New Ontario rules target private mortgage lenders

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In the past 12 months mortgage broker Mark Mitchell has been hearing from a growing cohort of homeowners who want to join the booming business of private mortgage lending, despite the inherently higher risks.

“I was surprised when it started happening, for a while it was two or three a week,” said Mr. Mitchell, a London, Ont.-based mortgage broker with Real Mortgage Associates Inc. who almost uniformly cuts short those inquiries from mom-and-pop would-be lenders. He does arrange private mortgages with a small group of high-net-worth households he’s worked with for years, but he’s not looking for new inexperienced capital.

“The new ones who have called me say they are accessing the equity in their home via a Home Equity Line of Credit and they want to lend it out at 12 per cent,” Mr. Mitchell said. What does he think happens when he turns them down? “I think they go down the list on Google and look for a broker that will take them on. That’s going to end well,” he says wryly.

Ontario’s Financial Services Regulatory Authority of Ontario (FRSA) has also seen enough of the growth in private mortgage lending to step in and for the first time propose a tougher licensing regime for the 11,826 mortgage agents and 2,592 mortgage brokers (as of 2020) it regulates in the province. The new rules, announced last week, would restrict any newly accredited brokers from arranging private mortgages starting in April, 2023, and there will be a two-year phase-in period where by 2024 any existing mortgage brokers or agents wishing to deal in private mortgages will need to take extended education on the subject and pass a second level of FSRA certification.

According to the FSRA, $164-billion in mortgages were arranged in Ontario through agents or brokers in 2020, about 8.2 per cent of that were private mortgages worth perhaps $13.5-billion. The data collection on private mortgages is incomplete, but Huston Loke, executive vice-president of market conduct at FSRA, says he has no reason to believe private mortgages have declined as a share of loans in the province given the rapid rise in house prices in 2021.

“Private mortgages fill a very important need,” said Mr. Loke, who nevertheless says the FSRA’s examinations of the field starting in 2020 found mixed results with poor record keeping and documentation. “I think that borrowers deserve to know exactly what they are paying for. … These products need to be treated differently,” he said.

There are several categories of private mortgage and not all are created equal. The main advantage for someone buying a residential home is that a private lender may not require a financial stress test, and much of that business is conducted by credit unions and mortgage investment companies such as Home Capital Group Inc. or Fisgard Capital. In 2021, the CMHC described MICs as the fastest growing segment of the mortgage market.

But there’s another chunk of the private mortgage business that is riskier for borrower and lender alike. Brokers in this space say the category includes everything from bridge loans – designed to cover a gap between closing periods when you sell one home and buy another – and people needing a second or third mortgage to consolidate debts as a result of some adverse event.

“I call it Band-Aid financing,” said Paul Tsigaris, broker with Mortgage Brokers Network Inc. in Oshawa and Whitby, Ont. Mr. Tsigaris advertises his services with sites such as cheapmoney.ca and turnedaway.ca and says the field is not for everybody. “Private mortgages are not designed to be long term; they are supposed to fix your credit – say you lost your job and your wife’s on mat leave – until you can fold that into your home mortgage,” he said. Sometimes borrowers need cash to settle tax or credit card debts that have gotten out of hand, and that’s where trouble can start.

“A lot of brokers consider private mortgages a reason to mark up 200 basis points and pocket the extra revenue,” Mr. Mitchell said. He describes a market where the average MIC lends out at 7 per cent, and an individual private lender will want 10 or 12 per cent, with 2 or 3 per cent fees that can add up to close to 16 per cent interest. And some deals are even worse than that.

“The bad second lenders, and there’s definitely some out there, will charge like $26,000 in fees on a $70,000 mortgage. The more desperate [borrowers] are, the more they pay,” Mr. Mitchell said.

While FSRA is moving now to change the rules over the next two years because of these potential risks, some believe much of the damage may already have been done as the real estate market finally shows signs of cooling in 2022.

“We’re going to find out a lot of people didn’t understand their private lending, a lot of investors and customers are going to say ‘I was misled.’ … It’s the classic tide going out thing,” said Ron Butler of Butler Mortgage Inc. “The number of calls we get from people saying ‘I can’t sell my house, I need a private bridge.’ … These calls are up 400 per cent in two weeks.”

Mr. Tsigaris is in favour of any rules that weed out “fly-by-nighters” in the industry, in part because he thinks there’s too much private lending when it’s not strictly necessary.

“Often there’s no reason to do private lending; for the most part MICs and B-lenders will do the job,” he said. “There are people who get into the space who do this as a part-time job. … This will start to weed out those individuals who don’t have the experience of handling private funds.”

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