Whether you are another mortgage broker who aims to enhance your expertise, potential investors question whether the deal is really “too good” or try to browse the homeowner of your choice, there are valuable insights here.
The purpose is to guide all of us to reach private mortgage lenders with the private mortgage lenders you rely on when making important decisions for the future of you or your family.
Be aware of emergency private mortgage bidding
Recently, I noticed a trend that brought my eyebrows higher than interest rates in the 1980s. I’ve seen some private mortgage bidding, and so to speak, some polish can be used.
Image: Comfortable wealthy people are lured to devote most of their hard-earned savings to private mortgages that go past the broker’s desk.
There is no inherent error in purchasing potential lenders. But what draws attention is the quality of information to be proposed, often accompanied by these magical words: hasty and urgent.
It seems that the two words are used as free passes, cutting corners faster than the race driver on the last lap. But let’s twitch the brakes for a moment and think about the big picture.
Ontario’s new mortgage licensing rules: Raise standards for private loans
There is some good news in our industry. Ontario’s financial services regulator FSRA now requires that only mortgage agents can make private mortgages on Level 2 and above after April 2024. I personally think this is a wonderful move and should be taken to coast to coast.
Mortgage Agent Level 2 License Authorizes Licensees to conduct mortgage transactions and transactions with mortgage lenders, which is the following:
- Financial institutions, as described in Section 1 of MBLAA
- CMHC approved lender under NHA
- All other mortgage lenders such as mortgage investment companies, groups, private, agents, brokers and brokers
What does this mean? Well, mortgage agent level 2 license holders can now engage in mortgage transactions and transactions through a wide range of lenders from financial institutions to private ones.
But this is the kicker: No matter how many years you have been in the game, there is no exemption for courses. This is a great regulatory initiative to protect the public and better educate all mortgage brokers interested in private mortgage loans. You are learning how to protect your borrowers and lenders.
Such regulatory changes cannot be more timely. The surge in private mortgage applications in recent years, most likely due to rising interest rates driving borrowers to meet stress-tested lenders’ eligibility criteria – now more than ever, it’s important to have knowledgeable professionals to manage these complex transactions.
How do you choose the right private lender?
As mortgage professionals, part of our job is to find the most suitable and lowest mortgage solutions for our clients. It’s like a matchmaker, but not finding love, we found the perfect lender motorcycle race. And if we think the mortgage is in anyone’s best interest, we would say so.
We always start with the door knocking on the bank and the A lender. If these doors appear to be locked, we turn our attention to alternative and private lenders. But who are these private lenders?
Who is the private mortgage lender?
Private mortgage loans can come from a mortgage investment company (MIC), an individual investor or a group of multiple investors.
These are usually economically versed people who want better returns than GIC or other low-risk investments. They may be solo, partner or join the group.
Lender bidding: handle with caution
When it comes to purchasing private investors, we need to stomp carefully. Remember, we are not dealing with faceless billion dollar institutions here, but real people with families and responsibilities. Our goal should be to help our investors sleep soundly at night and know that their investments have been carefully reviewed and selected to ensure their quality and relative safety.
I learned this lesson in 2008 in the early stages of the global economic crisis.
I witnessed a $50,000 private mortgage that went sideways immediately after getting the funds. The borrower did not make a one-time payment, and by the time the dust settled, the bank had already recovered the mortgage, but the investor in the second position had only one valuable (and expensive) course left.
Two solicitation stories: How to discover bad private mortgage transactions
One of my long-term investors is often bombarded by other mortgage brokers with potential private mortgages. It’s not necessarily a bad thing, and in fact, he usually sends me any quotes he’s interested in my comments and evaluations.
Every time, I give him candid advice to let him know if I think the deal is solid. If there are any traps or red flags, I always get his attention.
Here are two recent examples that highlight why we need to improve performance in private mortgage bidding.
Story 1: Hurry and Incomplete Quotes
It was late Thursday night and marked “emergency” land in the investor’s inbox. The sender was looking for a $535,000 first mortgage by Monday. Sounds exciting, right? OK, grab the hat, because this is where things get interesting:
- The sender’s email lacks proper signature. No last name, brokerage information or confirmation of its licensing level. It’s like trying to solve a mystery with half the clue.
- The property in question is close to the finished building front house. LTV comes in 75%, but this is based on appreciation values. Is LTV relative to the original purchase price? Up to 94%. Talk about selective information!
- The application appears to have seized some creative freedoms on the borrower’s assets and liabilities. The property was overvalued, some were completely omitted, and the borrower’s net worth was exaggerated. They had only 1% of the two non-subject characteristics.
- There is very little supporting documentation to say the least. When strong mortgage brokers handle such documents, they include dozens of well-organized support documents, making them easy to review. There are only a few packages, and there is no comfortable piece that the sender reviews or understandings of these packages.
- This application does not include documents supporting income. Non-subject property was expressed as having substantial rental income, but no evidence was provided.
- Application and Credit Bureau reports another mortgage agent from another broker!
- The exit strategy is to refinance traditional banks or column B users.
This may be the borrower’s intention, but there is not enough information to determine whether this is feasible.
My advice to investors
In view of these red flags, I advise my clients not to do so. There is no clear exit strategy, and the deal doesn’t work for him, especially since he’s only interested in short-term financing opportunities of six months or less.
Story 2: This is not a wise purchase!
Just when I thought I had seen everything, another type of tender landed in the same investor’s inbox. It’s short, sweet, … well, let’s say it’s bold.
ask? $400,000 in private second mortgage, purchased $1,100,000 in property purchase. Oh, did I mention that the seller already has a $580,000 supplier mortgage?
Yes, they are looking for 89% of the LTV second mortgage to complete the purchase. At this point, even my most risky investors are ready to hit the “delete” button faster by pressing what you call “high risk investment.”
Key Point: Why Due Diligence Is Critical in Private Mortgage Transactions
As mortgage professionals, we have a responsibility to do business with everyone we do. This means not cutting corners, rather than rushing through important details, and certainly not providing incomplete or misleading information at your own licensing risk.
Remember that in the world of private mortgages, Hast not only wastes it, it also leads to huge financial losses and damage to its reputation.
So, before passing too many quotes to reality, slow down and approach everyone to cope with the care and attention we expect from ourselves and our family. After all, diligent and ethical business practices can help everyone sleep better at night.
As always, feel free to contact us at Askross.ca if you have any questions.
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Last modified: March 9, 2025
