ISSUE 07 • WINTER 2017
Lender Focus Benefits of Reverse Mortgage Solutions
CANADA’S LEADING SOURCE FOR ALTERNATIVE LENDING AND MORTGAGE INVESTING EDUCATION
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Why Canadians should take a closer look at the U.S. market PAGE 08
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regulatory changes Legal strategies to adapt & add
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S D N I EADW E PAG
Avoiding common pitfalls when operating a MIC PAGE 16
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CONTENTS WINTER 2017 EDITION 06 EDITOR’S NOTE New opportunities that exist in 2018 in light of the macro environment that exists in the mortgage & real estate industries in Canada
12 COVER STORY Industry veterans discuss emerging trends and insights that will help shape your business in the year ahead
08 ALTERNATIVE LENDING MARKET IN THE U.S. Geraci LLP explains why Canadians should consider the non-bank lending market south of the boarder
16 ACCOUTING STRATEGIES Rosenwig McRae Thorpe LLP discuss how to navigate the pitfalls when operating a MIC
24 OPPORTUNITIES FOR MICS »»p.08
4 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
OSFI regulations: what’s the impact on MICs from Shannon Dolphin of Dolphin Enterprises Ltd.
FEATURES 18 LENDER FOCUS Yvonne Ziomecki of HomEquity Bank discusses the benefits of reverse mortgage solutions
20 ETHICS & SOCIAL RESPONSIBILITY »»p.18
American Association of Private Lenders highlights the ethical issues & social responsibility in private lending
22 NEW YEAR, NEW CHALLENGES M. Alessandra B. Ocampo of Indigoblue Legal Group touches on the changing real estate market and how brokers need to adapt
26 AD INDEX Get a snapshot of our advertising partners in this edition
WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 5
EDITOR’S NOTE NEW YEAR, NEW OPPORTUNITES In February of 2015, Benjamin Tal, Deputy Chief Economist at CIBC had penned a brief paper labeled “How Shadowy is Mortgage Lending in Canada?” The objective of the paper was to analyze the size of the alternative market with a particular emphasis on private/alternative lending. The conclusion of the study seemed to be that while the size of the private lending is increasing, it continues to be insignificant in relation to the total mortgage activity in Canada. Since February 2015, three further regulatory changes have come into effect and the stress test requirement for conventional mortgages will be in play as of January 1st, 2018. The overall impact of the collective measures starting from 2008 to now has shifted significant business from traditional prime lenders to institutional alternative lenders to MICs & private lenders. Furthermore, the quality of business that has shifted over has further enhanced the portfolio credit quality of all three respectively. This unexpected improvement in portfolio credit quality could incite a healthy debate regarding the label “shadowy” in the context of ever improving credit scores for alternative lenders and the record low delinquencies for all lenders in general. As we approach 2018, the prime world of mortgages will face headwinds in light of the collective impact of all regulations that have been implemented since 2008 that have and will continue to slow down originations. Monolines have already started to experience tremendous decline in market share due to regulations that have impacted securitization. With originations on the prime side slowing, it will be interesting to see if any of the traditional prime lenders shift resources over to the alternative side especially since the credit quality of the alternative portfolios is vastly better than what it used to be. While the traditional prime lenders have deep balance sheets, they typically find it difficult to convince their investors and boards to invest in alternative portfolios due to the stigma associated with conventional understanding of what alternative business is. The institutional alternative lenders that have previously controlled the lions share of the market are also subject to OSFI’s latest stress test requirement which will on average mean that a customer must be qualified based on contract rate plus two percent. In summary, the clear winners at the moment would appear to be Mortgage Investment Corporations and private lenders that have significant pools of funds to lend out. Of course, MICs and private lenders are not immune to competition and it is therefore not a surprise to notice an inordinate number of MICs and private lending operations springing up across the country. In this issue, we have focused on opportunities that exist in 2018 in light of the macro environment that exists in the mortgage and real estate industries in Canada. We have also featured a couple of articles from our partners in the U.S. to give our readers a broader perspective on private lending across North America to see if there are any lessons or opportunities. Happy reading and happy holidays!
WWW.PMTODAY.CA ISSUE 07 • WINTER 2017 EDITORIAL
Editor Harry Singh
Anthony Geraci Chris Cheng Chrissey Breault Dean Koeller Guy Scheiner M. Alessandra B. Ocampo Shannon Dolphin Yale Ren Yvonne Ziomecki
Co-Editor M. Alessandra B. Ocampo ART & PRODUCTION Creative Director Kayla Patullo
EDITORIAL & ADVERTISING INQUIRIES
tel: +1 416 400 3977 x 4 tf: +1 877 240 5375 firstname.lastname@example.org Private Matters Today Inc. 1 Greensboro Drive, Suite 301 Toronto, Ontario M9W 1C8
Private Matters Today Inc. is a national publishing and events company. We produce national print and online publications as well as events dedicated to providing educational content surrounding the alternative mortgage industry. 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.
- Harry Singh, Editor. 6 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
THE ALTERNATIVE NON-BANK LENDING SPACE
A PRIMER FOR THOSE WANTING TO ENTER THE U.S. MARKET
The United States’ alternative non-bank lending market is large. While estimates vary, my estimate is that it is over $1 trillion dollars through the United States. There are several large players who have mortgage funds (similar to Canada’s MICs) anywhere from $30 million USD to over $600 million. However, while that may seem like a substantial market cap, there is still a large need for both capital and sophisticated players in the United States market, and Canadians would be within striking distance of entering the US market and funding these types of deals. THE UNITED STATES REGULATORY MARKET FROM A 30,000 FOOT VIEW While on the outside the United States looks like a united front, in the mortgage industry for non-bank lending it is far from it. Similar to the regulations in each Canadian province, each state of the United States (50 in all) has its own licensing system. Further, in the United States the lending licensing is separated from the securities licensing. We’ll briefly talk about both in turn. LENDING LICENSING While all states work with the National Mortgage Licensing System (https://nationwidelicensingsystem.org), each state has its own requirements and its own registration and/or exemptions. For instance, in California, certain licenses that allow you to lend do not require any net worth. Compare that to New York, for instance, that requires audited financials in the amount of $250,000 and a credit line of $1,000,000 for you to be an alternative non-bank lender in that state. SECURITIES LICENSING The securities framework in the United States is a lot easier to comply with than lending licensing. Unlike state licensing, the United States Securities and Exchange Commission preempts states from interfering with its laws regarding raising capital. This makes it a singular place to register, comply and raise money. The United States passed the JOBS Act in 2010 but it wasn’t until 2014 that the JOBS Act had the regulations it needed to be effective. Now, a company can raise money from the United
8 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
States regardless of purpose will little to no trouble. Under the JOBS Act, you are able to advertise your fund and solicit funds generally without knowing the investor for a period of time like older requirements under Regulation D. Further, under Regulation A+, a company could register with the SEC and raise funds with lower suitability standards than what is required under Regulation D. Between these two changes, the SEC clearly wants to make it easier for companies to raise money from investors and put it to work for their aims, i.e. in our case into making more loans in the alternative non-bank lending space. THE UNITED STATES’ LENDING MARKET FROM A 30,000 FOOT VIEW Alternative Non-Bank Lending thrives in many states but is concentrated in a hand full of states. California, New York, Florida and Texas comprise 50% of the lending market in the United States. This is due to a variety of reasons, including housing pricing, availability of capital and the sophistication of alternative non-bank lenders in these markets. YIELD COMPRESSION IN COMPETITIVE MARKETS Due to the above reasons, each of the four states above are facing yield compression across the board through what were once bread-and-butter products such as rehabilitation/flipping financing and bridge financing. Rehabilitation financing is where a real property investor buys a property from foreclosure or other places and remodels the home with the intention to profit from selling the property immediately after remodel. California, for instance, was regularly able to return to alternative non-bank lenders 12% per annum interest and 2-3 points on the loan. Today, most loans are under 10% interest and 2 points. This competitiveness has forced some alternative non-bank lenders to branch out into multiple states UNDERSERVED MARKETS Markets such as Tennessee, the Northeastern United States (outside of New York) and the midwest states (Michigan, Ohio, Indiana) are underserved in that alternative non-bank lenders are able to command 12%+ interest per annum. PREDICTION FOR 2018-2019 FOR UNITED STATES REAL ESTATE The United States is currently red-hot with its stock market, but its recovery is finally on a solid footing. A key interest rate, the Federal Funds Rate, remained at 0% for 8 years before Janet
Yellen and the Federal Reserve Board steadily rose it to its current rate of 1.16%. It is expected to rise another percentage point by the end of 2018. What does that mean? The Federal Funds Rate is the rate that banks lend to each other for overnight deposits. It’s such a key interest rate that it has a significant impact on the United States economy, including its mortgage rates. By raising this rate, the U.S. mortgage rates will increase. This in itself isn’t remarkable. Rather, it’s the cumulative effect on the market that is concerning. With interest rates cumulatively rising up to 2-2.5%, the mortgage rates will raise an extra percent to 2% as well. This, in turn, will cause new homebuyers to extend themselves and with wages still largely stagnant, these new homebuyers will demand lower prices to afford the homes. Since the new homebuyer is required for the overall economy, they are the limiting step in the housing market. If they need lower prices, so too will it have a chain effect for those who are selling their homes to upgrade into bigger or different homes. My crystal ball therefore predicts a correction of 5-10% of the housing market by the end of 2019. While this will not largely affect the alternative non-bank lender who has plenty of equity in the properties to withstand a small correction, it may play havoc on those who have junior mortgages who have levered the property up to 100% loan-to-value. CONCLUSION For those who are looking into additional markets, Canadians may want to puruse the United States’ market and appetite for alternative non-bank lending. While there are hurdles that have to be overcome, it is easy to raise money in the United States and, with proper planning, alternative non-bank lenders are able to make loans in both larger and underserved markets for additional income and yield. _____ Anthony Geraci is the managing shareholder of Geraci LLP in charge of firm strategy and development of Geraci’s team and culture. He is skilled in mortgage lending and securities law and has authored numerous articles on real estate finance and security subjects. Mr. Geraci is a leader in creating national mortgage pools and mortgage funds as well as sophisticated net branching arrangements among several mortgage companies.
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2018 PREDICTIONS OPPORTUNITIES OR HEADWINDS
Private Matters Today caught up with some of our industry’s thought leaders to gain insights on what could unfold in 2018 in the alternative lending and investing market. In this interview, industry leaders comment on the direction the market is headed, what major influences might propel or deter the alternative channel and advice to brokers in the industry:
THE OSFI B-20 GUIDELINE CHANGES COMING INTO EFFECT ON JANUARY 1, 2018, WHAT OPPORTUNITIES OR THREATS DO YOU FORESEE FOR INSTITUTIONAL ALTERNATIVE LENDERS IN RELATION TO MICS AND PRIVATE LENDERS?
A. Certainly, over the last decade any time we have experienced changes to Insured mortgage rules or underwriting guidelines, our business has been impacted. Over this time we have seen an improvement in the credit quality of our borrower. We are also seeing an increase in the volume of borrowers requiring financing options to bridge them from alternative back to federally regulated financial institutions. This is where private mortgage lenders are able to provide interim options by either restructuring existing debt or correcting credit situations. I would expect that our business will see an increase in business from those types of unintended consequences from borrowers who are impacted by the transition of the rule changes. -Dean Koeller, Calvert Home Mortgage Investment Corporation
A . The tighter mortgage underwriting guidelines could negatively impact the institutional alternative lenders since they are the most sensitive to such changes and they might see their mortgage origination volume decrease. On the other hand, the demand for private mortgages and MICs should increase. Not only it will drive up the demand for private mortgages but it should increase the credit quality of the MIC portfolio as well.
A. I believe that institutional B lenders will tighten their LTV guidelines and will incur additional costs due to a higher level of due diligence as a result of the new policy. MICs and private lenders, on the other hand, will benefit the most from the guideline changes because a higher number of mortgage applications will be rejected by Institutional lenders providing private lenders & MICs with the opportunity to lend on higher quality mortgages at a higher return.
We are still in a low interest rate environment and it is a great opportunity for a MIC to gather new deposit funds from investors with the primary objective to secure investment principal and to generate higher yields than other traditional fixed income products such as GICs and Bonds. Even though we cannot compare MICs with other fixed income products, investors are more willing to consider adding a MIC to their investment portfolio. With the credit quality of the MIC portfolio improving and generating a more consistent yield then a GIC, investors will continue to be drawn towards them in the future.
-Guy Scheiner, Mortgage Arena
DO YOU FORESEE THE HOUSING MARKET CORRECTING SIGNIFICANTLY IN 2018?
A. There will be some correction in 2018 due to the new policy from OFSI which will knock some first-time home buyers out of the market and push others to buy less expensive homes. The new rules might slash the purchasing power by as much as 20%.
-Chris Cheng, RESCO MIC WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 11
COVER STORY However, the impact will be both positive and negative; it will affect certain neighbourhoods and certain types of housing. On the positive side, condo and townhouse market should continue to see a surge in price due to the fact that some buyers are not able to afford the mortgage payments on detached homes. On the other hand, luxury homes exceeding a few million dollars might see a decrease in value due to affordability which will lead to lower demand. -Chris Cheng, RESCO MIC
A . Yes, there will be an impact to the housing market. Smaller communities with smaller volumes and less financial options available to them will have the largest impact. The impact to larger communities will be muted depending on the economic factors of that community. The real estate community has seen a number of both national and local changes that will continue to create uncertainty and strain on our economies. The fortunate benefit we have in Canada is all the rule changes over the last decade have made our real estate economy more resilient that it has ever been so we are able to manage these changes better than we would have in the past. Industry is also better educated and knowledgeable to assist home owners in managing for this change. -Dean Koeller, Calvert Home Mortgage Investment Corporation
A . I foresee slower sales activity in year 2018 with increasing MLS inventory which in turn will put more downward pressure on prices. I project a further price decline of about 15%-20% but mostly in the GTA with the prices in downtown Toronto will hold their ground in most locations. In addition to declining sale prices, I believe we will experience a new trend of sale transactions involving VTBs as a result of lower dollar value mortgage approvals. -Guy Scheiner, Mortgage Arena
WHAT ADVICE WOULD YOU PROVIDE TO BROKERS WHO MAY POTENTIALLY EXPERIENCE A SLOWDOWN IN OVERALL BUSINESS IN 2018?
A . Be persistent regardless of good or bad times - even though the mortgage business might slow down and your clients might not have immediate needs for mortgage financing, it is important to keep in touch with your clients by contacting them on a regular basis via phone calls, emails or seminars. Providing your clients with market updates and educating them on mortgages and financial planning will enhance the relationship with your clients in the long run. When the market picks up again the clients will remember you and you will be their primary contact for their financial needs. Personal development – when the business slows down take the opportunity to learn and to develop new skills. Taking courses that you didn’t have time to take before when you were busy. For example, the private equity market is becoming more and more popular and perhaps taking the Exempt Market Proficiency Course which will allow you to sell exempt market products such as MICs and it could help you generate alternative streams of income. 12 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
Innovation – Similar to above, take the time to work on initiatives that you didn’t have to time before. Review your current business model to fine tune your existing processes such as integrating new technology to your office, updating your CRM system, offering new financial products other than mortgages to your clients, etc. -Chris Cheng, RESCO MIC
A. Definitely mortgage brokers today need to be better educated on alternative lending options and to understand when these products can be effectively used to assist the client to get the optimal lending terms available. Certainly, interest rates are important but it is also important to consider the not only what todays options are but what the implications of those options will mean in the future in giving clients flexibility to make good financial decisions in the future. -Dean Koeller, Calvert Home Mortgage Investment Corporation
A. I would recommend brokers to be more active in private mortgages and network with mortgage professionals who are experienced in this space. Brokers should brand themselves accordingly and educate themselves on relevant Fintech technologies to help them source competitive private financing more efficiently. -Guy Scheiner, Mortgage Arena
WITH THE RATES CONTINUING TO INCREASE, WHAT ADVICE WOULD YOU HAVE FOR BROKERS WHO IN THE LAST 9 YEARS HAVE SOLD MORTGAGE SOLUTIONS ON THE BASIS OF RECORD LOW MORTGAGE RATES?
A. I never believe in selling mortgages based on rates, it is about finding the right mortgage that meets the client’s needs. The right mortgage can save your client thousands of dollars. Every mortgage has several elements that should be taken into consideration other than rates, such as fees, repayment privileges, early discharge penalty, etc. In order to build a long-lasting mortgage business, we need repeat customers and by providing the right solution and the sound advice your clients will come back to you and they may even refer their friends and family to you. I believe 2018 will be a busy year for mortgage brokers due to the mortgage rule changes. Major financial institutions such as banks can only offer “one” solution which is their own proprietary mortgage product. Since it is becoming more and more challenging to obtain a mortgage due to the rule changes, borrowers are looking for professional advice and options. As mortgage brokers, we have access to over 40 to 50 different lenders which gave us a huge advantage. We should leverage our experience, knowledge and ability to access different lenders to assist our clients with their financial needs. -Chris Cheng, RESCO MIC
A. Adivce I would provide to mortgage brokers today, first your value as a mortgage broker is more than the lowest rate, sell your knowledge and your expertice, use existing mortgages to WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 13
COVER STORY leverage other options – it may be adventagious to use an exisiting low interest rate mortgage and a private second than refinancing the first. Offer a wider range of services including alternative and private lending products as part of your plroducts you have available to your clients. -Dean Koeller, Calvert Home Mortgage Investment Corporation
A . My advice is to develop a new selling strategy which is more LTV sensitive than rate sensitive. Going forward, borrowers will tend to go with a higher loan amount and a softer approval process and give up on cheaper rates at lower LTVs. -Guy Scheiner, Mortgage Arena
WITH MANY NEW MICS AND PRIVATE LENDERS NOW IN THE MARKET, HOW DO YOU STAY COMPETITIVE; WHAT WILL BE THE KEY TO YOUR SUCCESS IN 2018?
A . This applies to any successful business, the key to stay competitive is to get accustomed to constant changes and not becoming complacent. Keep re-inventing ourselves by focusing on a number of key areas such as: • launching new mortgage products and services; • improving our existing process for underwriting, fulfillment, funding, etc. to enhance the brokers and clients experience; • Continue to expand our market by gathering deposits not only from retail investors but possibly institutional investors as well. • Enhancing our brand not necessarily by advertising more but rather focusing on delivering our value and our promises to our clients. -Chris Cheng, RESCO MIC
A . We remain competitive in the market by being trusted advisors to mortgage brokers helping them to assist their clients in making responsible financial decisions for themselves. If our service is not committed to good financial outcomes for others we will not be in business for long. We want to create an effortless experience to our clients and change how people interact with their mortgages. Dealing in mortgages does not have to be a painful experience. -Dean Koeller, Calvert Home Mortgage Investment Corporation
A . The key is to recognize two or three MICs that you believe offer the most common-sense lending approach and then get familiar with their underwriting and approval process and build strong relationships with the underwriters. Moreover, spend time to create a network of new individual investors who are interested in lending private mortgages and gain their trust and loyalty. This will benefit you immensely as you will have access to competitive private money with lending flexibility. -Guy Scheiner, Mortgage Arena
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Chris Cheng is currently the Chief Operating Officer of RESCO Mortgage Investment Corporation. Chris started his career in 1992 with TD Bank and has worked in multiple businesses for 20 years holding a number of senior roles such as Director of TD Mutual Funds and District Vice-President for TD Canada Trust. He has been in the MIC business since 2011.
Dean Koeller is the President of Calvert Home Mortgage Investment Corporation. Dean Koeller joined the family business, Calvert Home Mortgage Investment Corporation, in 1997 after completing his Bachelor of Commerce. He obtained his Mortgage Brokers License in 1998 and dedicated his efforts to learning the mortgage business from the bottom up. As an industry member, Dean has served as a director of the Alberta Mortgage Brokers Association for 6 years (three as Treasurer, and one as President). He currently sits as the Founder and Chair of the Private Mortgage Lenders Forum for 7 years and is an industry member representative on the Exempt Market Advisory Committee for the Alberta Securities Commission for 2 years.
Guy Scheiner is the Co-Founder of Mortgage Arena, an online marketplace connecting brokers and alternative lenders. Guy Scheiner is a licensed mortgage broker and realtor with 13 years of progressive experience. Highly knowledgeable and experienced in commercial real estate and in arranging private financing.
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MORTGAGE INVESTMENT CORPORATION
HOW TO AVOID COMMON PITFALLS
WHEN OPERATING A MORTGAGE INVESTMENT CORPORATION
Setting up a Mortgage Investment Corporation (MIC) can create a lot of synergies for private lenders in the real estate market. Heading into 2018, we expect more private lenders to look to MICs as a vehicle to consolidate investor funds in a structured manner and diversify the overall portfolio to mitigate risk. When establishing a MIC for the first time, there are dozens of questions to be answered and decisions to be made, and even simple things can turn into complicated discussions. Making the wrong decision could prove costly, such as failing to meet regulations or having to drastically change processes later on. Fortunately, with experience, these pitfalls can be navigated and here we share our experience working with MICs over the past years, both as advisors and auditors. MEETING THE MIC DEFINITION Each MIC must meet the definition defined in the Income Tax Act and must be taxed as such. Meeting these criteria is important both for tax reasons and to enable the MIC to be an eligible investment for tax-sheltered investment accounts. The most common criteria that a MIC fails to comply with is the requirement to have more than 20 investors where no single investor can directly or indirectly hold more than 25% of any class of shares of the MIC (combined with any shares held by children under 18 or spouses/ common-law). This rule applies at the last day of the first year, and throughout the year for all years after the first. We see this rule broken in two common ways. First, an investor makes a significant investment in the MIC that puts their investment above the 25% threshold. Nobody wants to refuse capital, but meeting the MIC criteria is a must. The MIC should only accept investments up to the 25% threshold and divert the rest of the capital to other private lending opportunities outside of the MIC. If this is the first year, the MIC can accept all the capital and raise more capital to dilute the initial large investment below the 25% threshold, and refund any excess. The second way that this 16 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
rule is broken is that the MIC managers sometimes forget that this rule also applies to the voting common shares. Each MIC needs at least 4 voting common shareholders none of whom own in excess of 25% - and you need to ensure that the test consider the fact that spouses/common-law and children under 18 are grouped together. INVESTMENT CLOSINGS AND DIVIDENDS Investors expect to be treated fairly regarding their dividend payments based on the timing of their investment. For example, if an investor contributes funds to the MIC on the 15th of a month, they expect to be paid starting from that date. This could result in additional legal costs if the lawyer has to close each investment separately. A common solution to this issue is to have one or 2 investment closings each month, so that the legal work is limited to batches and keeps the cost reasonable. Investors also expect a consistent flow of dividends from a MIC. Any reductions or increases in dividends are generally not advised unless the business model or portfolio changes drastically. This expectation creates a need to deploy capital rapidly since idle cash in the MIC does not earn interest. The use of a savings account earning slightly higher interest rate for idle cash is recommended. A MIC could also have a surprisingly good year through cost savings, lower delinquencies, or simply getting a higher return on capital. In these cases, the MIC can pay a special dividend rather than increasing its regular dividend rate. This special dividend is also tax deductible as long as it is paid within 90 days of year-end. Alternatively, management may also choose to hold the excess earnings in reserve to prepare for a bad year. In some cases, corporate taxes will need to be paid on this reserve. FOREIGN INVESTORS Capital inflow is generally the bottleneck for a MIC’s growth, and some MICs may look to sources outside of Canada. There are no restrictions in the Income Tax Act that prevent MICs from
having non Canadian resident shareholders. However, there are withholding requirements imposed on the dividend payments made to foreign investors. The default withholding rate is 25% and is modified by tax treaties between Canada and the country of residence of the foreign investor; the rate can vary significantly based on these tax treaties. There are also other significant implications as the foreign investor’s investment in the MIC may be taxed differently, or even unfavourably, in their home country. Therefore, it is prudent to consult accountants in both countries before accepting foreign capital to ensure the investor fully understands all tax implications. PROPER USE OF THE MORTGAGE ADMINISTRATOR In the typical MIC structure, there is a FSCO licensed mortgage administrator company that administers the mortgage portfolio for the MIC. The main task of the administrator is the collection of interest in trust for the MIC, but we also often see the administrator collect lending fees, discharge fees, and similar items. The common pitfall here is that the FSCO rules are not followed and there is a lack of distinction between funds that belong to the MIC and funds that belong to the administrator or broker. This could lead to problems during the annual FSCO compliance audit and result in costly processes changes.
of the MIC, and this interest is then paid to the MIC on a monthly basis and should clear to close to zero each month. The operating account is used for all other items that may belong to the broker or the administrator, such as lending fees, discharge fees, NSF fees, etc. The admin fee charged by the administrator should also be paid into the operating account. Lastly, the $25,000 working capital requirement imposed by FSCO should also be kept in the operating account. These are the most common challenges encountered by new MIC managers based on our experience. We hope to share these experiences with you so you can navigate safely past these pitfalls. _____ Yale Ren is a manager at Rosenswig McRae Thorpe LLP. RMT is a full service accounting firm with extensive experience in real estate. For more information visit us today at: http://www.rmtcpa.ca/
Ideally, the administrator should have 2 bank accounts: an operating account and a trust account for the MIC. The trust account should only be used for the collection of interest on behalf
WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 17
LENDER FOCUS WITH HOMEQUITY BANK BENEFITS OF REVERSE MORTGAGE SOLUTIONS
WHAT ARE REVERSE MORTGAGES?
Quite simply, a reverse mortgage is a lifetime loan secured to the value of your home, available to Canadians aged 55+. Unlike a conventional mortgage, no regular principal and interest payments are required until the homeowner(s) no longer live in the home, at which point the whole loan becomes due. Just like a conventional mortgage, a reverse mortgage is a charge on title and the homeowner retains ownership as long as he or she remains in the home.
HOW DO CUSTOMERS BENEFIT FROM THIS PRODUCT?
Reverse mortgages offer a number of benefits to customers: • No regular mortgage payments are required. This frees up more monthly cash for Canadians aged 55+ to spend on the things they want. • Limited credit & income qualification. Some older Canadians may find it difficult to qualify for credit products and may find it easier to qualify for a reverse mortgage. • Money received is tax-free. All funds received from a reverse mortgage are tax-free and will not impact OAS or CPP. • Canadians aged 55+ can access up to 55% of the value of their home. • Flexible ways to receive their money. There are different options for customers to access their money, tailored to the different lifestyle needs of older Canadians. Let’s hear more about a customer’s situation and how a CHIP Reverse Mortgage from HomEquity Bank was able to help: Shirley, 65, is a recent widow who is struggling with her finances even though she works part-time to make ends meet. She had to make monthly mortgage payments and her part-time job at the local drug store only earned her a few extra hundred dollars a month after she made her mortgage payment. Shirley wanted to reduce her monthly mortgage payment so that she could have more cash flow each month. She came across the option of a CHIP Reverse Mortgage and with no monthly payments, and a tax-free loan, it was the best solution to help her control her finances. Shirley has since improved her monthly cash flow and reduced her financial stress.
18 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
“The CHIP Reverse Mortgage offered me a solution to rebuild my financial security and to live a life I could finally enjoy. I now have the financial freedom to spend a little bit on myself every month without feeling guilty,” said Shirley, from Edmonton, Alberta.
CAN YOU SPEAK TO PRICING RANGE?
HomEquity Bank reverse mortgages are priced very competitively when compared to many credit products, including credit cards or private mortgages. They are priced higher than conventional mortgage products because no mortgage payments are required. Our current pricing ranges from 4.49% to 5.99% depending on product and term preferences.
DISCUSS THE CURRENT CANADIAN DEMOGRAPHICS AND HOW YOUR PRODUCT FITS? Here are some sobering stats: According to the most recent census, there are 10.9 million Canadians aged 55 and over. For the first time ever, there are more Canadians aged 65 and over than there are Canadians aged 14 and under. In addition, roughly two-thirds of the Canadian workforce does not have a workplace pension and private retirement savings are wholly inadequate. In short, there is a looming crisis when it comes to retirement income. As such, the home should be a fundamental part of a prudent retirement plan. A reverse mortgage from HomEquity Bank can be a great way to tap into your home equity while still enjoying the home and neighbourhood you’ve enjoyed. ____ Yvonne Ziomecki is the Executive Vice President, Sales and Marketing of HomEquity Bank. Ziomecki believes in helping older Canadians live the retirement they deserve. Ziomecki is a member of the Executive Committee. Ziomecki joined HomEquity Bank in 2013 and serves as a Board Member for Canadian MedicAlert.
ETHICAL ISSUES RESPONSIBILITY IN While private lenders are the oldest form of financing, the banking industry has gained prestige and influence year over year. If you were to ask anyone where they can get financing for projects, purchasing property, and any other life events, most will say a bank. Bank are large, organized and visible, making it easy and attractive to use their services. Their branches litter streets across the country – across the World. Why? Because they are what people know. Even today, banking scandals and failures continue to fill the news. People continue to lose trust in banks. Consumers trust and confidence levels eroded significantly following the 2008 financial collapse, when the role of the megabanks was revealed. Earl Warren, former Supreme Court Justice, said, “I hate banks. They do nothing positive for anybody except take care of themselves. They’re first in with their fees and first out when there’s trouble.” The truth is that ethical issues in banking are the same issues that private lending professionals have been fighting for generations. The same issues effect everyone. Even if you don’t work in the financial filed, you’re a consumer of the services. The public seems to have the perception that those in the financial sector are more unethical than any other business. The misconception persists for several reasons. First, the industry itself is vast. It includes securities firms, insurance companies, fund management organizations, credit agencies, capital management, private mortgage lenders – any company doing business in the arena of finance. Due to the size alone, the industry tends to reap headlines, many of which peddle its ethical lapses. Think about $50 trillion in assets growing at 8 percent a year – that’s more than twice as fast as any gross domestic product. Even with the amount of regulation on banks – and the lack of 20 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
realistic framework for private lenders – theoretically, there are a higher percentage of bad transactions happening every day that are identified and reported, conceivably more so than in other less regulated industries. Nevertheless, consumers don’t care about the excuses of how large of an industry it is when ethical lapses occur. Those ethical lapses are personal and we all have a responsibility to represent the industry as best as we can. Be the new breed of lender dedicated to providing funding for local communities and individual borrowers by using modified sets of criteria that would be unacceptable to banks or other traditional sources of capital. Consumers are looking for organizations and products that are compatible with what they believe. Help change the perception of private lending by fighting the predatory lenders that demand up-front fees and damage consumers’ credit scores. Be genuinely committed to getting your borrower our of debt instead of profiting from it. Markkula Center for Applied Ethics discussed five reasons why offenses happen: Self-interest sometimes morphs into greed and selfishness. This sort of greed becomes a kind of accumulation fever. “If you accumulate for the sake of accumulation, accumulation becomes the end, and if accumulation is the end, there’s no place to stop,” said Ronald Duska, Markkula Center Chair of Ethics. The focus shifts from the long-term to the short-term, with big emphasis on profit maximization. Some people suffer from stunted moral development. This happens in three areas: failure to be taught, failure to look beyond their own perspective, and the lack of proper mentoring. So, what if you went to business school? Most often they tend
AND SOCIAL PRIVATE LENDING to reduce everything to an economic entity: the fundamental purpose of business is to make money, maximize profit and increase shareholder value. How many students ever questioned the fundamental purpose of something? It’s the ultimate ethical questions: What’s your purpose? Some people liken moral behavior with legal behavior. People are complacent that the only requirement is to obey the law. They tend to ignore the spirit of the law in only following the letter of law, disregarding the fact that even though an action not be illegal, it still may not be moral. For example: When an investor has to move a home into foreclosure it’s often because the owner is suffering the “3 D’s: death, divorce or disease.” Just when a person is struck by tragedy and needs all the comfort of home, a failure to make a payment (or two) leads to endless phone calls and letters from lenders (or collectors for lenders.) Legally, could a lender follow through with a foreclosure if an agreement is broken? Of course. To avoid looking unethical – as if you didn’t originate a loan based solely on the desire to see the recipient fail so you could obtain the title – consider loan modifications, forbearance agreements, and repayment plans so foreclosure can be avoided. Professional duty can conflict with company demands. A faulty reward system could induce unethical behavior. A purely self-interested agent would choose that course of action which contains the highest return to him or herself whether tangible like a monetary gain or intangible like positive recognition within the company. Individual responsibility can wither under the demands of the client. Sometimes the push to act unethically comes from
the client. How many people expect their accountants to pad their expenses where possible? How many clients expect their insurance agents to falsify their applications or claims? It’s a temptation once you have a relationship with the client, you really want to help you client out. That’s just another conflicting loyalty. WHO’S RESPONSIBILITY IS FINANCIAL SECURITY? Let’s start by saying that consumers need to be better informed. It doesn’t necessarily mean that they need to know everything about the service you are offering, but they should know enough to ask the right questions. With the financial world in a constant state of change, you, as an industry professional, need to be educated enough to answer those questions accurately. Strategies that worked a few years ago don’t always apply today. There are plenty of opportunities you can take advantage of to generate positive results instead of practicing “accidental ignorance” and putting yourself and/or your company in jeopardy of acting unethically. Being socially responsible or practicing responsible lending has been making an imprint on the financial marketplace around the globe. Solid rates of return and sustained level of success have posted through turbulent markets and are attracting institutional investors. A corresponding grassroots movement in the mortgage and personal loan market may signal the beginning of a much larger trend. A trend that fights back against fraudulent transactions by scam artists and works on repairing the unethical reputation that private lending has been plagued with. ______ Chrissey Breault is the Director of Marketing and Member Services of the American Association of Private Lenders.
WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 21
NEW YEAR, NEW CHALLENGES AND A REDEFINED LAW FIRM
INDIGOBLUE LEGAL GROUP COMMENTS ON THE CHANGING
REAL ESTATE LANDSCAPE & HOW BROKERS NEED TO ADAPT
With the ever-changing landscape of lending, why not relieve yourself of one hassle with the start of a new year? Mortgage professionals have their plate full with the changing lending policies and regulations, communicating with other mortgage professionals, lenders, lawyers, clients, and an array of other responsibilities to ensure lending occurs efficiently and effectively. The current market space will continue to change and the law firm you as a broker choose should be one that adapts to the changing market as much as you must to maintain a competitive advantage. Lawyers just like mortgage professionals need to adapt to the changing market. We recognize the difficulties that brokers face on a daily basis when dealing with lawyers and we, Indigoblue Legal Group, are here to make your 2018 transactions smooth and painless. At Indigoblue Legal Group, as your business partners, we ensure that your legal interests are protected. We take a step-by-step approach to ensuring that all of the i’s are dotted and the t’s are crossed. By bringing Indigoblue Legal Group on board as your trusted legal partner for either yourself as a lender or for your client as a broker, you will be assured legal expertise with an uncompromising commitment to personalized service. We offer free mobile service* to clients located within the GTA so that your clients do not have to worry about traveling to our office. If they prefer to visit our office, we are conveniently located just south of Pearson International Airport. We recognize that most individuals are busy during the typical 9-5 work hours so we are 22 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
flexible and offer evening and weekend meetings at no extra cost. We offer title insurance through our strategic partner, Chicago Title Insurance who also provides Transaction Protection Endorsement for the benefit of all parties involved in the transaction. We pride ourselves on taking the time to educate our clients on the documents they are signing and not just rush them through the process. For our brokers, we guarantee to have a response within hours of your inquiry to ensure that you are kept up to date on all your transactions. Our final reporting documents will be issued to your office in less than one week of the closing of the deal. Transparency and communication is the key to our success. Our goal is to become your competitive advantage by focusing on delivering both legal expertise and exceptional customer service. Our clients -- whether brokers, lenders, realtors, or direct clients -know that they are valued and not simply a transaction. Let’s start the new year together and allow us at Indigoblue Legal Group deliver both real estate law expertise along with professional and personalized service. ______
M. Alessandra B. Ocampo is the founding lawyer of Indigoblue Legal Group. For more information visit: www.iblegal.ca or contact email@example.com
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OPPORTUNITIES FOR MICS OSFI REGULATIONS: WHAT’S THE IMPACT ON MICS WHY MIC FOR FUNDING? As of October 17th 2017, Office of the Superintendent of Financial Institutions Canada (OSFI) released another set of mortgage restrictions for the traditional Canadian Lending Industry. “The Office of the Superintendent of Financial Institutions (OSFI) has proposed regulations that would require buyers to make down payments of more than 20 per cent of a home’s value – who do not need mortgage insurance – to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiate. The changes are designed to protect lenders from a spike in delinquencies if interest rates rise. They would be written into guideline B-20, which sets out the due diligence, appraisals and paperwork lenders must perform, and was last tweaked in 2014.” (Globe and Mail) In short, the intent of the new rules is that insured homebuyers need pass a stress test to qualify at a rate greater than their contract rate. Combining the previous regulations, the new set of restrictions will likely move borrowers to seek alternative financing away from the traditional lending institutions. This movement will provide private lenders with an increase in quality deal flow and growth in financing opportunities. WHAT ARE THE NEW RULES? OSFI news release: OTTAWA - October 17, 2017 - Office of the Superintendent of Financial Institutions Canada Today the Office of the Superintendent of Financial Institutions Canada (OSFI) published the final version of Guideline B-20 − Residential Mortgage Underwriting Practices and Procedures. The revised Guideline, which comes into effect on January 1, 2018, applies to all federally regulated financial institutions. The changes to Guideline B-20 reinforce OSFI’s expectation that federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices. The final Guideline focuses on the minimum qualifying rate for uninsured mortgages, expectations around loan-to-value (LTV) frameworks and limits, and restrictions to transactions designed to circumvent those LTV limits. OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages. Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.OSFI is requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk. Under the final Guideline, federally regulated financial institutions 24 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve. OSFI is placing restrictions on certain lending arrangements that are designed, or appear designed to circumvent LTV limits. A federally regulated financial institution is prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. For the purpose of this Guideline, a “residential mortgage” includes any loan to an individual that is secured by residential property (i.e., one to four unit dwellings). Home equity lines of credit (HELOCs), equity loans and other such products that use residential property as security are also covered by this Guideline. BRITISH COLUMBIA CREDIT UNIONS “(As of November 1st), FICOM confirms that it will not be adopting recent OSFI changes for Credit Unions. FICOM has stated that is satisfied that further changes to its Guidelines are not needed at this time, but will continue to gather feedback and monitor the impacts to the system from the recent OSFI changes.” (source: Canadian Mortgage Brokers Association of BC, CMBA) WHAT DOES THIS MEAN? The new regulation has decreased buying power for borrowers by 18 – 20%. For example, under the current conditions, a family with an income of $100,000 with a 20% down payment ($145,387.80) at a five-year fixed mortgage rate of 2.83% amortized over 25 years can currently afford a home worth $726,939. Under new rules, the borrower will need to qualify at 4.89%, and they can now afford $570,970 which is a difference of $155,969 (less 21.45%) (RateHub.ca) In addition, major cities such as Toronto and Vancouver see a unit prices already well above $500,000.00 and in Vancouver there is exceptionally little inventory less than a million dollars. With the previous and upcoming regulations, a borrower seeking a mortgage on a $1,000,000.00 would need a down payment over 200 thousand and a mortgage approval for a 1.2 million dollar loan. WHAT DOES THIS MEAN FOR MICS AND PRIVATE LENDERS? With the increase in federally regulated lending restrictions, MICS and private lenders have seen an increase in quantity and quality of deal flow. Although consequences are still uncertain, private lenders and consumers could potentially see the current traditional
mortgage lenders migrating towards short-term mortgages, home renovation loans or debt consolidations. With an increase in the quality of deals, the MIC Manager can now be more selective for funding and thereby increasing the number and value of their pooled mortgages. WHY MICS FOR A LOAN MICs as with many lenders have a strong underwriting department. MIC guidelines are flexible with subjective terms and thus accept more potential fundings. According to the Bank of Canada, these lenders “provide diverse sources of funding to the economy, help distribute risk among financial sector participants and can also be a source of financial innovation.” MICS FOR BROKERS MICS have a fluid source of capital as loans are generally short term. Similarly, MICs have seen growth in investment as they provide excellent returns against tangible capital. With fluid capital and growing investments, MICs will generally have funds available for mortgages as opposed to individual private lenders. With the inherent strength of a MIC structure, in addition to lending restrictions, MICs can provide mortgage brokers with a good source of funding for residential mortgages.
MIC’s investor compliance. MICs must also maintain accurate and transparent accounting records. MICs mitigate risk from single defaults or individual investor withdraws by managing a pool of capital to fund a pool of mortgages. Most MICs in the past 5 years have strong growth in terms of private investment as well as quality and quantity of loan applications. With all the changes and uncertainty around all the mortgage lending guidelines, the private lending industry has already seen a tremendous growth for loan applications investments and growth. Although no one is really certain the results of the January 2018 and other regulatory changes to the mortgage lending industry, MICs with their strong corporate strength, sources of capital and subjective lending guidelines will likely continue to see an increase in strength, opportunity and growth. ______
Shannon Dolphin is the CEO of Dolphin Enterprises Ltd. For more information contact email@example.com or call 604 685 6721 or visit www.dolphinent.com
Consequently, mortgage brokers are increasingly submitting residential loan applications to MICs and private lenders as opposed to the once dominated traditional lending industry. MICS AND INVESTOR RETURNS With returns of upwards of 7% , investors are seeking investment into MICs due to the strength of the products as well as the high compounding returns. For example, having a monthly compounding factor and a 7% yield , an investor in a MIC would receive an annual return of 7.23% rather than a straight line of 7%. MICs are also a great investment compared to GICs and even some stocks and bonds. MICS AS A LENDER MICs maintain audited financial and corporate compliance reports to meet regulations. MICs have a team of administrators including an underwriting department thus providing a strong corporate framework. Each provincial security regulator monitors WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 25
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03 Canadian Mortgages Inc.
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19 HomEquity Bank
07 RESCO Mortgage Investment Corporation
26 Indigoblue Legal Group
25 Rosenwig McRae Thorpe LLP
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Community Trust Company does not provide investment advice and does not endorse or promote any investment products. Investors are encouraged to seek independent financial and legal advice before making any investment decisions.
Every quarter Private Matters Today reveals imperative information on a particular alternative lending topic that is essential to the collec...
Published on Dec 1, 2017
Every quarter Private Matters Today reveals imperative information on a particular alternative lending topic that is essential to the collec...