that raise the risk of a second wave of infections, which could force us back to the restrictive lock-down measures that have only recently begun to ease. Until a viable vaccine is readily and widely available, human nature will determine the fate of Canada’s real estate markets as much as the economic fundamentals. CMB MAGAZINE

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recommendedchanges

NEW CONCEPTS FOR THE MORTG BROKERS ACT CMBA-BC submits proposals on exemptions and licensing requirements for financial institutions and their employees BY SAMANTHA GALE

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B

ritish Columbia’s Ministry of Finance closed a consultation on a review of the Mortgage Brokers Act (MBA) at the end of April 2020. B.C.’s Act dates to 1972 and is one of the oldest mortgage broker licensing statutes in any Western jurisdiction – making it overdue for a revamp. When the MBA was first enacted it was forward thinking, but things have changed over the past 50 years. A revised statute provides opportunities to adopt brand new concepts not found in any current provincial mortgage broker licensing statutes. Below is part of a CMBA-BC submission to

government on the subject of exemptions and licensing requirements for financial institutions and their employees.

CURRENT AND HISTORICAL STATUS The MBA does not provide a full exemption from the application of the MBA to financial institutions and their employees who broker mortgages. What not many industry members realize is that section 11 of the MBA only provides an exemption from the “registration provisions” of the MBA – firstly to a list of different entities and individuals, and secondly to their employees.

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recommendedchanges

AGE More specifically, section 11(1) provides that: “The registration provisions of this Act do not apply to any of the following while acting as mortgage brokers or submortgage brokers under their proper names: (b) savings institutions . . .” It further states in subsection (2) that: “The registration provisions of this Act do not apply to any of the following: (a) an employee, or director, of a person exempted from registration under subsection (1) (a) or (b) . . ..”

Under ordinary rules of statutory interpretation, the specific reference to some provisions of a statute will exclude the other non-specified sections in the statute. In a nutshell, the MBA, therefore, only exempts banks and their employees who deal in mortgages from having to register as a mortgage broker, and does not exempt them from other provisions of the MBA. By implication, this means that any exempted entity or person listed in section 11, which includes financial institutions and their employees, should be complying with the consumer protection requirements set out in the MBA when engaging in the

registerable activity listed in section 1, which includes mortgage arranging. Historically, mortgage dealing employees from financial institutions were registered under the MBA in a special category of registration, created by policy, called Mortgage Development Brokers. This policy was revisited by the Registrar in 2008 under Bulletin MB 08-002, “Registration Requirements for Mortgage Development Brokers Contracted by Financial Institutions”, which is no longer posted on the BCFSA and is presumed to be inoperative. The crux of MB 08-002 is that a “person who brokers mortgages between borrowers and third party CMB MAGAZINE

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lenders, lends their own mortgage funds, or operates under a name other than that of the proper name of the financial institution will be considered to be an independent contractor and not an employee.” Under this analysis, persons who broker mortgages underneath a financial institution are not exempted from the MBA and require registration under the MBA. However, it appears that not many mortgage specialists or mortgage brokers working on behalf financial institutions obtained registration as a mortgage development broker. This interpretation of the MBA does not appear to have been widely accepted by financial intuitions, and nor is there is evidence that it was ever enforced.

appears to clearly mean that rest of the MBA provisions do apply. However, it is not clear if the term “registration provisions” applies to only specific sections requiring persons who engage in registerable activity obtaining registration, or the entire Part 1 of the MBA, which is headlined “Registration” and encompasses more than registration requirements. Furthermore, any consumer protection requirements that are imposed on a sector of the mortgage brokering industry without the need for licensing or registration are unenforceable, and therefore provide little or perhaps absolutely no value. The licensing process provides regulators with the capacity

The Supreme Court of Canada in a trilogy of cases (referred to as Marcotte) has determined that banks, while regulated federally, must also comply with provincial consumer protection legislation in certain circumstances. The Supreme Court concluded that “banks cannot avoid the application of all provincial statutes that in any way touch on their operations, including lending and currency conversion.” CHALLENGES WITH THE CURRENT STATUS Some of the challenges with the exemptions set out in section 11 as they relate to mortgage arranging activity by financial institutions are obvious and include: 1. Lack of clarity with wording and confusion over the purpose 2. Nature of employment relationships, and the use of the term “employee” 3. Balancing constitutional issues with good public policy

1

Lack of clarity with wording and confusion over purpose

As set out above, the reference to the registration provisions of the MBA not applying to certain entities and persons

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to mete out discipline through licensing suspensions, terminations, suitability reviews and the imposition of conditions of registration. The Registrar is left with no tools to enforce compliance without the power to control, grant or revoke a person’s licensing status. It is therefore not clear what the original drafters of the MBA intended by wording section 11 as it is currently set out.

2

Nature of employment relationships, and the use of the term “employee”

Employment relationships are currently in transition. They are becoming even more varied as work becomes more transitory and piecemeal, with workers often working flexible schedules from

the home and sometimes for limited durations. While some mortgage brokers clearly do act as true employees (such as “assistants”), the vast majority work on commission and pay a desk fee or a small percentage of their commission to the mortgage brokerage. Generally, mortgage brokers act independently to find and close transactions; they earn a commission when they do and receive no compensation when they do not. Exemptions that are dependent on the existence of true employment relationships, particularly in the field of mortgage brokering, may therefore not stick if put to the test in today’s new worker environment. Exemptions in the MBA should contemplate that workers may not neatly fit into the boxes of “employee” and “independent contractor” – modernized exemption provisions should be drafted to provide more certainty in their application.

3

Balancing constitutional issues with good public policy

There is a confusing regulatory landscape in Canada within the financial services sector. Banking under the constitutional federal commerce and trade power is regulated by the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada; while the provinces, under the constitutional property and civil rights power, regulate the industries and professionals engaged in finance and real estate activity, usually under provincial licensing legislation and land titles requirements. Other provincial powers such as over matters of a merely local or private nature (such as B.C. lands being mortgaged by a B.C. borrower to a B.C. lender) may come into play as well. The Supreme Court of Canada in a trilogy of cases (referred to as Marcotte) has determined that banks, while regulated federally, must also comply with provincial consumer protection legislation in certain circumstances. The Supreme Court concluded that “banks cannot avoid the application of all provincial statutes that in any way touch on their operations, including lending and currency conversion.” Despite the Marcotte case, some banks have authorized their employees to act


as financial intermediaries, such as mortgage brokers who place borrowers with third party lenders, without obtaining any provincial licensing. The absence of licensing is, in our view, an improper attempt to shield those bank employees from being subject to standards and discipline external to the banks (such as that imposed by provincial regulators on mortgage brokers and lenders). Most bank customers looking for a traditional bank mortgage do not expect to encounter bank employees who will place them with third party lenders not connected to the bank; yet such a placement is exactly what often occurs when the bank employee is unable to qualify the client for a bank mortgage. This is often done to the financial benefit of the bank and/or bank employee without the client having consented to (or even been made aware of) the relationship between the third party and the bank, and the additional expense. While duly licensed mortgage brokers act for borrowers to find them the best mortgage options, bank mortgage brokers do not. They may superficially resemble mortgage brokers, but they work for the bank and do not act in the borrower’s best interests. As you likely know, high-pressure sales tactics by banks have recently come under review by the Financial Consumer Agency of Canada. A fragmented financial services eco-system will inevitably lead to even greater overlap and confusion between federally and provincially regulated services providers. Exemptions for banks and their employees or contractors who engage in mortgage brokering therefore represent bad public policy and put the public at risk. Accordingly, any revision of the MBA should not contain any exemptions for mortgage brokers working for banks from the requirement to obtain mortgage broker licensing. Just like other mortgage brokers who work underneath independent brokerages, mortgage brokers working underneath banks should be required to obtain mortgage brokering licensing under the MBA.

RECOMMENDED CHANGES We recommend that bank contracted or hired mortgage brokers be required to comply with certain provincial consumer protection statutes that govern areas of exclusive provincial jurisdiction, such as mortgage broker licensing. Mortgage broker licensing statutes provide detailed, well-considered and essential consumer protection requirements in the absence of any similar federal requirements. It makes sense to put the bank mortgage broker on the same level playing field as other provincially licensed mortgage brokers to ensure that robust consumer protection rules are effective and enforceable against the entire mortgage brokering industry.

REVISIONS TO THE EXEMPTION SECTIONS OF THE MBA SHOULD BE MADE TO: n Exempt financial institutions

from the requirements to obtain licensing as a mortgage brokerage under the MBA. n Exempt employees or contractors

working for and under the proper name of a financial institution who place mortgages with the same institution (e.g. bank mortgage representatives) from the licensing requirements of the MBA. n Require the licensing without

any exemption under the MBA of persons who act as brokers by placing borrowers with third party lenders (e.g. bank mortgage brokers), regardless of whether they have a business, contractor or employment relationship with a financial institution. n Require the licensing without

any exemption under the MBA of persons or entities who work for a financial institution and arrange mortgages for the financial institution but do not work under the proper name of the financial institution.

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pandemicprotocols

The COVID Mortgage professionals discuss lessons learned

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pandemicprotocols

For those who often depend on making personal connections with clients, it’s been a time of challenge and discovery BY LISA GORDON

Experience: A

s the COVID-19 virus began to sweep across Canada in March 2020, businesses rolled up their sidewalks and shuttered their storefronts as employees relocated to home offices. Technology took centre stage as services such as Zoom and Skype allowed for safe virtual meetings. New online productivity tools and informative webinars were put to the test, with many people surprised by how effectively remote business could be conducted. Ironically, we’ve never been so connected – and at the same time so separated – from our co-workers and customers. For mortgage professionals across Canada, whose business often depends on making personal connections with clients, it’s been a period of challenge and discovery. Canadian Mortgage Broker reached out to several industry members to find out how they have weathered the storm and how they see the pandemic impacting mortgage transactions in the future.

REZA GHAZI

CEO Greenflow Financial Toronto, Ont. CMB: Coping with isolation has been a challenge during the pandemic. Where did you hunker down to ride out COVID-19, and what activities have helped you pass the time? RG: I spent most of my days in my home office, which is in the basement of my midtown home. I am currently completing my Master in Corporate Innovation at Queen’s University in addition to full-time work, so the deliverables and research kept me pretty occupied. I am at the tail end of the program. Soon, I have to work on the innovation that I would like to bring about in the mortgage space, so I am pretty excited!

CMB: Please tell us how the COVID-19 pandemic has affected your mortgage brokering practice. RG: I have to say that we were very well prepared for COVID from an operational standpoint. Starting in 2015, we as a company started working off the cloud; as such, we were positioned to work remotely and only attend important meetings or training at the office. We immediately postponed in-person gatherings and fully utilized video conferencing (which to some extent we previously used) to conduct our client and lender meetings. Luckily, everyone on our team is comfortable using technology, so there wasn’t a huge learning curve for adaptation. CMB: Do you think COVID-19 will have lasting effects on how we transact mortgage business? Describe any best practices or lessons learned. RG: Yes, I believe COVID-19 only fast tracked the impact of technology on mortgage transactions. It is imperative for all industry participants to be fully aware

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pandemicprotocols

of the technologies that are available and aim to simplify processes, while building new solutions to try to stay ahead of the curve. Building technology that is borrower focused, user friendly and transparent is the only way forward. Best practices that helped us adapt during COVID-19 were: n Having a good cash reserve to stomach volatility and potential revenue loss. n Staying fully in tune with changes to lending policies and government programs and reflecting such information to our clientele. n An early pivot of strategies to bank on the opportunities that have arisen from COVID-19 and historically lower rates (i.e. refinance to consolidate debt, switches). n Doing business with partners and service providers who value the use of technology to better serve customers.

CAROLINE RAPSON

Director of Operations Centum Financial Group Inc. Vancouver, B.C. CMB: Coping with isolation has been a challenge during the pandemic. Where did you hunker down to ride out COVID-19, and what activities have helped you pass the time? CR: I live on a boat that is a bit of a restoration project, and there is always a project on the go. So, I decided to keep coming into the office. Everyone else was set up to work from home, and I wouldn’t come into contact with anyone. Our office building has security card access and requires special access to get to our floor. My thought was that if a strict lockdown happened, at least I would have had a change of scenery for a while. CMB: Please tell us how the COVID-19 pandemic has affected your mortgage brokering practice. CR: From a national network perspective, we always look at what value we can provide to our entire network. When the pandemic hit, this was no exception. Our priority was what could we do to help brokers through 38

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these times? We increased our education and training offerings with the support of our lenders and partners, created specific marketing materials so brokers could inform their clients, referral partners, friends and families, and were checking in regularly to see if there was anything we could do for them or help we could offer. We want to help brokers not only survive but thrive, while dealing with all the changes. CMB: Do you think COVID-19 will have lasting effects on how we transact mortgage business? Describe any best practices or lessons learned. CR: I feel that the way mortgage business is transacted will change, for the most part. Brokers and clients who may not have been so comfortable dealing with online/ Zoom/phone transactions seem to be more accepting of it. Some people crave and enjoy the in-person meetings and relationships, and some will go back to that. I have spoken to various brokers in the industry who previously met their clients in person, and they feel they are more efficient with the current way they are doing business. Depending on the clients’ tech savviness, there may also be a bit of a learning curve, quite often with the excitement of learning something new.

ROCCO MONGELLI

Broker and Owner The Lending Nest powered by Sherwood Mortgage Group Concord, Ont. CMB: Coping with isolation has been a challenge during the pandemic. Where did you hunker down to ride out COVID-19, and what activities have helped you pass the time? RM: My home has always been my safe retreat, but it automatically became Mortgage Central, my go-to gym, a new learning and education centre for my kids, and a business centre for my wife. It’s amazing how productive you can still be with a full house, and with it being so busy for everyone, the days

went by quicker. I also gained a few gym and cardio partners, too! CMB: Please tell us how the COVID-19 pandemic has affected your mortgage brokering practice. RM: For me, COVID lit a bit of a fire. It is easy to get complacent in our industry when you are in it for a while. All of a sudden, you get hit with a pandemic that most of us have never experienced in our lifetimes, and we find ourselves reverting to the simplest rules of engagement with our clients. It brought back a fire that reminded me what has made me successful and also humbled me to remember where I came from. I also took the opportunity to become a support system for all my clients. I remember sitting on my couch in the evening and just hammering out emails and text messages to my clients with a simple message: “I’m here for you. Not for business, but for anything you need.” Everyone experiences different emotions and circumstances, both mentally and financially, and I wanted to ensure I could become a support system in whatever way they needed. The gratitude I received in return was not expected, but I was happy to see that it resonated. We go through so many emotions when helping clients get into their dream homes, and now it was time to ensure those dreams were not shattered by unforeseen circumstances. CMB: Do you think COVID-19 will have lasting effects on how we transact mortgage business? Describe any best practices or lessons learned. RM: I think the effect on how we transact was inevitable, but COVID definitely gave it a push. When you look at the industry as a whole and how all lenders had to adapt so quickly, it makes you realize that we cannot always count on tomorrow. Technology is now on fast forward. Brokers, lenders and any supporting industries such as appraisal services are all finding ways to ensure they’re up to speed and don’t become out of date. Things like video conferencing with clients, remote and virtual signings, and the acceptance of electronic signatures were always there, but now they are here to stay. The future has become the present in a very short period of time. It was great to see that we can adapt and that our clients prefer it.


researchfunds

NO PLANS FOR A NEW FEDERAL HOME EQUITY TAX Housing equity tax is really an “imputed rent tax” BY SAMANTHA GALE

C

anada Mortgage Housing Corporation (CMHC) has come under fire recently for reports that it is researching how to deploy a new federal home equity tax. However, a CMHC media spokesperson has now confirmed with Yahoo Finance Canada that such reports are inaccurate and that neither it nor the federal government have any agenda to implement such a tax. CMHC further explains that research funds have been provided to Generation Squeeze through its Solutions Lab to explore solutions to housing, wealth and inequality, and, more specifically, to improve housing affordability in Canada. A CMHC spokesperson advises: “While the project includes a research component, it is primarily focused on confirming the issues. Once the issues have been further analyzed, the most promising solutions will be further developed with stakeholders, prototyped, tested and prioritized for possible implementation and scaling.” Eric Swanson, executive director of Generation Squeeze, writes, “Rising home prices are creating a growing divide between those who own housing and those who don’t. This project will bring a broad cross-section of people into dialogue about solutions that might bridge that divide, in ways that support all Canadians.” A report on the Solutions Lab findings is anticipated sometime during early 2021. Most observers have concluded that a federal home equity tax is a capital gains tax. However, Dr. Jack Mintz, President’s Fellow of the School of Public Policy at the University of Calgary, has explained that a home

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equity tax is not the same as a capital gains tax – it is a broader tax on imputed rents. Taxes on imputed rents are not popular but do exist in some European countries, such as Switzerland, Holland, Belgium, Iceland, Spain and Luxemburg. Imputed rent is an estimate of the rent that an owner-occupied property would earn if it were tenanted and generating rental income. The theory behind imputed rents can be understood like this: if two independent people own property of equal rental value, and each lets the other person live in their house without collecting any additional monies (e.g. a housing swap), so that the mutual rental transactions generate no tangible rental income, the government is deprived of the opportunity to tax rental income. In theory, imputed rents on property are considered to add to a person’s disposable income as they do not pay rent.

In academic circles, the failure to tax imputed rent is referred to as homeownership bias. Removing homeownership bias by taxing imputed rent would undoubtedly create chaos in the housing market, by upsetting the equilibrium of current housing taxes, which include municipal property taxes, property purchase taxes and a host of other hidden real estate related taxes. In addition, cash-poor, asset-rich sectors of the community, such as senior citizens who have owned their home for many years, would be unfairly and disproportionately impacted by imputed housing taxes. Let us hope that the anticipated Solutions Lab report identifies a plethora of housing affordability solutions that add to the capacity of all Canadians to own a home and stays away from taxation options that tend to undermine affordability. CMB MAGAZINE

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covid-19recovery

Trudeau government should target high tax rates during COVID recovery and beyond Fighting deficits by reforming and reducing spending would likely produce better outcomes than relying on revenue from personal income tax hikes BY TEGAN HILL AND BEN EISEN

D

ue largely to COVID-19, Canada now faces a steep recession. A recent RBC forecast estimates the economy will contract by 7.1 per cent this year. Government policies will help determine the pace of recovery and the country’s economic growth prospects. To help support the economic recovery, the Trudeau government should target Canada’s uncompetitive personal income tax rates. Over the last decade, tax hikes at the federal and provincial levels have increased the top combined (federal and provincial) personal income tax (PIT) rate in every province. In 2015, the Trudeau government added a new top tax rate, increasing the top federal rate from 29 per cent to 33 per cent. Over the same period, seven out of 10 provincial governments increased tax rates on upper-income earners. The combined rate hike was highest in Alberta (9 percentage points), with Ontario (7.1 percentage points) and Quebec (5.1 percentage points) also seeing large rate increases. As a result of these PIT hikes, seven out of 10 provincial governments (including Quebec and Ontario) now have a top personal income tax rate greater than 50 per cent. This is a marked change compared to just one decade ago, when the top rate in all 10 provinces was below 50 per cent.

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Today, as noted in a new study by the Fraser Institute, Canada’s PIT rates are decidedly uncompetitive compared to other jurisdictions. For example, for the top PIT rate, out of 61 jurisdictions in Canada and the United States (provinces, states and Washington D.C.), nine Canadian provinces are in the top 10 least-competitive tax jurisdictions. In total, 48 of the 51 U.S. jurisdictions have lower top PIT rates than every single Canadian province. And it’s not just about high-income earners in the top tax brackets. Canada’s tax rates are uncompetitive across a wide range of income levels. Indeed, all 10 provinces are in the top 10 least-competitive tax jurisdictions at $300,000, $150,000 and $50,000 in income.

WHY DOES THIS MATTER? For starters, Canadians keep less of the money they earn. But high personal income taxes also discourage work, because they lower the reward for work. High income taxes also deter high-skilled workers, entrepreneurs and businessowners from starting, expanding or relocating businesses in Canada. Indeed, evidence shows that PIT rates can influence people’s decision on where to work or start new businesses. All else equal, jurisdictions with higher PIT rates are less

likely to attract mobile professionals and entrepreneurs than jurisdictions with lower rates. Of course, individuals consider a wide range of factors when deciding where to live, but PIT rates are one factor. In the midst of the COVID recession, tax policy decisions must be made in light of Ottawa’s large budget deficits (and the red ink in every province). However, according to research by late Harvard economist Alberto Alesina, deficit-reduction efforts based on spending reductions – not tax hikes – tend to help produce better economic growth outcomes. Put differently, fighting deficits by reforming and reducing spending would likely produce better outcomes than relying on revenue from PIT hikes. This recession will eventually end, and governments across the country will need to develop policies that support growth and prosperity. Addressing Canada’s uncompetitive personal income tax rates could help attract talent, support investment, encourage job creation and ultimately support economic growth for the benefit of Canadians and their families. Tegan Hill is an economist at the Fraser Institute; Ben Eisen is a senior fellow at the Fraser Institute. More at fraserinstitute.org. This article originally appeared in the Vancouver Province. CMB MAGAZINE

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bestpractices

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DECISION

ADVICE

RISK

SAFETY

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bestpractices

Reduce liability risks by avoiding acting as client’s fiduciary How to minimize the risk of a broker becoming a fiduciary BY RAY BASI, J.D., LL.B., STAFF, EDUCATION AND POLICY REVIEW

T

he June 17, 2020, Alberta Securities Commission’s (ASC) decision in Re Rustulka 2020 ABASC 93 acts as a reminder for mortgage brokers to avoid unnecessarily taking on liability risks by conducting themselves as fiduciaries of their clients. This article will discuss: n what it means for a broker to be a fiduciary of a client; n risks associated with a broker being a fiduciary of a client; and n some easy steps to minimize the risk of a broker becoming a fiduciary. A fiduciary: n has the obligation to act in the best interests of another party; n owes a duty to the other party to act with scrupulous good faith, honesty, candor and loyalty; n has the trust and confidence of the other party; n has skill and knowledge upon which the other party relies; and n has the power, by unilaterally using discretion, to affect the other person’s legal or practical interests. A mortgage broker can become a fiduciary because either: n the law makes the broker automatically a fiduciary of their clients; n the broker agrees to be a fiduciary of the client; or n the broker’s conduct makes them a fiduciary of the client.

Clearly a broker should generally not want to be a fiduciary of the client. A broker who is in fiduciary relationship with a client and fails to meet the obligations owed to the client can be responsible for damages suffered by the client. Fortunately, it is relatively easy for a broker to avoid becoming a fiduciary of the client. No law makes brokers fiduciaries of their client simply because of the brokerclient relationship. (For a fuller discussion, see Canadian Mortgage Broker magazine, ‘Is a Mortgage Broker a Fiduciary,’ Samantha Gale, Fall 2015, p.16). As well, it is within the broker’s control to not agree to be a fiduciary for the client. Accordingly, to avoid becoming a fiduciary, it only remains for the broker to not conduct themselves in a way that makes them a fiduciary. What sort of conduct should a broker avoid? A broker by a combination of legislation, regulatory requirements and civil law (primarily by usual client service agreements and negligence law) needs to, for the purposes for which the broker is retained, act in the best interests of the client and do so with scrupulous good faith, candor and loyalty. The broker has the trust and confidence of the client who is relying on the skill and knowledge of the broker. Accordingly, to avoid a broker becoming a fiduciary of the client, it is important that the broker be an adviser to the client and not unilaterally exercise discretion (such as by making decisions) for the client. The broker should provide advice, options and recommendations so as to allow the client to make informed decisions.

That was the essence of the problem that faced Rustulka in the ASC decision. He had sold about $$6.5 million in exempt market securities and earned about $460,000 in associated commissions. The ASC concluded Rustulka either did not know his clients (in the sense of the know your client or KYC requirement), or he misrepresented what he knew on their KYC forms and Suitability Assessment Forms. He recommended securities purchases and investment strategies that were patently unsuitable for them; exacerbated the situation by making misrepresentations with respect to risk while over-estimating and over-emphasizing the potential upside; and, he failed in his duty to make a balanced presentation regarding prospective investments and to warn the investor client of the risks. In effect, Rustulka had deprived his clients of the opportunity to make informed decisions concerning investments and had himself made the decisions for them. He acted as a fiduciary rather than remaining an adviser. He failed in meeting the obligations that came with acting in that role. The matter of determining sanctions for doing so was put over to a later date.

TAKEAWAY To avoid becoming fiduciaries and taking on liabilities, mortgage brokers should fully and competently advise their clients as to options and recommendations so as to allow them to make informed decisions concerning mortgages.

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nextgeneration

PLAYING TO POTENTIAL A lifetime sportsman, Wes Sudsbury is focused on helping others achieve their best performance, both on and off the field. BY LISA GORDON

W

es Sudsbury is passionate about coaching. Whether it’s assisting a new mortgage agent with a difficult deal or encouraging kids to play their best game at the hockey rink, he gets great satisfaction from helping people realize their full potential, both on and off the field. In fact, the love of the game – just about any game – has been a constant for as long as Sudsbury can remember. From age four, he’s put his heart into ice hockey, ball hockey,

helped me work with people. It helps me to have vision. In business, you want to work on improving your product knowledge, and sports has given me a good work ethic for improvement. It’s a community in business, just the same as sports.” In fact, it was a sports analogy that helped Sudsbury get through his first year as a mortgage agent. He had left a 10-year career at Laurentian Bank/B2B Trust to try his hand at Homeguard Funding, the family-run mortgage brokerage founded in Newmar-

The experience I had growing up in the sports community has helped me work with people. It helps me to have vision.” –Wes Sudsbury lacrosse and, more recently, golf. Whether he’s playing himself or coaching one of his three kids’ teams, he believes sports prepare you for life. “You have to learn to work with many different personalities in pursuit of a common goal,” he says. “The experience I had growing up in the sports community has 44

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ket, Ont., by his parents, Wayne and Sheilah Sudsbury, and their partner Bill Eves. “I just kept the end goal in mind,” he recalled. “That’s what put me through the first year as an agent. I didn’t make as much as I made at the bank in the first year, but I knew the future potential was much greater. My kids are all in sports, and I wanted that

flexibility to be there. I didn’t want the twohour-a-day commute. I knew if I stuck at it, I’d be able to benefit.” Although the job was new, in some ways Sudsbury had been preparing to join Homeguard Funding for his whole life. He remembers competing in games at the company picnic and helping the office digitize paper records as a teenager. “I’ve been in the mortgage business forever,” he said with a laugh. “I helped Dad out with setting up the booth at trade shows, or putting signs around town.” Now, at age 40, he’s ready to help the company achieve tomorrow’s goals.

BUILDING FOR THE FUTURE Homeguard Funding was started in 1983 as a family-operated, full-service independent brokerage firm serving the Greater Toronto Area. Partners Wayne Sudsbury and Bill Eves made it their mission to find creative, innovative solutions for even the most difficult funding deals, always putting an emphasis on personal service. Today, after 35 years in business, the company enjoys strong relationships with second- and even third-generation customers. The staff has grown to include 23 mortgage agents, two full-time underwriters, two customer service staff and one administration manager.

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As the founders have pulled back a bit to contemplate retirement, the next generation is primed and ready to write a new chapter in the Homeguard Funding story. Wes Sudsbury and his brother-in-law, Grant Brown, are introducing new technology and modern processes to the company, while at the same time staying true to the firm’s original recipe for success. While Brown has been with Homeguard Funding since 2001, Sudsbury made the jump in 2012. He said his progressive roles at the bank helped prepare him for the move. “Dad was looking to transition to retirement, and one day he asked me if I was ready to take over. ‘Are you done training?’ he asked me. I’d never really envisioned jumping into the business, but my experience at the bank gave me the confidence to go and try it. I was nervous, of course, but I had a lot of confidence in my abilities.” Initially it was a tough go, with that first paycheque taking four months to arrive. Sudsbury worked his contacts, letting the world know what he was doing. Eventually,

the business started to come. And even though making the transition from a big bank to a small family-run business was difficult in some respects, Sudsbury knew his dad (and his mom, who runs the office) always had his back. “Where it was probably the weirdest was going through the working day and then going to a Father’s Day golf game; it was hard keeping work and family apart. I couldn’t complain about my boss to my dad,” he joked. Today, he knows he made the right decision. “I love the idea of leading an organization. Running a business excites me, and I like coaching the agents. I get a lot of satisfaction from bringing a new agent along and seeing them develop and grow. True to his nature, Sudsbury enjoys sharing his knowledge with the industry. He’s been a member of CMBA since 2004 and a board member since 2016. At the time

of writing in June, his first year as CMBA Ontario chapter president was just concluding. “I want to move the industry forward, and I believe there is a reason for CMBA,” he said. “We need to band together to provide best practices to our membership and give them resources, tools and education to help them in their business. We need to be that voice from an advocacy standpoint. We’re better together.” Meanwhile, Brown and Sudsbury are committed to carrying on Homeguard Funding’s tradition of personalized customer service. “We stay in touch with our clients, follow up, make sure they are OK,” concluded Sudsbury. “It’s harder to get new clients than to just service your own. We’ve found this year, especially, it’s sometimes just a phone call that’s needed to ask how they are doing.” With 80 per cent of their business coming from repeat and referral clients, it’s a tradition well worth protecting.

Equitable Bank Switch Mortgage Solution Is your client ready to make the switch to a mortgage that better meets their financial goals? By removing some of the hurdles that exist when switching a mortgage to another lender, we’ve created a cost-effective switch option that makes it easy for your clients to pursue the mortgage option that works for them. Here’s how it works: • We permit up to $3,000 to be capped onto the loan to cover transfer-related fees1

• Loans with active transactional insurance receive high-ratio pricing irrespective of LTV

• For mortgages that are registered as conventional charges, we cover the registration fee

• We accept switches from all three primary mortgage insurers3

• For mortgages registered as collateral charges, the collateral registration fee can be capped onto the loan2

• Some switches may qualify under “grandfathered rulings” permitting qualification on the contract rate, 30 year amortizations, purchase prices over $1MM, etc.

CONTACT YOUR RBM TODAY

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This includes prepayment charges, discharge fees, collateral registration fees, etc. No equity takeouts permitted. 2 Provided total charges/fees capped on the loan do not exceed $3000. All switches are re-registered as standard charges. 3 All deals must be insured or insurable.

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Profile for CMBA

Canadian Mortgage Broker Magazine - Summer 2020  

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