Private lending in an evolving mortgage space

Fergal: [00:00:24] Hello again and thanks for joining us on another edition of CMP TV. I’m Fergal McAlinden, news editor for Canadian Mortgage Professional. Well, it’s been an eventful year to date for Canada’s mortgage market, and that’s been no different in the private space. New educational requirements for Ontario mortgage agents, further regulatory attention and rising interest rates have been just some of the topics to grab the headlines where the private market is concerned. Here to discuss those developments and many more, I’m delighted to be joined by one of the best known figures in Canada’s mortgage industry. Shawn Allen is the founder and principal owner of Matrix Mortgage Global and was recently named Broker of the Year for Private Lending at the 2022 Canadian Mortgage Awards. Shawn, thanks very much for joining us today. How are things with you?

Shawn: [00:01:07] Oh, fabulous. How about yourself? It’s actually summertime.

Fergal: [00:01:12] Everything is going really well. Thanks again for coming on this show today. We really appreciate having you. Obviously, these are very changing times for Canada’s housing and mortgage markets. But how do you assess the state of play and the private space specifically?

Shawn: [00:01:26] The private space is growing continuously. It’s been going, you know, for quite some time. And a lot of people are seeking refuge in the private mortgage space as interest rates continue to rise and the challenges of getting financing are becoming more burden on the Canadian homeowners.

Fergal: [00:01:44] One of the things that I mentioned at the top was that there’s been a lot of attention from regulators on private lending in recent months. Do you feel that’s justified? Was that something that you anticipated coming down the line?

Shawn: [00:01:54] Yeah, I’m all for that, actually. I’m all for the new regulatory changes in the mortgage licensing requirements. I’m all for the scrutiny in the private lending space because there are a lot of people coming into the space that have no business being in that, you know, handling private mortgages. They’re preferred in the industry, charging exorbitant rates and putting people into mortgages that just don’t fit the type of lending that they should be getting. I’m all for tightening that up and making sure that the industry remains coherent and beneficial to homeowners who are looking to seek refuge in private mortgages. So all of the changes that are coming out with regards to a lot of the potential audits coming out as well as the licensing requirements, I’m all for that, actually.

Fergal: [00:02:49] Do you think that that extra attention has come as a result of the fact that there is that influx of new lenders during the pandemic? We’ve seen, obviously, a lot more people coming into the space in the past couple of years.

Shawn: [00:03:01] With regards to the scrutiny, I think that goes back to the whole syndicate mortgage fiasco that’s plaguing the private mortgage space. But that’s all justified because there were some flaws, major flaws that were identified in the mortgage industry through that ordeal. However, yeah, there’s a lot more people coming into the space, but I think there definitely needs to be more education around the types of mortgages and the exit strategies of those mortgages. When you’re talking about private, because a lot of times I’m seeing people getting slapped into mortgages that really don’t fit. They’re getting high interest rates and there’s really no exit strategy. And it’s really challenging for people who aren’t getting the proper disclosure to be put into a mortgage. There’s really not a benefit to them other than for the personal greed of those would be people who are doing a deal here and deal there to profit and profit hugely. So it’s a full rounded approach that needs to be taken to kind of clean up the image of private mortgages. But traditionally, private mortgages were the bread and butter of mortgage brokers. So how the industry changed, it’s very interesting to see where we’re going with that, for sure.

Fergal: [00:04:29] Shawn, is there anything in particular that you’re keeping top of mind in your approach to the private space this year, amid the changes that we mentioned in the market and also the regulatory attention?

Shawn: [00:04:38] Yeah, exit strategy disclosure, those are those are top of mind all the time. When we’re putting together private mortgages at Matrix, we want to make sure that there’s a sound exit strategy prior to even getting that mortgage underwritten. That is the fundamental part of our underwriting strategy, is having that sound exit strategy in place and then full disclosure is also paramount is what we want to make sure that our clients are coming in knowing what the exit strategy is and providing full documentation. Because I think over the next 12 to 18, even 24 months now, the regulators, if they haven’t done so already, they definitely should have a plan to come in and start auditing those mortgage brokerages with within the private lending space to make sure that we are not to say that we’re trying to weed out bad apples. We just want to make sure that we have a consistently level playing field to make sure that we’re all playing by the same rules and offering Canadians the security that they need in times of need. So I’m all for that. And I think that just creating a standard because I don’t think there is a standard practice in the private mortgage space. And I think that we definitely have a standard practice and I’m all for providing support and any encouragement that I can to people that are looking to get in and even the regulators as well if they want to get some standardization done within the private space .

Fergal: [00:06:00] Is there anything that you’re encouraging brokers to be aware of in their choice of lender or indeed the borrowers.

Shawn: [00:06:05] Not in particular, other than just making sure that they read the fine print because a lot of new brokers are coming in and they actually don’t they may not know the type of products that they’re getting their client into. So that may be an issue, but just making sure that they’re providing the proper due diligence and reading the fine print. Because a lot of times brokers come in and they offer their client a private mortgage. And actually it’s not only private mortgages, any mortgages, because there were always institutional lenders and lenders that are putting clients into mortgages with no exit. They can’t break the mortgage as a bona fide sale or there’s exorbitant legal fees or discharge fees and things like that. So just making sure that they’re doing the due diligence and doing what’s best for the client, I think is the best advice I could give.

Fergal: [00:06:59] And Shawn, specifically on those new proposals by [00:07:01] FINRA [00:07:02] for an additional licensing class for agents who want to transact in private mortgages, it sounds as though you’re all for that. But you think that’s going to benefit the industry as a whole?

Shawn: [00:07:11] Yeah, 100%. But I don’t necessarily agree with the time frame that they’re implementing in that strategy where you have to do the traditional mortgages first and then the private mortgage is second. I think if you want to truly give your clients a holistic approach and a holistic solution, then the licensing for both should be done concurrently because at the same time you could have a client come to you and you may think or they may think that they ‘re a triple-A client, but then they may be an old client. Vice versa, they may not qualify for it all today would fit into a private, but because you don’t have the licensing requirement to offer them that solution, then they’re forced to go elsewhere for that. So I think that offering all of the training at the same time and just cross training the mortgage agents would be beneficial to providing the solutions that they need so that they could provide those solutions to Canadians.

Fergal: [00:08:15] It’s almost hard to believe that we’re over halfway through the year now and we’re looking towards the second half of the year. Are there any noteworthy trends or developments that you see coming down the line that you think people should be aware of or that you’re keeping an eye on yourself?

Shawn: [00:08:29] Yeah, rising interest rates is definitely a concern. As you know, pre-pandemic, 2017, 2018, a lot of those mortgages are coming up for renewal now. And at the time, those mortgages are getting two and a half to three and a half percent on a five year fixed. But right now we’re seeing mortgages at institutions at 5% for high fours, low fives. Most people who get a mortgage, a five-year mortgage, the average person renews their mortgage every two and a half to three years if they have a five-year term. So a lot of people that got their mortgage in 2017, 2018 may have benefited from the variable rate mortgages in 2020 and 2021, but then now those people are stuck with variable rate mortgages that are on the uptrend. So we’re seeing a lot of issues with that, with people having higher interest rates on the renewals, as well as rising interest rates on mortgages that they renewed prior to maturity. And now they are stuck with higher variable rate mortgages. What we’re seeing is that a lot of those people that have bought investment properties and they have rental properties, maybe they have one rental property in their portfolio and now they’re forced to be in a negative equity position because those properties are yielding a fixed return with the rents that they can’t increase. However, the cost of carrying the property has increased. If they took a variable at a time or if they have a fixed mortgage, the cost of the fixed mortgages are increasing. So we’re going to see a lot of people with negative equity positions in the near future. So it’s going to be interesting to see what 2023, 2024 looks like when all of those mortgages come up for renewal. And then people are stuck behind the eight ball because you can’t kick the tenants out. Andes. Increase in the mortgage rates are tied to the CPI, but the CPI’s finding calculations. So it’s going to be interesting to see what’s going to happen with those clients in the next 24 to 48 months.

Fergal: [00:10:37] One thing that I must mention to you before I let you go is that you were obviously named broker of the year for private lending at the recent Canadian Mortgage Awards. First of all, congratulations on that. It must feel great to get that recognition again from the industry for your performance.

Shawn: [00:10:51] Yeah, yeah, for sure. It’s a great honor to be recognized for the fifth year in a row. It’s just a testament to the work that my team is doing, and I really appreciate the recognition, but at the same time, it’s really putting a lot of pressure on the team to perform and it’s putting us in the spotlight. So we want to make sure that we’re providing excellent service and excellent knowledge to the industry as well. So it’s a responsibility that I like to be given and I definitely want to make sure that I’m providing excellence in regards to the services that I’m providing to people looking for that private mortgage space, whether you’re a mortgage broker looking for advice or consumer looking for advice. It definitely is and it’s a definite honor to be in the position to provide that support.

Fergal: [00:11:42] Okay. Great stuff. We’ll leave it there for today. Shawn, many thanks for coming on the show. I appreciate your time as always. I’m sure we’ll catch up very soon.

Shawn: [00:11:49] All right. Thank you very much. Thank you. Thank you for having me.

Fergal: [00:11:53] That’s all we have time for on today’s show. Thanks again, TO Shawn Allen of Matrix Mortgage Global for joining us. Thanks to you for watching and we’ll see you next time here on CMP TV.

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