Satnam Sidhu has been a realtor for almost 40 years and he’s been buying and selling foreclosed houses for the past couple of decades. But he says it’s been many years since he’s seen the surge in foreclosures that he has witnessed in the past few months. And most of the properties are being sold off by private lenders – a rapidly emerging and largely ignored major player in the B.C. housing market.
“I have never seen more foreclosures on the market than I have in the last six or eight months, especially in areas like West Vancouver and the west side,” Mr. Sidhu says.
Mr. Sidhu is the former president of the Real Estate Board of Greater Vancouver and the Canadian Real Estate Association, and the former chair of the Real Estate Council of B.C. He’s also chaired several government committees and task forces on real estate matters.
An obvious reason for the increase in foreclosures is the overall market downturn. But another is the distortion caused by private lending. Private lenders are individuals and mortgage investment corporations (MICs) that fund mortgages, and the number of private lenders in B.C. has exploded in the past few years.
Because they are taking a greater risk, a private lender is more likely to foreclose on a property as soon as the mortgage payments stop. Since the banks introduced “stress test” rules on borrowing, property owners have turned to private lenders in droves. They use them if they are self-employed and don’t have the necessary credit rating; to borrow first or second mortgages on their homes because they need to pay off Visa bills; to pay their kid’s university fees; for a new car, or any number of reasons. Mr. Sidhu says he sees a lot of borrowing to pay off income taxes and to consolidate debt.
Because so many people are using private lenders, some believe Canadians might be far more indebted than is being reported by mainstream financial institutions. But, Mr. Sidhu says, private lenders are “filling a huge void in the marketplace.”
“In the past, the bank would say, ‘We will refinance and increase your mortgage from $500,000 to $600,000, and now banks won’t do that – because people were using their homes as ATMs and not always for a good reason, for maybe a car or a motorhome.
“So the trend over the last few years has been more and more towards people having to borrow from private lenders, smaller lenders. But the rates are higher with these lenders, because there is more risk.
“And now, when I look at foreclosures on the market, a good 70 per cent of the properties being foreclosed upon are [backed by] private lenders.
“A private lender is not going to wait like a bank would. Banks have tens of thousands of mortgages, so if you have a bad one, it’s not the end of the world. But for a smaller lender who doesn’t have tens of thousands, just a few, they can’t absorb those losses.”
In the past several years, there have been many people making tidy profits in the world of private mortgage lending.
Lenders can be anyone who has a chunk of money they want to invest, and Mr. Sidhu sees realtors, lawyers, doctors, and many other average people lending money and charging interest typically between 10 and 12 per cent. And the mom-and-pop private lenders are an unregulated group, he says. They just need a lawyer to handle the mortgage contracts.
Toronto-based mortgage broker Ron Butler says that while individuals who lend mortgage money are unregulated, only a registered mortgage broker can advertise such services. He says that’s the case in Ontario and B.C.
“A private person can loan mortgages, but cannot publicize providing them in any way,” Mr. Butler says. “That is an offence that comes with large fines and possible jail time.”
Usually, the loans are for about a year, and some private lenders operate as numbered companies, realtors say. If the person misses a payment, the lender can obtain an Order for Conduct of Sale, which means they have the right to sell the house close to market value and recoup what is owed to them. If other lenders have charges against the property, they also get paid out. However, foreclosure is a last resort, emphasizes Mr. Sidhu, because if the loan-to-value ratio has gone as high as 70 or 80 per cent, the loan might be bigger than the equity left in the house. The lender might lose. In a declining market such as this one, that has become the concern.
“In the Lower Mainland, our values have dropped in the past year or two, and maybe the equity isn’t there anymore, so now these people want their money back. But if the person is paying, the lender will just carry on [with the loan].”
Mr. Sidhu says he knows private lenders who have saved cash and want a better return on their investment than they’d get with a typical investment product, and who believe private lending carries less risk than buying shares in a company.
“You want ways to get the maximum return on your money – and you are certainly not going to do it by putting it in GICs,” he says.
A more formally structured and regulated form of private lending is the mortgage investment corporation, or MIC, which is an entity formed by a group of investors who’ve pooled their money for lending purposes. They might charge fees on top of interest and get paid dividends every quarter.
Ron Usher, a lawyer who was part of an independent advisory group that made recommendations to reform B.C.'s real estate industry, is keeping an eye on private lending transactions. He says the mysterious inflow of money through private lending needs to be made transparent.
“What we do need for buyers and unregulated [individual] private lenders are ‘source of funds’ declarations at the time of purchase, or on the advancement of funds further to a mortgage,” Mr. Usher says. “MIC’s should also have to disclose the source of funds, at least to Canada Revenue Agency.”
Mr. Sidhu estimates that about 75 per cent of foreclosures he’s seeing are claims by individual private lenders and MICs. He just sold a property in West Vancouver, B.C. that was a court ordered sale listed by a private lender, and he has another court ordered sale at 1370 Ottaburn Rd. in West Vancouver, listed at $3.298-million that has been listed since December and was reduced by $500,000.
The listing is one of five current court ordered sales in West Vancouver, and four of them list private lenders as the sellers.
Another one of those listings is at 928 Groveland Rd., West Vancouver, which is a 7,767-square-foot mansion, built two years ago and listed at $6.998-million, reduced from $8.898-million. Listing agent Malcolm Hasman says that he knows nothing about the seller, other than it is a private lending company.
“My client is a financial institution who has a court order, a mortgage lender,” Mr. Hasman says.
He says he does not market the properties as “must sell,” or anything to encourage low bids. Mr. Hasman says he believes there is a market turnaround underway in West Vancouver.
“Of my active 20 listings, I only have two that are under Supreme Court order,” Mr. Hasman says. “This house [on Groveland] was originally priced two years ago at $10.88-million. Some people might say it’s come down 35 per cent, but the truth is it was probably unrealistically priced when first listed.
“You are seeing massive price reductions on houses … but there are two sides to every story. The open houses I’m doing on Saturday and Sunday on premium properties in the $8-million to $15-million price bracket are extremely busy.”
He’s seeing packed open houses and buyers looking to move up the property ladder from Richmond to West Vancouver, and looking for deals.
“They see houses listed at seven or $8-million that were at $9-million or $10-million. They see opportunity.”
Mr. Hasman’s brother, realtor Andrew Hasman, says he’s heard about the uptick in foreclosures. Andrew is a private lender involved in MICs, usually with conservative loan-to-value ratios of around 55 per cent. That’s far less risk because there is plenty of equity left in the house should the borrower default.
Private lending investment is “huge,” he says. “On a conservative fund, you are getting 7 or 7.5 per cent net. But here’s the thing – the average investor knows nothing about this stuff, because it’s more for sophisticated investors.
“To go to one of these private MICs, where they are not publicly traded, you need to become an accredited investor with a minimum net worth of something like $5-million or $2-million, something like that.
“That’s because of the risk level. I’ve been involved for five years now and the returns are tremendous. The three funds I’m involved with have never missed a payment. We always got our interest cheques or whatever. But I suspect in this market environment, there will be an increase in bad debt and bad loans.”
Andrew Hasman says he became a private lender when he learned about it through his network. Each year he attends an extravagant business party with hundreds of wealthy retirees at a private country club, where he rubs elbows with fellow private lenders.
An example of a borrower is a wealthy self-employed individual who doesn’t qualify for a bank loan and wants to purchase a $3-million home and needs a $1-million mortgage, he says. A group of lenders might get together and loan that person money.
“There are lots of ways to get money out there if you are creative. There’s no question.”
Andrew has invested a small amount in a publicly traded MIC and “a good chunk” in a private MIC. But he is growing wary of pouring more money into private lending in the current market.
“The funds I’m involved with have done incredibly well because business is booming. But I’ve been a little bit cautious about giving them new money because of downtick in real estate prices. I think that there will be an increase in bad loans. So one needs to be careful if they are on the investor side of it, for sure.”
To the outsider, private lending can be a labyrinth of transactions and deals. For example, a scan of property titles shows a $6.468-million property at 5811 Adera St., Vancouver, which has both bank loans and private lender loans on title. The private mortgage lender, who is charging the owner 10-per-cent interest, identifies 5811 Adera as his own address. Then there is the Coal Harbour condo at 2401-277 Thurlow St., where a businessman borrowed $11.414-million from a businesswoman. The property is assessed at only $10.709-million.
Private lending isn’t just a Vancouver phenomenon. John Pasalis of Toronto’s Realosophy released a report last fall with Teranet that showed a major spike in private lending. In the second quarter of 2018, refinancing mortgages from private lenders increased 67 per cent in two years in greater Toronto.
“They are the only ones making a ton of money now, because people can’t qualify for homes or investment properties. And it’s hard for people to refinance if they don’t fit the OSFI [Office of the Superintendent of Financial Institutions] mould.”
Due to requests from clients on the hunt for foreclosures, realtor Ian Watt has relaunched his website exclusively devoted to Vancouver homes that are court ordered sales. He has already collected about three dozen listings, including multimillion-dollar houses. Private lenders are behind more than half the listings, he says.
“The stress test doesn’t mean anything. It just means it’s pushed people into private lending, and private lending is way riskier,” Mr. Watt says.
“It’s riskier because who knows if those guys can keep their boats afloat. What if people start withdrawing their financial support? There is so much money involved and nobody knows where it’s coming from.”
Are you a homeowner worried about debt? If you would like to share your story with The Globe and Mail, contact reporter Rachelle Younglai at firstname.lastname@example.org
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