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Mortgage Solutions for the every day Canadian mortgage consumer. Are you thinking about becoming a mortgage broker learn first hand what you should look for in a brokerage and what you need to be successful.
Transcript
Len 00:02
Welcome. My name is Len Lane, and I am the founder and president of Brokers for Life Inc. and we are Dominion Lending Centres in Western Canada. The topic of our podcast will be about what we consider to be Real Life Mortgage Solutions.
Len 00:19
Welcome back, today we are going to talk about private lending and mortgage investment corporations that are known as MICs of the industry. My guest today has been in the industry, since almost as long as I have by the looks of it, according to LinkedIn anyway. They started as a mortgage broker back in 2008. Working for an investor group, was a business development manager for HomeTrust and got scooped up by our good friend Hali and now he's now he is actually the National Broker Relations Manager for Fisgaard Asset Management. Reaza Ali.
Reaza 00:58
You got it. That's a long one. That’s a long one. Thank you very much, Len. I appreciate that. Yeah, even going back further than 2008, I actually, and you'll remember some of this started in the industry with household finance back in the day, HFC. So yeah, it's it's been I think I'm it's been almost 26 years now, in the industry. So yeah, I really don't see myself leaving it now.
Len 01:25
Yeah, it’s too late and too hard to retrain. That's right. You're probably not unlike me, we're pretty much unemployable outside of this industry.
Reaza 01:36
You kind of wonder what you do with yourself afterwards, you know, it's, but I do love it. Absolutely love, the people in the industry.
Len 01:43
Seven to eight years ago, somebody asked one of my team, if I had gotten tired of this, because I had been in work for a concrete company and sold concrete and then new homes and, a few other things. But I had moved around within those industries as well. Right? And, and when I heard that question, I'm gonna like, No, I don't think I'll ever get tired of mortgages, because there's no two days the same. And we just had another week where it's like, there's a whole bunch of different things that came across my desk, but I hadn't had never seen so. So–
Reaza 02:13
That's one thing I do say. There really is not a day, that's the same. You hear so many different scenarios, although we've been in the business as long as we have. And we've probably seen most of everything. But the nice thing is each day is different. It does bring a different scenario, and the industry is ever-changing. So, you do have to stay on top of things.
Len 02:39
That is true. And it's hard to do. I can't imagine being part-time in the industry at this point. There's a change every day. So–
Reaza 02:48
Very difficult. But talking about change.
Len 02:50
Yeah. Talking about change. Well, I guess part of the change is asking this question. The average Canadian probably lumps private lending in with MICs and syndication and all of those different definitions that we understand. But, of course, lots of things that we see happening in the private lending side. What makes that different from mortgage investment corporations, which is what Fishguard is.
Reaza 03:13
Yes, and we do love talking about this, because to your point, you know, the word private, is associated with everyone and that's not necessarily the case. I'd like to break it out in this way. Either one of us can be an individual investor, we want to put our money out on a particular property, there's certain risks that go along with that. And as an individual investor, we take that into consideration and charge accordingly. But at the same time, we're human, we listen to the news, individual investors react differently, whereas when you're talking about a mortgage investment corporation, it's exactly as it's it sounds, almost institutional, private lending, if you will. And there's infrastructure behind it. There's regulations behind it. And when I talk regulations, whether it's Securities Commissions, or the the Broker Regulation side, in each province that we lend in, that is a big part of the operation and consideration. So, we have to protect our investor funds, whereas an individual investor, it's their own personal money going out on a property and all of the risk is on that property versus someone investing into a Mortgage Investment Corporation, their risk is spread amongst the entire portfolio.
Len 04:48
Right, it's not quite syndication, but it actually goes to that next step where it's however many investors and then there's probably hundreds, I'm sure with this guy If not 1000’s. \
Reaza 05:02
Yeah, there's literally 1000s and investors in the corporation. Exactly. And it varies. It varies between organizations and mortgage investment corporations. But to your point, you're correct, we actually have control on that money, we put out an operating memorandum to our potential investors and our existing investors. And they look at the risk of the portfolio and our history in the business and determine if it's somewhere that they would like to place their funds to see, you know, a reasonable return on their money.
Len 05:37
Excellent. So, lots of news lately about private lenders, especially in Ontario, and how unregulated they seem to be, but especially after recent collapses. So how is that different in the world of MICs? We don't see as many MICs collapsing over the years. Right?
Reaza 05:58
Right and, you know, I go back to just helping the audience understand when you talk about private lending, and educating our broker community as well, on the history, private lending has been around if you think about it, since the start of time, you know–
Len 06:16
All the way back to royalty, I'm sure so
Reaza 06:19
Precisely, and this is how I describe it. You know, you have a village, if you will, and you have a family that either owns the village or the land and the people that need something, you know, back in the day, they may have been trading animals is an example, right? And that evolved to what we know now is the cash transactions, private lending has been around forever and ever. What the difference is now is it's evolved into what we now know, as a mortgage investment corporation or mortgage investment entities. There are different formats out there. But the the individual investor, as we term it, Mom and Pop, that have some money laying around and they're looking for a return, it can be quite risky, if you don't really understand all the risks in putting your money out onto a certain property. So, working with professionals like yourself, if they choose to go that route, is critical. And that's where someone like yourself would buffer that risk and look at it and advise appropriately. You know, when we talk about what's been going on lately, I almost equated that people are just looking for the silver bullet solution in accelerating their wealth. And there really isn't one. But when you take that, when you take that road, you have to understand there's enormous risk associated with that. And you have to be willing to understand, you may risk losing your money as an individual investor. The difference with dealing with an institution like ourselves, or any of the other operators out there, we haven't seen to your point any sort of collapses because we are highly regulated. Every year we're audited, we are regulated by the Securities Commission. So, there's a lot of thought that goes into the risk appetite. I always say our number one, there are two number ones for us, deploying our investor funds, so that everyone can see a decent return and a reasonable return. But the the other number one is making sure we get all of those funds back and not lose any of our investor funds on any sort of trend, even whether it's an individual transaction or multitude. Those are the thoughts behind when we look at deploying capital, that it's a big focus for any one of us out there, not just not just Fisgard.
Len 09:10
Yeah, and that exit strategy, as we call it, right is always important. We've looked at, obviously, 1000s of deals over the years, we've helped over 6500 families with mortgages, it's like, if you're in a private mortgage, or in an even in MIC, what's the strategy? How do you get out of it? How does the investor get its money back? And you know, that that is almost the point where you have to start and then work the deal backwards, right? So, it's like, okay, if we do this, this, and this, at the end, are you going to be in a better place, and then hopefully get out of it. And, of course, it's important to your investors. And, you know, even if it's a private individual, and that's where they say 86% of the complaints on insurance or filed claims on insurance are coming from private individuals who weren't happy. The borrower was happy, they got the money. But the actual individual lenders are the ones that don't always understand I think is the problem what the scenario is right? The money's gonna stay there until the end of the term, and you know that's when you can either renew it or ask to have it back at that point. So.
Reaza 10:21
Yeah, it's assessing the risk. You know, we always like to say, when we're looking at an application, we always look at the file with the exit in mind, as you said, working backwards, does it make sense that, and can we see an opportunity that we will get our investor funds back without losing anything and putting their money at risk. And that's always in the back of our minds, when we look at any file out there. The challenge I find, and it's, you know, I'll put it this way, I love cars. I'm not a mechanic. I don't know how to assess any of that stuff, maybe some basic things. But, you know, that's why we take it to a professional that understands that particular vehicle. In the world of finance, and the world of mortgaging, not every individual understands all the finite details of risk and what potentially may happen with their money. And you know, whether it's someone purchasing a home, as we say, it's always the biggest investment any one of us will make. But as an investor, you have your capital sitting there, and you want to put it out on a particular file. It then comes down to how good are you at assessing, not just the property, but the market. What's going on in the market? And who are you lending this money to? Do they have the capacity to repay you? And not just on a monthly basis but ultimately, as we talked about the exit, can you get all of that money back so that you can then use it however you see fit?
Len 12:11
Yeah, it's a tricky game. And putting someone in a worse situation doesn't serve anybody any good at all right? So, let's talk about that client. So, stress tests obviously a big thing right now. If you look at a one-year term, the bank, you really have to qualify at almost 9%, anyway. So, 7% interest for one-year terms at the moment, right? Coming down a little bit, but but not a whole lot. Stress test that at nine, your worlds not that far off of that number anymore. So how was the client changed? Is the average application better or worse? I know, for a long time we MICs were, you know, the world where we took our 500 and low 600 kind of scores. Right? So what change is your part of the industry seeing there?
Reaza 13:04
You’re absolutely right. So, I go back even 10 years ago, and you see this evolution of the client, simply with things like regulation changes, not that they're poor payers, you know, as we talked about the landscape of regulations change all the time in this business. Unfortunately, in some cases, that shifts clients out of the banking side, the institutional lending side, into our space. Now, what people may have thought is private lending, were always for poor payers, is not the case at all anymore. We're seeing, you know, on average, probably a 680 credit score on the portfolio, and we're coming across 700 plus 800, credit score files. So, these are people that handle their money. They're just not able to qualify at the institutional lending side. They're not fitting the box, if you will. And as you've seen over the last few years, the box is shrinking, in many cases.
Len 14:17
Yeah. No, question self-employed, especially right to the site and up on that so much that it really is, which is one of our podcasts about both the different ways we have for financing that and private lending is definitely part of that conversation that regardless, you know, if you're going to claim $25,000 a year on your taxes and your business makes 2 million. It makes it really hard to get a house for you. Right?
Reaza 14:46
There's a trade-off, right? Someone who’s self-employed for many different reasons. And one of those reasons is the benefits of the tax side. There's a choice to be made if they want to end up on the institutional banking side with the best rates, they can now refile their taxes. But you have to consider the amount of tax that you're going to have to pay. And as a self-employed individual, why would you want to do that? So, always look at these types of transactions and to your point self-employed makes up a large component of any of our businesses. It's not even self-employed only anymore, it's multiple sources of income, that are involved, you know, people just have to do that to survive or even get ahead. But that does not necessarily fit the box on the institutional lending side. So, it really then comes down to somewhat of a business decision. It's a business transaction, although it may be dealing with your principal residence, and in many cases, investment properties, but it really does come down to a business transaction. And is it worthwhile to return? Is the return there for what you're paying for a one-year or two-year term mortgage? And then ultimately, moving out to better financing down the road. But, you know, I always say there are clients, that majority of them can move on into a better financing situation, but there are many that will just continually use private equity. That's really what it comes down to, private capital. It's not new. When you look at people that have larger portfolios, you know, you could probably answer this one, Len. Are they really utilizing the banking institutions? Or are they utilizing private capital to get their their transactions completed?
Len 16:57
In a lot of cases, it's more towards the private side, because the bank is so hard, if you know, your business cash flow has to be super impressive to the bank for they'll lend you any extra money if you want to do something, but you have equity in the company, you have equity in properties, possibly right or equipment. So there's lots of other ways I think that they're going about getting money to help them grow because that's basically what that money is usually for. Right?
Reaza 17:24
Exactly. That's where the business mindset comes into play is, yes, we might be paying x in a percentage on this mortgage amount. But the benefit is, whether it's the growth and equity or just growth in the portfolio itself, far outweighs that cost.
Len 17:46
You know, it's funny you say 680. Because the new 650 is the 700 on the regular banking side, you know, it really has come to that 700 beacon is kinda where they want to look at you. Before 650-620 was okay, we can get by with that, but not anymore.
Reaza 18:04
Well, you remember the days when the insurers, you could do a 600? Or even a 610, credit score, and you're getting an insured file completed.
Len 18:15
Yeah even in that high five, sometimes. Right. But 10% down. Yeah, yeah.
Reaza 18:22
Yeah. Those days are gone.
Len 18:23
Long gone. Right? Yeah, the banks have tightened up, I don't know if that's all because of OSFI or the other part of their inspectors, but it's definitely have made it harder for individuals, regardless if it's self-employed or not, but that I think that's where you see a lot of them, you know, transitioning to looking at the MICs and things like that to buy a property. I actually know a client who's been in a MIC mortgage for almost a decade.
Reaza 18:50
Are they with the same institution? Or do they need to move around every so often?
Len 18:56
Yeah they just, they renegotiate every year. And but again, he doesn't change how much he claims on his taxes, right? So, it's a trade-off, he's gonna show the government I'm paying you 25 and $25,000. And he's just keeps his mortgage away from the bank altogether. So.
Reaza 19:11
Right, but you know, for that individual, there, they must see a benefit to doing this. Otherwise, you know, from a financial perspective, there must be a benefit there for them on a grander scale.
Len 19:26
I’m not 100% sure what it is, but it's working for him. So he says, Why would I bother to change it at this point, I'm going to start to claim more taxes just so I can go back to a bank, right? It's basically it's a mentality, right?
Reaza 19:38
It is, and I know, everyone wants to get back to that prime lending side. Eventually, most people do. But when you're talking multiple sources of income or the self-employed community, it's something that needs to be thought of a little bit deeper.
Len 20:01
So you’re Fisgard licensed from BC to Ontario? Or right across Canada?
Reaza 20:07
That’s correct. Yeah, we're currently from BC to Ontario, all the provinces in between.
Len 20:13
So, what kinds of changes are you seeing in the markets, given that everything has definitely changed over the last two years?
Reaza 20:20
Well, I can tell you, Alberta specifically is doing quite well. You know, Alberta has always been one of those provinces that has been up and down, obviously, with whatever happens with the oil. But there seems to be a little bit of a different feel to it. Over the last few years now, the oil is the oil, everyone knows about that. But it seems like there's a little bit more diversification happening in the province. You see more interprovincial movements into Alberta. I'll tell you this, and I'm in Ontario, driving around yesterday. And on our news, I hear an ad promoting Alberta, for people to come and move and incentives to come and move out to Alberta. So, that's a big focus, obviously, for the province. But from a from a lending perspective, risk. It's we're seeing it's a good market to do business in, it's been steady, for the most part. Although I do believe you guys are going to start to experience a number of things that us in Ontario and the folks in BC, which are similar markets, between the two provinces, have been experiencing for the last number of years with, you know, the supply and demand piece. So, in Ontario and BC right now, with the run-up of values, the enormous demand for housing, coupled with the influx of the immigration piece has really put a hold on the market, let's say. So, they're trying to control that a little bit, bring the affordability piece back in line. But quite frankly, I really don't see that happening anytime soon. Just, again, basic economics supply and demand. It's I think we're years and years out from that ever bouncing off.
Len 22:26
Yeah, I don't, I don't think what the government's are doing is going to make that much of a difference in the housing market. Because like you say, we've never really built more than 300,000 homes a year across Canada, like province, one coast to the other.
Reaza 22:42
And we've had quite a million people come in.
Len 22:42
Yeah. So yeah, you know, the math just doesn't make sense to bring in millions of people every year. For what, almost four straight years now, right? But, you know, there's two or 3 million new Canadians, which is great, because we need them for a variety of reasons, but it's like it, there's no place for them to live. And I've just done a couple of mortgages in downtown Toronto, two bedroom apartment 850,000, even to this day, right? So, it's, you know, it's not changing where 850,000 here when we get your very nice house on a big acreage and smoke buildings if you want to have a pony or something, I guess. But you know, it's funny. You're right. The change in Alberta right now is this is my fifth boom. The boom and bust cycle so many times in this province. But it's like, there's not just oil this time pipelines open. That's going to be huge for Fort McMurray, obviously. A $15 billion Dow Chemical hydrogen plant in Fort Saskatchewan just outside the city. That's a game-changer for Alberta. Just as you know, another product. Carbon Capture in Cold Lake is a huge project as well. Plus, the military is revamping and doubling the size of Cold Lakes base and things like that are going on all around the province, right? Calgary always has a problem with housing, it moves first. You know, a $5,000 credit for tradesmen because we need them.
Reaza 24:18
That's the ad that I heard on the radio yesterday.
Len 24:23
Yeah, it’s a tax credit. So that's good because we also have the lowest income tax to begin with. So, it's gonna definitely help, right? So, there's lots of lots of things that are changing. I know Saskatchewan, I hear stories from there that things have ramped up quite a bit and it's one of our agencies, Ukrainian and so she's done a lot of work with Ukrainian immigrants. She said they go to Toronto or Vancouver first and then they realize these are these are big cities, but they're not cities that you can afford to live in. Right? They're the European style with, you know, corner, still some corner grocery stores, I'm sure in some of the older neighbourhoods and things like that, but it's not, just the cost of living is just too much.
Reaza 25:04
Yeah, and to your point, I always talk about, yeah, its cost of living, its lifestyle, you know, what kind of lifestyle does someone desire, although we don't lend in Atlantic, you know, they saw the boom as well through the COVID time, and they're still quite active out there, just from an affordability picture, it is a different lifestyle. And that's something that people do have to consider when they're going from province to province. You know, if someone grew up in the GTA or GVA, it is a different pace. But everyone has to determine what is good for them and try to build something for themselves. But from our perspective, as a lender, you know, we're still lending in all the provinces that we operate in, we haven't changed too much. But there are certain things, you know, when you look at what's been going on over the last couple of years, with not only the interest rates going up, values taking a step back, aside from your own province but, you know, in Ontario and BC, we absolutely saw that values take a step back over the last year and a half or so. And again, from a lender's perspective, we have to account for that. And when we're handling our investor funds, and placing them on these files, does it make sense? And do we see that exit where, you know, whoever we're lending that money to, they're in a position from an affordability picture, number one, and number two, there's a clear path to move on to a better financing situation, you know, our philosophy is one that we're not going, we want your client, but we don't want them forever and ever and ever, we would like to see them move on to a better financial position when it comes to their largest debt. So, that's a position we take, and we do our best when we underwrite any of these files, to take that into account. But once again, protecting the investor funds constantly.
Len 27:20
Yeah, and that was, you know, started off by talking about the difference between private individual lending, which we don't allow in our brokerage.
Reaza 27:31
I know many that don't, yeah.
Len 27:32
Yeah, it's the High-Risk part of it. Right.
Reaza 27:35
And reputation as well for yourselves.
Len 27:39
Yeah. You know, the mortgage investment corporations give us an extra level of protection, if you'd like you do your due diligence as well as we do. So, it's kind of a double layer that's there. And that I think, is, should be key for anybody that's considering having to be anywhere other than the bank, that the reputation of the lender you're with for one is is hugely important to if it doesn't look right, there's a reason. And/or the fees or something like that, or, you know–
Reaza 28:10
There's a lot of digging that needs to be done on your part, obviously, on behalf of your client, to ensure you're placing them with an appropriate lender out there. Everyone's different. Everyone has a different business model. You know, the beauty of the position you're in, and the market that we're in today, there's so many choices there a multitude of options out there, that I always say, there's probably very little reason that you should say that you cannot bring a solution to your client. And that's a great position to be in, you know, from the consumer perspective, trusting your judgment. And understanding what's best for them at that time, is critical as well.
Len 29:02
Yeah, and that's why our slogan has been and will be Real Life Mortgage Solutions, right? It's like, there is a fit for everybody. But, you know, it's gotta work all the way around. Right? It's got to be good for the lender, it's got to be good for the client. And, you know, like I say, it's a longer-term project that you have to plan that exit strategy so that everybody is in a better place when we're done with the term of the mortgage, right?
Reaza 29:32
Yeah, I always say it's, you know, you take on an advisory role, not just a mortgage processor, if you will.
Len 29:40
Yes, we let the mortgage processors because I don't know how many people you've asked over the years who was your mortgage broker, and they have no idea. Right? Transactional brokerages never thought it was a good business idea, and that's why we endeavour to train our agencies as best we can and you know, and support them all the way through their mortgage career. Right?
Reaze 30:03
It's a big win for your consumer base and your agents for sure.
Len 30:09
Yeah. Excellent. Okay, we'll let you get back to work. At least probably got you on the clock there somewhere.
Reaza 30:16
You know there's always work to be done. Yeah.
Len 30:21
I’m sure. Appreciate your time today, Reaza and we will talk to you soon.
Reaza 30:26
Yeah, thank you very much again, Len. I appreciate it. Good seeing you.
Len 30:31
Thanks for listening today. I hope you found the information that we provided to be useful in your mortgage journey. And remember, you can always find our associates at www.brokers forlife.ca/associates. Have a great day.