Private Matters Today - Fall 2016

Issue 02 • Fall 2016

WHAT’S A “MIC” & HOW DO YOU START ONE?

PLUS PLUS Appraisals 101 with Patrick Smith of Metrowide Appraisal Services ➲ p.22

How to Sell & Secure More Private Deals ➲ p.8

Top 5 Reasons Why D&O Insurance is Important ➲ p.17

➲ p.12

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WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 3

CONTENTS

»»p.17

»»p.12 »»p.18 4 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

CONTENTS

FALL 2016 EDITION 6 EDITOR’S NOTE Forging ahead in our goal to produce a publication that provides timely and relevant educational content.

12 COVER STORY Wondering what a Mortgage Investment Corporation is and how to set one up? Cross your t’s and dot your i’s with the expert advice from Jeff Levy of Levy Zavet PC Lawyers.

17 RISK MANAGEMENT »»p.08

LMS ProLink’s Derrick Leue, guides you through the importance of D&O insurance in this first edition of his quarterly feature “From Derrick’s Desk”.

18 BUSINESS STRATEGY Our marketing expert Javed S. Khan reveals 10 ridiculously effective lead generation ideas for your mortgage business.

FEATURES 8 LEARN FROM THE LENDERS »»p.22

More borrowers are taking advantage of non-traditional lending – PMToday caught up with a few private lenders to discuss the nuances of private lending.

22 APPRAISALS 101 Patrick Smith of Metrowide Appraisal Services highlights the benefits of using a full appraisal.

24 FEATURE LENDER PMToday features Secure Capital MIC and highlights the benefits of their latest product offerings and services.

26 AD INDEX Get a snapshot of who is in our 2nd edition! »»p.24

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 5

EDITORIAL

EDITOR’S NOTE A COMMITMENT TO TIMELY INFORMATION

With real estate markets in Greater Toronto Area and Vancouver in overdrive, one of the key questions on the minds of private lenders and Mortgage Investment Corporations will undoubtedly be the eventual correction of the real estate prices in those two critical markets. While there may be differing opinions on the timing and degree of the correction, almost all experienced private lenders, brokers and industry participants would likely agree on the inevitability of it. After a successful launch of the Private Matters Today publication, in this issue, we are forging ahead with our commitment to providing timely information and how-to pieces to our readers.

In this issue, we have attempted to capture the process and steps involved in setting up a Mortgage Investment Corporation, while providing tips and advice from industry experts on how to minimize liability claims by enhancing our understanding of the nuances of various policies available. With the province of British Columbia recently having introduced a 15% foreign ownership tax on real estate purchases, it is logical to assume increased participation by foreign investors in the GTA real estate market which in turn may further fuel the bidding wars all too common at the moment.

We have reached out to appraisers considered experts by private lenders and brokers in the marketplace regarding tips and advice they have for the private mortgage industry. The feedback we received on the one hand guides mortgage brokers on how to interpret appraisals to better structure sensible solutions for their customers while guiding the private lending community on how to interpret values so as to lend judiciously on the other. Clearly the credit crisis of 2008 and 2009 brought about many structural changes in how financial institutions now lend mortgages but outside of requiring more full appraisals as opposed to moving toward Automated Valuation Models, the Canadian lending community or the Appraisal Institute of Canada for that matter, didn’t invest too much time in enhancing the qualitative information contained in a typical real estate appraisal in Canada.

With Canadian economy being in flux, the uncertainty created by the outcome of the US presidential election, one thing is certain: Canadian prime rate is not increasing anytime soon. Red hot real estate markets in GTA and Vancouver in conjunction with unrelenting debt to income ratios for Canadians will likely necessitate further tightening by The Office of the Superintendent of Financial Institutions (OSFI). While this will be widely accepted news to the private lending community, a close eye will have to be kept on valuations and the qualitative ingredients that go into an appraiser’s report in arriving at the value. We will continue to research this topic in our upcoming issues. In the interim, happy reading!

- Harry Singh

6 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

WWW.PMTODAY.CA ISSUE 02 • FALL 2016 EDITORIAL

CONTRIBUTORS

Editor Harry Singh

Bryan Jaskolka Derrick Leue Eduardo Pontes Jaime Vilas Javed S. Khan Jeff Levy Justin Kowal Kimberlee Freeman Marianne Lachcik Michael Carragher Patrick Smith Rosa Shirani

ART & PRODUCTION Production & Design Kayla Patullo

EDITORIAL & ADVERTISING INQUIRIES tel: 647 872 6807 info@pmtoday.ca Private Matters Today Inc. 3280 Bloor Street West, Suite 1140 Toronto, Ontario M8X 2X3 tel: +1 647 872 6807 www.pmtoday.ca

Private Matters Today Inc. is a B2B publishing company that produces a quarterly magazine dedicated to providing educational content surrounding private lending and investing, as it relates to mortgage brokers and agents operating in Ontario.

Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributors are invited, but copies of work should be kept, as the magazine can accept no responsibility for loss.

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LEARN FROM THE LENDERS

ALL YOU NEED TO KNOW ABOUT PRIVATE LENDING CLN FINANCE Phone: 1-416-494-1144 Email: info@clnfinance.com Website: www.clnfinance.com

Eduardo Pontes, Manager of Operations and Marianne Lachcik, Credit Manager

CANADIAN MORTGAGE INC. Phone: 1-866-243-2207 Email: info@canadianmortgagesinc.ca Website: www.canadianmortgagesinc.ca

Bryan Jaskolka, Vice President of Business Development

FIRM CAPITAL CORPORATION Phone: 1-416-635-0221 Email: info@firmcapital.com Website: www.firmcapital.com

NEW HAVEN MORTGAGE CORPORATION Phone: 1-866-996-8226 Email: info@newhavenmortgage.com Website: www.newhavenmortgage.com

PARAMOUNT EQUITY FINANCIAL CORPORATION Phone: 1-905-201-2282 Email: customerservice@paramountequity.ca Website: www.paramountequity.ca

8 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

Michael Carragher, Vice President, Mortgage Investments and Justin Kowal, Senior Manager, Mortgage Origination

Kimberlee Freeman, Director of Business Development

Rosa Shirani, Manager Lending

There are significant obstacles for most first time home buyers who require mortgage financing in order to purchase a property. With traditional banks tightening their lending criteria, private lenders and mortgage investment corporations (MICs) continue to see an increase in their funded volumes, as they aid those being turned down by the banks. New Immigrants and Business for Self borrowers particularly feel the tighter credit guidelines hindering their ability to enter into home ownership. Brokers and agents who have primarily worked with traditional lenders or who are new to the industry are often unsure how to dive into the private lending and MIC arena.

PMToday caught up with some MICs and Private lenders to get their insights into why brokers and agents should take their clients to non-traditional lenders and how this could be a lucrative proposition for them.

WHY SHOULD NEW AGENTS INVEST IN LEARNING ABOUT PRIVATE LENDERS AND MICs?

financing needed that is truly borrower-focused.

DESCRIBE SCENARIOS IN WHICH A BORROWER MAY NEED A PRIVATE FINANCING SOLUTION? After taking the time to learn about private lenders and MICs, you must also be aware of why a borrower would need this solution to begin with.

There are many scenarios in which a borrower might require private financing. According to Rosa Shirani, Manager Lending of Paramount Equity Financial Corporation, “the most common is simply due to credit issues.” The great thing about this scenario is that MICs and private lenders are more likely to assess borrowers based on equity and security, rather than income and credit history. With this in mind, Eduardo Pontes, manager of operations and Marianne Lachcik, credit manager of CLN Finance, consider nontraditional financing solutions mainly for those with “bruised credit, business for self-borrowers or borrowers who don’t meet traditional financing guidelines.”

“As a new agent, it is worthwhile to familiarize yourself with some private lenders/MICs and establish working relationships. These relationships will give you access to another source of capital to provide short term solutions for your client until they can improve their financial position and be able to qualify for a traditional mortgage,” says Firm Capital Corporation (FCC).

“The latest changes under the B20-B21 guidelines have made it increasingly difficult to place your typical deal due to the more rigorous underwriting guidelines relating to GDS/TDS ratios, income qualification and equity take outs as banks and mono-line lenders are becoming more conservative.” Ultimately, as the need for nontraditional financing grows, new agents should strongly consider putting their educational efforts into understanding the products and services that a MIC or private lender can provide.

Private lenders and MICs offer specialized products and services to accommodate each client’s unique situation. Canadian Mortgages Incorporated (CMI) often finds itself providing solutions for: short term bridge loans, 12-month debt consolidation and credit repair mortgages, paying tax arrears, property renovations, or borrowing funds to acquire another investment property, whereas Firm Capital Corporation typically provides solutions for “foreign investors/ non-residents, self-employed individuals and infill construction financing.” In order to fully understand what non-traditional lending solutions will best fit your clients needs, you must not only look at what type of borrowers lenders accept but also evaluate how private lenders and MICs assess those borrowers.

Kimberlee Freeman, Director of Business Development & Planning of New Haven Mortgage Corporation says “it is imperative to understand that not all MICs and Private Lenders have the same “matrix” or underwriting requirements.

Some may in fact be equity lenders only or others may apply some covenant criteria to their approval process.” Getting to know these requirements through creating strong working relationships and investing in your own professional development, will allow you to easily source and sell the

Bryan Jaskolka, VP of Business Development of CMI says “this is specific to each lender, just like within A and B lending segments. We look at a mix of the marketability of the property and covenant, with a higher focus on covenant at high LTVs. We adopt a more lenient view on those who have strong equity.” For brokers and agents entering the non-traditional lending space, it is imperative to understand that “MICs and private lenders are utilized for more difficult deals,” explains Freeman. Geographical areas and real

HOW DO PRIVATE LENDERS/MICs ASSESS BORROWERS?

estate itself are also significantly assessed “by reviewing appraisals in great detail and focusing on the condition of the property, days on the market etc.” says, CLN Finance. Private lenders and MICs assess borrowers by understanding the importance of knowing “the story that leads to the situation a borrower has found themselves in,” says Shirani. To some non-traditional lenders, explaining the big picture could help your client get the funding that they need.

THE KEY DIFFERENCES BETWEEN A PRIVATE LENDER VERSUS A MIC? A private lender is usually an individual lawyer, doctor, or other high net worth individual with excess capital – or a corporation

that deals with or approves mortgages. “They tend to be more lenient in their underwriting [and generally] have a finite amount of capital” says FCC. The flexibility in how they assess a loan gives them the freedom to lend to whom they choose and the ability to make exceptions.

“A MIC, on the other hand, is governed by the O.S.C. (Ontario Securities Commission), must follow rules and regulations (as set out by the O.S.C.) and has an offering memorandum that is affixed to their lending criteria. A MIC is made up of numerous accredited investors who pool their funds,” says Freeman. If the MIC is public, it will “have an asset manager evaluating the underwriting risk and who is very well versed in the real estate market; they are also constantly watching market trends and adjusting the mix of portfolio from an asset class and geographical perspective. As well, the MIC asset manager has an origination team working with brokers/agents to provide a constant flow of new business” explains FCC. “I would say the differences are primarily regulatory and affect how the lender or MIC must manage their capital raising process.

Ultimately, the two compete in the same space,” adds Jaskolka.

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 9

FEATURES WHAT SHOULD BROKERS AND AGENTS LOOK FOR WHEN ASSESSING WHICH PRIVATE LENDERS OR MICS TO WORK WITH? Brokers and agents need to do their due diligence when working with private lenders and MICs, just as one would with traditional lending. CLN Finance explains the importance of placing your client with a reputable lender, “who has creditability, a good track record and has established a good name for itself in the industry.” Working with someone who is knowledgeable and experienced can make this process less daunting.

Getting into the nitty gritty of working with nontraditional lenders, brokers and agents need to be meticulous. “The most important thing for agents to do is to review all pages of either their letter of Intent or commitment. Each lender outlines conditions they will require prior to funding and fees associated with the mortgage, costs for things like NSF’s, statements and especially early payouts after funding.” Shirani continues, stating that “agents must read the commitments and clearly understand these conditions and costs so they can clearly explain to the borrower. The last thing they want is to fund and then find out what their costs are, or what their costs will be at the end when they try to discharge.”

FCC adds, “as a broker/agent you should be aware of the following: a) the product types the lender likes to focus on; b) the product features namely mortgage terms, rates, fees, interest only, prepayment options etc. c) you also need to understand the lender’s underwriting process and requirements. These are options that can be very important as to how you structure the loan for your client.” Ultimately, “the more informed you are the less stressful the process will be and the faster you close your deal leading to a satisfied client and repeat business for everyone.”

WHAT IS THE IMPORTANCE OF AN EXIT STRATEGY IN PRIVATE LENDING? Most private mortgages are means to an end. The mortgages offered are usually short term, ranging between six to twelve months. “After this period, most lenders are looking to see the client transition into a trust company or credit union/bank lender” says Jaskolka. “As an agent or broker you need to be thinking in terms of the plan required for the borrower to establish a better credit score or a plan to prove more income and therefore be in a position to qualify for a loan via a traditional lender

10 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

MICs and Private lenders will give you access to another source of capital to provide short term solutions for your client...” and be able to refinance the existing private/MIC mortgage loan” adds FCC.

WHAT ADVICE WOULD YOU GIVE TO BROKERS AND AGENTS SELLING PRIVATE SOLUTIONS, PARTICULARLY AS IT PERTAINS TO RATES AND FEES? CLN Finance: It is imperative for agents and brokers to explain that private solutions often have higher rates and fees based on the risk associated with the investment. Agents and brokers should identify the opportunities that private lending offers, when the client does not meet the guidelines for a traditional mortgage.

Canadian Mortgages Inc.: APR and fees are important, but so is the value that the client is receiving from the transaction. Service providers that add value to their client can usually stipulate rates and fees that are fair to all parties involved.

If the loan is consolidating $1,500 of monthly payments into $500 and improving their credit, then it’s not just a matter of the lender fee.

Likewise, if a client is saving a 3-4% insurance premium on a much larger amount or a huge penalty with their bank by borrowing via a second mortgage, it’s not just what they are paying but rather what value is being created or how does the cost of borrowing compare to the alternatives that really matters.

Firm Capital Corporation: When borrowers do not qualify for a traditional mortgage with an A lender they typically do not want to accept that their financial situation presents a higher level of

risk for a lender. As a result, the broker/agent must educate their client on the pricing they should expect to pay to solve their financing problem.

Once the broker/agent obtains a mortgage commitment that will solve the clients financing situation, the solution should be presented as short term with the ultimate goal to source a traditional mortgage in the next 12-24 months.

On this basis, a reasonable borrower will be more receptive to the rate and fee structure offered by private lenders/MICs.

New Haven Mortgage Corporation: Be candid and disclose the “math” or total cost of borrowing. The borrower must understand that legal fees and appraisal fees are pretty much common place. The rates and fees must of course be in line with the conditions, terms and prepayment penalties to make a decision. An 11.99% fully open mortgage may be better than a 10.99% mortgage that has a 3-month interest penalty affixed to it. In some cases, a private 2nd mortgage (even at a higher rate of interest) would be more beneficial than the cost to break an existing 1st mortgage and the additional default insurance premiums. All details of the loan must be analyzed.

Paramount Equity Financial: A private mortgage is a private mortgage. When a client requires private financing to correct a problem, the problem needs to be fixed. Clients should be given a full scope of total costs, monthly payments, lender fees and discharge fees. Often there is not much difference between one lender to another, it is simply presented differently. One lender may charge a higher lender fee and a lower rate while another may charge a lower rate and higher fee.

Some may charge a lower rate and a lower fee but a much higher discharge fee. This goes back to first point that it is important for an agent to invest in learning about private mortgages.

- Kayla A. Patullo

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ajay.kaith@oppono.com 416-669-9274 WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 11

COVER STORY

MORTGAGE INVESTMENT CORPORATION (MIC)...

WHAT IS IT & HOW DO YOU START ONE? With significant potential for favourable rates of return and previously instituted tax exemptions, Canadian Mortgage Investment Corporations (MIC’s) are increasingly becoming recognized as a low-risk method of investment. In 1972, the Residential Mortgage Financing Act was developed by the federal government to encourage private financing. The Act later functioned as a precursor to Section 130.1 of the federal Income Tax Act (ITA) which is responsible for setting out the “rules that apply to mortgage investment corporations and their shareholders”.[i] MICs were first established to provide investors with the opportunity to invest their money as shareholders into residential mortgages, and to own a portion of the MIC’s total portfolio. As a result, MICs have become known for their great advantages 12 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

such as the direct flow-through of net income to investors with the exemption of corporate tax.[ii] MIC’s invest primarily in residential mortgages however mortgages in commercial, industrial, developmental and construction categories are also customary.

Considering how volatile the stock market can be, the MIC is an excellent option for investors to receive consistent dividends while owning security against real property.

Depending on the particular MIC, certain investment options such as RRSPs, RRIFs, DPSPs, or RESPs and TFSAs may be eligible for MIC investment, and distributions received on MIC investments held through these investment options are taxed according to their respective regulations.

MICs experience restrictions as well, such as the inability to invest more than 25% of

all corporate assets in real estate, as well as the inability to develop land or engage in construction.[iii]Legislation exists to ensure that MICs are bound to a set of stated rules, such as the condition that MICs are to be held as a public corporation (according to the ITA at 130.1(5)). Subsection 130.1(6) (c) of the ITA lists certain criteria that a MIC must satisfy throughout a taxation year, including that none of the property of the corporation may consist of: (i) debts secured by real property situated outside of Canada; (ii) debts owing by non-residents unless secured by real property situated in Canada; (iii) shares of non-resident corporations; or (iv) real property situated outside of Canada or leasehold interests in such property. The corporation must be Canadian and no person may own, directly or indirectly, more than 25% of any class of shares. (ITA 130.1(6) (d)). In addition, at least 50% of a MIC’s

MICs provide an excellent alternative source of financing and for the many positive reasons, MICs are growing exponentially in operation and capacity in Canada. With prudent and professional management, MICs can achieve high returns to investors with low risk. assets must be in residential mortgages, and/or cash and insured deposits through the Canada Deposit Insurance Corporation member financial institutions (ITA 130.1(6) (f)(ii)(A)).

Provincially licensed mortgage brokers and real estate agents are typically accountable for the management of the MIC; this involves sourcing, acquiring and administering mortgages that would provide the greatest rate of return with the lowest possible risk. The mortgage portfolio is continuously managed with newly invested share capital and the proceeds from repaid and discharged mortgages are utilized to fund new mortgages. MICs typically include a Credit Review Committee of shareholders who are responsible for the review and approval or rejection of mortgage applications in the portfolio. This is to protect shareholders’ investments while remaining cognizant of current market conditions and any potential underlying risks. Since brokers gain commission from placing mortgages, they are restricted from acting as members of Credit Committees due to an obvious conflict of interest. At the end of every fiscal year, audits of a MIC’s annual financial statements must be made by an independent accounting firm.

In Ontario, MIC’s are registered and licenced provincially and must meet additional requirements to receive tax incentives pursuant to section 130.1 of the ITA. If all conditions expected of the MIC during the course of the year are met, the corporation receives entitlement to reduce its taxable income to the extent that taxable dividends are paid by the corporation during the year, or within 90 days post year-end (ITA 130.1(1)).

Although taxable dividends received from the MIC are considered interest income, they do not qualify for any gross-up or dividend tax credit and are subject to full income inclusion by the shareholder (ITA

130.1 (2) and (3)). The creation of a MIC is similar to other corporations in the method of organization, election of directors/officers and the faculty to appoint committees, hire employees, and issue shares. Generally, a MIC will authorize and issue several different classes of shares including common voting shares and preferred non-voting shares.

The MIC itself will not pay income tax so long as the profits are flowed through to the shareholders and taxed in their hands.

This is advantageous to an investor who has purchased MIC shares through a selfdirected registered retirement savings plan (RRSP) or a self-directed registered retirement income fund (RRIF) as the tax is deferred until the funds are transferred or annuitized.[iv] In the case of Tax Free Savings Accounts (TFSA), the dividends earned are tax-free when withdrawn.[v]

Principal expenses include management fees, audits and other professional fees.

Revenue is earned in the form of mortgage interest from fees, penalties, interest from mortgages, revenue from property holdings, and capital gain dividends, typically from the disposition of real estate investments (ITA, 130.1).

With all investments come potential risks and benefits, and while the risks of investing in a MIC are few, there are a few potential vulnerabilities to MICs one should be aware of prior to making a financial commitment.

Although fraudulent occurrences are uncommon since MICs must produce audited financial statements each year, an investor can research to see if the MIC is subject to any lawsuits by reviewing its yearly financial statements. If a MIC fails to maintain status by eluding the ITA’s requirements, the MIC will have its income taxed prior to shareholder distribution, lowering returns significantly.

Audited financial statements show investors how much the MIC has borrowed, and the prospectus typically shows what the MIC policy caps are for the borrow limits. (Many MICs are reasonably short term lenders, usually with a turnaround within 24 months).

The investment process begins when an investor deposits funds into the MIC, followed by the funds’ exchange in return for company shares. Each investor is entitled to an appropriate number of preferred shares, entitling the shareholder to a prorated share of mortgage income earned by the MIC. When investing in an RRSP, the investor instructs the trustee to deposit funds on their behalf into the MIC, and the trustee holds the preferred share certificate “in trust”.

Projected returns range (depending on the MIC) from 6%-12% per year and are usually disbursed quarterly in the form of a dividend and taxed to the individual as interest income which can be received in cash or reinvested back into the MIC. Dividends may be collected by way of funds or additional shares (ITA, 130.1).

A reasonable concern that investors may have regarding investing in MICs is “what if the mortgagor defaults?” Management of the MIC must be vigilant and selective with whom they lend to, and investors can inquire about whether the MIC in question will allow investments within various percentage brackets ranging from low to high risk. This option would provide investors with the opportunity to select an investment according to their level of risk (this option does exist with certain MICs).

Also, investors that are researching potential involvement in MICs should be aware that there are some MICs in limited markets, such as smaller towns, that concentrate on specific industries. Considering the location, economy and possible market downturn is essential for investors to decide if they feel that risk is not an option.

According to section 130.1 of the ITA, a MIC must distribute 100% of its annual net income before taxes to shareholders in the form of dividends. As is commonplace for any company, a MIC’s net income is equivalent to its revenues, minus expenses.

Benefits of investing through a MIC are many, but not limited to: the excellent potential for dividend distribution, the extenuation of potential risk by the ample participation of investors, the adherence to legislative expectations by the MICs professional WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 13

COVER STORY management team and the careful continuous consideration of the Credit Review Committee. Furthermore, shares are typically redeemable in certain prescribed circumstances and may be retracted at any time provided that the fund has the capital capacity to make the redemption.

As aforementioned, an additional benefit to MICs is the security provided to investors with annual audits of financial statements to ensure accountability of finances and safety against fraud, including financial reporting to shareholders every month.

MICs provide an excellent alternative source of financing and for the many positive reasons discussed, MICs are growing exponentially in operation and capacity in Canada. With prudent and professional management, MICs can achieve high returns to investors with low risk. As with any investment, be it real property or by way of share purchasing, investors should discuss the legal operative requirements of a MIC with their lawyer when deciding to establish a MIC, or just to discern whether the ITA’s legal requirements are clearly abided by a MIC in order to make the most profitable yet secure investment decision. The lawyers at Levy Zavet PC can definitely assist investors in deciding to invest in a MIC on a compliance level, but also can help those looking to start and incorporate a new MIC, as well as advise on maintaining a MIC.

Jeff Levy, HBSc, MBA, CFA, AMP, JD

Managing Partner and Co-Founder of Levy Zavet PC, Lawyers.

Published originally on www.levyzavet.com August 14, 2013. __________________________________ [i] Department of Finance Canada, “Explanatory Notes Relating to the Income Tax Act, the Excise Tax Act and Related Acts and Regulations: Part 5”, Clause 276 <http://www.fin.gc.ca/drleg-apl/ nwmm-amvm-1012n-05-eng.asp> [ii] Ottawa Citizen, “Mortgage Investment Companies Drawing Tentative Investor Interest” [Feb 21, 1976] <http://news.google.com/

14 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

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FROM DERRICK’S DESK

TOP 5 REASONS WHY D&O INSURANCE IS IMPORTANT I am excited to be given the opportunity to contribute a new column to Private Matters Today called Derrick’s Desk. This regular column will be focused on risk management for the private mortgage lending community. The topics will range from risk prevention and avoidance to insurance and liability claims examples. Our firm, PROLINK Insurance, has been serving private lenders for over 12 years. We think that Private Matters Today is an industry journal that was long overdue for an important segment of the mortgage lending industry.

In this inaugural edition of the column, I thought it might be important to focus on Directors & Officers (“D&O”) Liability insurance because it is probably the most misunderstood insurance product available to protect private lenders. D&O is more than just a necessary evil; D&O Insurance has far-reaching benefits many private lenders don’t fully understand or may have never experienced.

The truth is, most private lenders do far too little to protect themselves, failing to fully appreciate the implications of potential risks, or the effectiveness of the strategies they believe they have in place.

So how does D&O Insurance really help you?

Well, with apologies to Mr. Letterman, here are The Top Five Reasons D&O Insurance Is Critically Important to private mortgage lenders.

1. INVESTORS AND BORROWERS CAN BE CRAZY More politely put, they’re unpredictable. There is no way to control the actions of your investors or borrowers once they contact a plaintiff lawyer.

Canada is becoming much more litigious and investors or borrowers who incur any type of financial loss are often looking for someone to take responsibility. The requirements placed upon mortgage investment companies registered with a provincial securities commission as an Exempt Market Dealer are significant. For investors, if their investment isn’t delivering everything they had in their head, they can start making all sorts of demands. For borrowers, if you decide not to lend or if you need to proceed with a power of sale then there can be all sorts of allegations brought against you.

And maybe it’s the new Trump Effect, but these days, when things go wrong, crazy people will take you to court! Lawyers simply sue everyone and

see what sticks. Even if you are not at fault, once you’ve been named, things get costly. Something as simple as filing a Statement of Defense, a requirement even for a frivolous lawsuit, can quickly rack up legal fees in the neighbourhood of $10,000 to $15,000.

2. E&O LIABILITY IS NOT ENOUGH Many private mortgage lending companies will tell me that they already have Errors & Omissions (“E&O”) Liability as required by FSCO or RECA, depending upon the provinces where you operate. The problem with the E&O purchased to satisfy FSCO and/or RECA is that the policy is only intended to cover mortgage brokering and administration services. These E&O policies are generic and do not cover: Exempt Market Dealer services, Restricted Portfolio Manager services, Investment Fund Manager services, Allegations of investment advice, Securities claims or Lender Liability.

There are highly customized D&O Liability policies that are specifically available to protect private mortgage lenders and their directors. You cannot afford to simply rely on your Mortgage Broker and Administrator E&O policy.

3. UNIQUE BUSINESSES REQUIRE CUSTOM COVERAGE D&O insurance is not like auto insurance, which is a highly regulated and standardized product. D&O policies are complex and differ significantly. Private mortgage lending is unique and therefore requires a policy customized to meet the complex exposures that you face. For example, a private lender should not purchase a D&O policy developed for a typical privately held Canadian corporation. This is because 95% of all D&O policies targeting privately held Canadian corporations will exclude any claims related to buying or selling securities or professional negligence.

wrong in such a complex environment are fairly high.

D&O Insurance protects the exempt market dealer, the mortgage investment fund (i.e., trust, fund or MIC) and the directors from lawsuits. The proper D&O policy is structured to protect all of the entities and individuals from both frivolous allegations and those financial demands with merit.

5. INCORPORATING IS NOT THE “FORCE FIELD” YOU THINK IT IS Incorporating should always be the first step when setting up a business because it is a way of protecting your personal assets in the case of something disastrous. But incorporation isn’t a silver bullet ... or silver shield ... or silver anything, really.

If something goes wrong, you can’t just declare bankruptcy, start over, and expect there to be no impact on your personal life or assets. Directors can be held personally responsible for statutory liabilities. D&O Insurance enables you to cover the expense, not run from the consequences.

Sometimes worry is good.

It’s my job to worry about all this stuff – not to threaten you that the sky is falling, but to remind you what could happen if it does. The likelihood of a catastrophe is, thankfully, not all that great.

But your business and reputation is everything. It has taken tremendous effort to build. It needs to be protected against misfortunes that could undo everything you and your team have accomplished, and result in punishing financial losses. D&O Insurance is the cornerstone of that protection.

Derrick Leue, President of PROLINK Insurance.

Please contact PROLINK Insurance to learn more. 1-800-663-6828 or DERRICKL@LMS.CA

4. THE MORTGAGE LENDING BUSINESS IS COMPLICATED Not to suck up to our new readers or anything, but what you folks do has a lot of moving parts.

Raising capital, managing funds, underwriting mortgages, understanding the real estate market, administering mortgages, regulatory requirements...the chances of something going

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 17

BUSINESS STRATEGY

10 RIDICULOUSLY EFFECTIVE LEAD GENERATION IDEAS FOR YOUR MORTGAGE BUSINESS

Inbound marketing isn’t going away anytime soon, people. What this means for your mortgage business is that your audience no longer wants their attention bought––they want it earned. With the marketing environment getting more and more diverse, it can be confusing for a mortgage broker to know where and how to generate leads.

With the ever growing world of digital coupled with the way we market, executing a lead generation sys-tem has become more beneficial than cold calling or other methods of prospecting for sales.

The following article outlines some of the most highly effective lead generation ideas you can consider to generate more qualified leads and clients for your mortgage business. These ideas are simple and cost effective once you know what to do and how to do it. However, any success in the world of digital will take time and loving care!

GATE YOUR VIDEO CONTENT The simplest way to capture prospects’ contact information is to set up an email gate.

Requesting all viewers to enter their email address before gaining access to a video allows you to create a new lead as soon as a prospect expresses interest. For example, if you have a trail of content leading to a detailed “how to secure the best mortgage rate” or “secrets behind what banks don’t tell you about your mortgage insurance” type video, you could gate the video to see how many viewers will volunteer their info having piqued their interest with good top-offunnel content in advance.

BLOG CONSISTENTLY (ACTUALLY DO IT) This one’s old – we know by now that blogging is effective for generating leads. Blogging by 18 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

posting arti-cles that add value and provide answers to your customers or prospects “pain points” will improve your online leads. Having a blog not only allows you complete control of what is said but also an opportunity to have the undivided attention of the reader. I’m amazed that in spite of this, many mortgage brokers don’t have a strong and consistent blog (many give up when no results come in the first month or two).

Remember to make sure your blog is optimized to generate leads by having a sign-up section for your newsletter. And I feel like a broken record, don’t make the blog all about you! Give real content value to your reader!

you need to start by watching and learning. What types of information do the members engage with most? When you get comfortable with the pattern of the groups join the conversation. Remember, go easy on the posts, you want to add value but don’t be “that guy or gal” who over does it on promotional posts. You could do your brand more damage than good if you’re not careful.

WRITE ON LINKEDIN Over a year ago, LinkedIn opened up their publishing platform to all users so anyone can create content. And I’m willing to bet you should invest your time in it. According to a study by Hubspot that surveyed 5,000 small businesses, LinkedIn vastly outpaced competing social networks for lead generation. As a matter of fact, they found that traffic from LinkedIn generated the highest visitor-to-lead conversion rate at 2.74%, almost 3 times higher (277%) than both Twitter (.69%) and Facebook (.77%). Remember that getting your post read on LinkedIn is just one part of the battle. You must also have a strong offer and a paired landing page to follow through and capture leads.

BUILD YOUR WEBSITE TO GENERATE LEADS Good-performing websites convert between 7-14% of visitors and are optimized toward this goal. A lot of people think that beautiful websites are better, but studies show that even ugly, but functional websites can be just as successful, if not more successful at converting leads. Our basic strategy for optimizing website conversions for lead generation is to: 1. Restrict the number of options a person has to explore through your website. The more over-whelming it is, the greater chance that they will get bored and leave.

2. Strategically place calls to actions after every section. Always be telling your visitors what they need to do next.

3. Make the forms simple and easy to complete.

Ask for less information and offer a social login as an option.

4. Create tags and keywords within your website to generate search engine results through organic searches.

JOIN A LINKEDIN GROUP, LISTEN AND PARTICIPATE Join a few groups that are popular with your customers and prospects. Building a targeted lead genera-tion program that uses social media means

GIVE AWESOME OFFERS Fact: the top 10% of landing pages have conversion rates 3x to 5x the average. How do they do it? Give awesome offers. For example, every software company offers a free trial. Every

plastic surgeon offers a free consultation. As a mortgage broker, what do you have to offer that is unique, compelling, and offers real value to your visitor?

customers and industry news. Using a software tool like Constant Contact will make your life much easier in terms of creating, integrating and executing your newsletter.

CONTESTS Contests have been huge hits on Facebook for years. The upside is they draw a lot of attention.

The downside is that the leads you get aren’t always the most qualified because you’ll have a lot of “tire kick-ers” or freebie seekers. But nonetheless, it’s a great way to gather emails.

HOST VIDEO WEBINARS (WITH SPECIAL GUESTS) Webinars are an inexpensive way to get your message to thousands of potential customers.

There are a variety of software services that allow you to broadcast a webinar quickly and easily. Zoom is software that will support video webinars and video meetings. And if you make it a recurring event, you’ll continue to grow your following. So, come up with a great idea that helps your customers and promote it using social media, your network and your newsletter. At the end of the webinar, feel free to ask the attendees to download an eBook, sign up for your newsletter, or visit your site. This will bring the leads flowing in.

CREATE AN EBOOK These work great for a mortgage business as people love to read and gain expertise about your industry. Make sure you don’t promote your services or products. People don’t want to be sold, they want to be informed. So write it from a neutral perspective and give actionable insights.

Share the eBook socially and ask your network to share it for you. You’ll want to ensure that you have a landing page set up that re-quires visitors to input their name, email and phone number for a chance to download the eBook. By the way, your eBook could range from four pages to 25+ pages.

MONTHLY NEWSLETTER Do you have a newsletter yet? If not, you’re missing out on one of the simplest ways to generate more leads. Make sure you put a newsletter sign up in every possible place that makes sense on your website. With your newsletter, not only do you have a captive audience (people have to opt-in to your newslet-ter). Remember to not make it all about you. Instead, share with your contacts your insights, recent wins you created for your

WHAT’S NEXT? The bottom line for your lead generation program to be successful is to test, test, and test. None of these tips will do you a bit of good unless you test them for yourself and determine what works for your mort-gage business.

Javed S. Khan, President of EMpression Marketing.

For more information call him directly at 416-889-6069 or javed@empression.ca

“Traffic from linkedIn generated the highest visitor-to-lead conversion rate...almost 3x higher than both Twitter and Facebook WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 19

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APPRAISALS 101 3

Q&A WITH PATRICK SMITH OF METROWIDE APPRAISAL SERVICES WHAT ADVICE WOULD YOU GIVE TO BROKERS WHO ARE ORDERING APPRAISALS THROUGH YOUR FIRM TO MINIMIZE DELAYS?

Advise us of any Due Dates and Conditions of Sale, as these are important dates. Remember to send a copy of MLS listing and Agreement of Purchase & Sale. Make sure you advise your buyer or homeowner of the correct appraisal fee amount. Ask your client if the home is undergoing any renovations or repairs, or if it requires any repairs, as this could impact the final estimated market value, or even the appraisal fee.

2

WHAT RECOURSE WOULD YOU RECOMMEND TO A BROKER WHO IS NOT HAPPY WITH THE VALUATION?

First, the Mortgage Broker should contact the actual appraiser who did the inspection, research and typed the report to discuss the valuation. If still not satisfied, speak to the review appraiser.

Keep in mind that all necessary research was most likely already conducted when the appraiser valuated the home. Note: maintain a calm and professional tone when speaking with an appraiser, this will achieve better results. Accusing an appraiser of killing “YOUR DEAL” is extremely unprofessional. It’s the homeowner’s financing that is not being obtained, so state it correctly. The sales and adjustments is what dictates the value. Lastly, if you want to ask a local Real Estate Salesperson to send listings to prove a value, please have them do adjustments on the listings just like an appraiser. Sending over MLS sales saying look at these, it tells you the value is incorrect, and is a waste of time, as all relevant data has already been researched and analyzed.

22 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

COMMENT ON BENEFITS OF A FULL APPRAISAL VS. AN AVM ESPECIALLY FOR A PRIVATE LENDER.

The benefits of a Full Appraisal are priceless. You get the benefit of a real person inspecting the home, taking interior and exterior photographs, itemizing any upgrades and or deficiencies, and proper research and analysis which is being completed based on professional training. AVM appraisals involve regression analysis, which usually is lacking the correct data to work, and usually the incorrect person using the regression software.

4

HOW DO YOU SEE THE PRIVATE MORTGAGE MARKET EVOLVING OVER THE NEXT TEN YEARS?

The Private Mortgage Market is growing fast, especially with increased red-tape from major lenders which is required to close a deal. The majority of Private Lenders take a more personal and professional interest in each deal, as they are usually very experienced and more concerned about the deal, as opposed to an underwriter at a Bank who is more concerned about pushing paper and leaving when the starting gate bell rings.

Patrick Smith CRA, Real Estate Appraisals & Consulting, Metrowide Appraisal Services Inc.

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Rose, Mortgage Intelligence “That is phenomenal. I really like how [Monalee Catena] promises and delivers... it shows that you actually come from the business and understand the pressures.”

Mohamed, RMA “I wanted to thank you for giving this a try for my client. You seemed to have a different philosophy than other lenders. You showed empathy for the situation, I don’t see that much...Especially in the “B” deals. I will be sure to recommend you to my colleagues at Mortgage Architects.

Thanks again!!”

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24 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

THINK OUTSIDE OF THE BOX WITH SECURE CAPITAL MIC Secure Capital is a Mortgage Investment Corporation that thinks outside of the box, offering flexible lending solutions for borrowers that do not fit into the traditional “cookie cutter” guidelines of most banks and A lenders. Secure Capital MIC surrounds their business practices around their Triple S Promise, speed, service and solutions;

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OLUTIONS: It starts with having an innovative team that thinks outside the box. Secure Capital MIC offers solutions which are unique to the market. For example the new 90% Equity Solution Mortgage, Construction Mortgage Solutions and Flex Mortgage which allows you to build your own pricing on a deal. With lending areas in Ontario, Quebec, Atlantic Canada, Alberta and Manitoba, Secure Capital MIC strives to provide creative financing solutions for your clients.

ERVICE:

Secure Capital has cash flow relief solutions; debt relief solutions and credit repair solutions for: • Business-for-self clients with minimal declared income • Mortgage arrears (1st or 2nd mortgage arrears) • Power of Sale • CRA arrears • Job loss • Poor credit • High TDS • Construction/Renovation half completed • Even unemployed!

With in-house legal services to facilitate quick closes, Secure Capital MIC is able to underwrite, process and closings your clients deals faster. Offering turnaround times of 24 hours, and minimal documentation with readily available funds makes for efficient service that will leave everyone satisfied.

At Secure Capital, the team’s mandate is to provide approvals within 24 hours and to think creatively when it comes to structuring mortgages or understanding unique client situations. Secure Capital is sharply focused on providing outstanding service to agents and brokers. In pursuit of that goal brokers and agents are provide a dedicated underwriting team and Business Development Manager, Monalee Catena, who are committed to speedy communication in order to efficiently fund your deal.

As “true” equity lenders, Secure Capital MIC does not look at income documents, notice of assessments or beacon scores. It recognizes that most borrowers need immediate or temporary solutions and they specialize in that. What makes Secure Capital MIC unique is their commitment to seeing the bigger picture.

The underwriting team looks to identify both current and potential future issues that may occur. The team then creates a solution that provides a sound plan for borrowers with consideration of not only present issues but rather future needs as well. Simply put, they think ahead. Secure Capital MIC has recently launched a 90% Equity Solution Mortgage product which is designed

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based on forward thinking. They are amongst a handful of lenders offering a 90% LTV Equity product.

At the end of the day, it’s about creating a solution that addresses the current issues and looks to put the client in a better position in the future. It’s not simply about lending money but rather providing solutions that make a difference in a borrowers’ life.

Secure Capital MIC is different – plain and simple.

Secure Capital MIC

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 25

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