The Nature of Investment Risk

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Extract from a conversation about Mortgage Investment CorporationsImage

The point I am making is that all investments that are not “guaranteed” by the government are considered to be high risk by securities regulators, for a variety of reasons far too long to go into in this forum.

Private Mortgages have risks, as does the investment of money in a MIC, including our MIC.  There are several pages of things that could go wrong and cost an investor their money.  Obviously, we don’t think they are going to happen, nor do we believe that we are going to lose you your money.  The reality is that no one can predict the future with certainty, including us.  We’re left with saying that we’re going to do our best, and to some degree, you as an investor are stuck with that.

There are all sort of things we do to reduce the risk of losing money, but none of them would have prevented the type of losses experienced during the meltdown of the US housing market.  Again, I don’t expect this to happen, but if it did, unless an investor could wait a very long time (in the US maybe ten years) a catastrophic lost can last a lifetime – which is why it is a good idea to do exactly what you are trying to do, which is research enough so that you can reduce your risk of loss.  There are a couple of other risk mitigations strategies you could consider, including diversification over a number of sectors and jurisdictions, mutualization of risk (which is why a MIC is a good thing, it’s better to own a part of a bunch of mortgages than to own just a couple.  Default ratios on mortgages are relatively low – unless you happen to own one of those that fail

If you want to sit down over coffee in my office, I’d be happy to meet with you myself and discuss our investment opportunities.  I believe we can do a good job of making  strong returns on your money, within a reasonable risk profile.  I also work with investors who have substantial money invested directly in second mortgages, and we could discuss that as well, although I believe that direct mortgage investments are inherently riskier than pooled investments.

Why Use A Hard Money Lender?

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Loan

Loan (Photo credit: Philip Taylor PT)

There are many misconceptions about private mortgage lender and mortgage brokers in Canada.

We have access to a wide range of financial alternatives, all the way from bank refinance to private “hard money” lenders. Our goal is always to find you the best, lowest cost alternative that solves your borrowing needs.

The expression “hard money-lender” is commonly used in the United States to describe lenders who specialize in “hard to get” mortgage loans, particularly for borrowers in distressed situations.  If someone can’t get mortgage money from a prime lender, such as a chartered bank or other institutional lender, it is possible for them to get a mortgage from a private person, mortgage investment corporation  or other private lender.  Unlike most institutional lenders, these lenders almost always lend the majority of their loans through mortgage brokers.

In Canada, unlike in the United States, there is not usually a completely separate class of mortgage brokers or agents who specialize only in “hard money” lending.  Typically, private loans are brokered within the context of a full service mortgage brokerage. Private loan specialists will typically deal with a variety of lenders, all the way from clients who are close to “bankable” to more extreme cases where the borrower may be in foreclosure, have little or no reportable income, real estate classes considered to be poor security generally, etc.

Loan

Loan (Photo credit: [Magec])

These loan specialist also have access to all the more traditional sources of mortgage money such as chartered banks and other insured lenders.  This describes our brokerage company, Dominion Lending Centres DominionGrand Financial.

Access to the financing alternatives the banks don’t want you to know are available – potential saving you thousands of $$$$. Since I send lenders millions of dollars of new business each month, they always offer us the deepest discounts which I pass that on to you IMMEDIATELY – whether you are purchasing, refinancing or renewing.

For many people and small business owners, it can be devastating to discover that you can no longer access traditional mortgage loans.  After you’ve been turned down by the banks, it is helpful to know that there is a whole world of alternative lenders available.

I shop the market saving you time – Calling me is like calling over 200 different lenders including Banks, Credit Unions, Trust Companies, Non Conventional lenders such as Mortgage Investment Corporations, Private Mortgage companies, and private lenders. – I have access to them all.

It is much more efficient to do a mortgage through a full service mortgage brokerage company than through a bank or a small one person mortgage broker.  These days, lenders are picky about with whom they have business relationships and unless your broker is a member of a national organization, it is unlikely that they will have access to the breadth and scope of lenders represented by a Dominion Lending Centre brokerage.  Our franchise, over the years, has developed a high level of ability in “hard money lending” as well as other private and institutional loans.

Fee and cost transparency – You will always know in advance how much our services are going to cost.

Mortgage brokers often proclaim that their services are “free.”  What they really mean is that in traditional mortgage loans the lender competes with other lenders for your business from the brokers, and they pay the brokers to bring them that business.  So a borrower generally doesn’t have to pay a broker fee out of his/her pocket at the time of the close of the deal.  This doesn’t mean it is free.  I merely means that in conventional and Insured loans that the broker is charging the other party to the transaction for the work.

In “hard money” or other private loans, the lenders do not pay the brokers for their services, as they perceive their loans to be a scarce commodity, where the borrowers need them more that they need the borrowers.  Fees are charged to the borrowersfor the services rendered.

Loans

Loans (Photo credit: zingbot)

The fees range a great deal from one type of deal to another, all the way from rates similar to the fees paid by institutional lenders to the brokers (between .05% to 1.8% of the loan balance) to much higher fees, based loosely on (a) degree of perceived riskiness of the loan, (b) scarcity of the capital available for the particular loan or borrower, and (c) the time and energy invested by the brokerage company in putting the deal together and maintaining their working relationships with lenders.

Mortgage brokers with little or no experience in private mortgages are seldom successful in putting together private mortgages, for a variety of reason.  Our firm does many private mortgage loans for brokers from other mortgage agents or brokers.

Our application process is simple and quick I’ll take some information and then present it to lenders that I feel are the best fit for your situation; 24 hr lender commitment is usual!  Private mortgages are often completed, beginning to end, within two weeks, and sometimes in a much shorter period than this. 

Step By Step: I’ll walk you thru the process of getting a mortgage, step by step, especially in difficult personal and financial circumstances. Solutions may end up being expensive, but an expensive loan that actually solves the problem may be the ONLY alternative in the short run. And I will work with you to replace expensive money with better rates of interest and terms, as your situation improves.

We are full service mortgage brokers, with specialists in several different niche marketplaces, including Hard Money lending.  Our goal is give the client a practical immediate solution that includes a strategy to get out of the hard money marketplace as soon as possible.  We will give you advice and support to improve your situation enough so that traditional financing replaces the “hard money” within a year or two.

Interest Renewal

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Dominion Lending Centres Owners University – April 25th, 2012 to April 27, 2012

I joined about 75 other franchise owners and managers at a three-day “University” with Dominion Lending Centres Gary Mauris and team in Coquitlam B.C.  These universities are designed to give the franchise owner with updates and new information about goings on at DLC, as well as new trends in the industry.  What the three days really did, is inspire anew the enthusiasm and energy that I felt when we first joined the company.

Your Credit Score – What do I do if it’s a mess?

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There is a lot of misinformation floating around about credit reports and their effect on your ability to borrow money, either on a mortgage or otherwise.  There are some things that aren’t readily obvious, even if you read all the public information.

Credit Scores

Credit Scores (Photo credit: Casey Serin)

  1. Not everything shows up on your credit report
  2. Some things you wish would show up don’t, and other things that seem pretty minor can really screw up your report
  3. Credit reports are not designed to be “fair”
  4. Credit reports are not necessarily used by all lenders in the same ways
  5. A credit report is not, by itself, sufficient to be relied upon as providing full disclosure, and just because a debt doesn’t show up on the credit report does not mean that you don’t need to disclose it in an application for a mortgage
  6. You can repair your credit report but it takes time and you actually have to change your credit behaviour.

Not everything shows up on your credit report

One of the misconceptions about credit reports is that they are comprehensive in their reporting of your behaviour as a borrower or as a consumer.  Many types of debt do not generally report to the credit unless the debt relationship ends up in “collections” or in court.

Factors contributing to someone's credit score...

Factors contributing to someone's credit score, for Credit score (United States). (Photo credit: Wikipedia)

  • Governments, utility companies, and private debts from non members of the credit bureau agencies generally aren’t reported.
  • So if you are behind on your property taxes it probably won’t affect your credit report.
  • Similarly, an overdue power bill or light bill will not likely show up, nor will a phone bill…. unless it really gets out of hand and the creditor has to pursue you through a collections agency or by filing a writ in a court.
  • Even many loans such as finance loans for time shares, or other shared property purchase agreements will only show up if there is a dispute.

Some things you wish would show up don’t, and other things that seem pretty minor can really screw up your report

Many consumers complain that they are really reliable in making their mortgage payments, which is the largest bill they pay, and yet, most of the time, a mortgage payment doesn’t show up on their credit report.  They think that because it doesn’t show on their report that it has no effect on their credit score. Not necessarily.

Logo of the Credit Institute of Canada

Logo of the Credit Institute of Canada (Photo credit: Wikipedia)

  • Mortgage don’t report to the credit bureau unless they do. In recent years more and more lenders are choosing to report mortgages, even though they are NOT considered traditional consumer credit.  The gradual extension of mortgage security for Lines of Credit and other revolving loans means that there has been a gradual shift by reporting agencies.  Sometimes mortgages will report and sometimes they won’t.  It is mostly lender dependant, with credit union lenders more likely to report and monoline and bank lenders less likely to report mortgages.  But don’t count on it, as this is quite fluid at the moment and is changing.
  • Minor credit problems can radically change your credit score.  Many consumers complain that disputes over tiny amounts of money can radically lower their credit score and adversely affect their ability to get loans, whether small or large.
  • Unfortunately, a negative report or a collection, even for a tiny amount of money, will negatively affect your credit score, and undermine years of excellent credit management by an individual.
  • What this basically means is that if you are disputing a billed amount by a credit grantor, the only way to dispute the amount owed or even whether or a debt really exists is to (a) pay the disputed amount and then (b) pursue a refund or (c) sue them for your money back.
  • Even if a consumer is absolutely right and can prove that they don’t owe a creditor any amount of money, if the creditor files a collection action or reports a delinquency to an agency it will negatively affect your credit report and score. Paying it after it is reported will mitigate the amount of damage to the score but not end it.  If you can prove it is false, the agency will remove it, but the process is time-consuming and the burden of proof is on the consumer not on the reporting credit grantor.

Credit reports are not designed to be “fair”

  •  Credit reporting agencies are not set up to serve the interests of consumers.  They are set up to give credit grantors access to objective information about the behaviour of credit consumers.
  • Enforcement of accuracy is up to consumers, even if the agencies are required to exercise due diligence in reporting, or can be found to be liable to the consumer in the event of false reports.
  • It is very difficult and expensive to fix wrong information on your credit report after the fact.
  • Many people have had their lives ruined by “identity theft” where a fraudster has used their identification or information to fraudulently get credit. Credit reporting agencies will work with consumers if there is a case of identity theft, but it takes months of concerted effort by the consumer to resolve these issues.  So be vigilant, and periodically check your credit report.

Credit reports are not necessarily used by all lenders in the same ways

My Mortgage Docs to be Reviewed by an Expert
My Mortgage Docs to be Reviewed by an Expert (Photo credit: Casey Serin)

While most mortgage lenders use credit reports in their review of an application it is only one of the measurements used.  Credit reports speak to the “credibility” of a borrower in terms of their “reliability” in meeting their obligations on time. Different lenders use credit reports in different ways – some rely on them, almost completely, and a bad credit report eliminates the possibility of obtaining a mortgage loan.

  • This is almost universally true of all high ratio mortgages in Canada granted by institutional lenders and guaranteed by mortgage insurers such as CMHC, GENWORTH and Canada Guarantee.  Because all insurance guaranteeing repayment of the principle of a mortgage loan is backed by federal government guarantees, the Government of Canada has spelled out the lowest credit scores required.

    CMHC logo

    CMHC logo (Photo credit: Wikipedia)

  • It is not necessarily true of non-insured lenders such as private mortgage lenders, Mortgage Investment Corporations, and finance companies.  Most they will look at credit reports but not limit their evaluation to a credit score.  Some don’t look at the credit report at all, and rely heavily on the value of the security for the loan for their loan security.  Typically these types of lenders will loan a lower amount against the value of a property – usually less than 65% of the value of the asset.

A credit report is not enough as “full” disclosure

A credit report is not, by itself, enough to be relied upon as providing full disclosure, and just because a debt doesn’t show up on the credit report does not mean that you don’t need to show it in an application for a mortgage.

    • As stated earlier in this article, many types of debt do not show up or report to a credit agency, such as mortgage loans, leases of some types, personal guarantees or covenants under business loans, it is critical to realize that full disclosure for the purpose of obtaining credit requires the disclosure of all liabilities, whether they show up on the credit report or not.
    • The legal obligation to report all relevant debt, whether it reports or not, is often violated by borrowers who mistakenly believe that they are not obliged to report anything that cannot be “discovered” by a lender.  While it is true that a lender may not “discover” the hidden liability during the course of underwriting a mortgage, if a mortgage is obtained without full disclosure it is considered to be a form of mortgage fraud, and is a criminal offense with severe potential consequences including a criminal record if discovered later.  This discovery most often happens in the event of a default on the mortgage by the consumer adding a major unexpected result of a foreclosure action by the lender.

Credit repair myths

You can repair your credit report but it takes time and you actually have to change your credit behaviour.

  • There are many companies that make a business out of helping to “fix” your credit report.
  • Some other businesses specialize in helping consumers recover from a major credit breakdown or serious financial collapse.
  • None of them can “correct” the credit reports if they are actually true.
  • In addition, every form of credit repair, counselling, or consumer repayment program has consequences in terms of its effect on your credit report, and will not restore your “good name” quickly or even certainly.

The only certain way to improve your credit report and score is to become someone who actually pays bills on time, limits use of borrowed funds to that which can be given in a responsible way, and reviews and protects your credit reputation by ALWAYS thinking through the consequences of various credit related actions.

If you are in deep financial trouble seek professional assistance, but realize that while they may protect you from the collection of debts you really can’t afford, this will come with a price that makes it very difficult to borrow for a long time, sometimes more than seven years from the time of the problem.

stressed and worried

stressed and worried (Photo credit: Wikipedia)

In summary, when it comes to your reputation as a borrower, be very very very careful and make sure that you know the consequences of your agreements with credit grantors.  They certainly are, and so should you be.

Donald Wilson, President of DominionGrand Financial Corporation.

Donald Wilson, broker

There is a lot of information available about your credit score and how it is calculated. If you want to find out look up credit score or credit report on Google, Bing or other search engine.

Understanding Your Credit Report and Credit Score

The government of Canada offers a free publication called Understanding Your Credit Report and Credit Score. This publication provides sample credit report and credit score documents with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. The publication is available online through http://www.fcac.gc.ca, the site of the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada.

From Wikipedia, the free encyclopedia

Accelerated Monthly Payments – Why does it matter?

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My Mortgage Docs to be Reviewed by an Expert

My Mortgage Docs to be Reviewed by an Expert (Photo credit: Casey Serin)

Why Use a Mortgage Broker?

The mortgage broker industry is always trying to tell borrowers that there is a lot more to your mortgage than the interest rate, amortization and term of a mortgage to consider when you refinance or get a new purchase mortgage.  One of the substantial differences between mortgages is the amount that a borrower is allowed to pay ahead of the payment schedule agreed to at the time of signing.

A Scotiabank in Thunder Bay, Ontario

A Scotiabank in Thunder Bay, Ontario (Photo credit: Wikipedia)

When I purchased my new apartment about two years ago, one of the features that appealed to me in my Scotia bank fixed term mortgage was the ability to increase my monthly payment by up to 20% over my payment every month if I so choose.  Once my wife and I moved in, we agreed that we would make the extra amount after living in the property for only a couple of months.  We reduced the outstanding amortized period on our mortgage from 35 years to 21 years in only eighteen months!  We paid an extra roughly $5,000 in payments over the year and a half but saved ourselves 14 years of interest on the outstanding mortgage balance.  Our payments were set at approximately $1600 per month, which we increased about $360.00 per month.  We have saved hundreds of thousands of dollars in payments that we won’t have to make at all.  That was accomplished by making what is actually a small increase in our payments.Crazy, isn’t it.  No.  It’s just the benefit of making more principle payments early in the life of a mortgage, over and above the agreed upon monthly payment.  If we want to we can also make early principle payments of up to 20% of the principle outstanding every year, in addition to increasing our monthly payments by 20%.  Even though our interest rate is only 3.9%, and you might believe that you can do better than that with capital, the truth is that the rate of return on the added payments is so profound that it is difficult to exaggerate its affect on your net worth at the end of the day.

For my wife and I, taking an aggressive attitude to early repayment, as allowed under the terms of my mortgage, means that when we have done all that we can afford to do in terms of repayment, that our home will be paid off altogether in under 15 years.  If we choose, we can then live rent free in our property for the rest of our lives.  There isn’t any RSP that I know can give us the comfort of knowing that we will have our home paid off early, and can live relatively well because we will have no mortgage to pay.

Now here is the point that borrowers should understand.  Not all mortgages have prepayment privileges.  Some “no frills” mortgages won’t allow you to make any prepayments over and above your agreed up payment.  These tend to be the least expensive in terms of interest rates but are generally highly restrictive in some ways, including no early payment and very high penalties if you want or need to get out of the mortgage early. In addition, many mortgages have only a 10% or 15% annual prepayment privilege with no ability to adjust your monthly payment to relatively painless make extra payments.  It is a lot easier to make an extra $5,000.00 at the end of the year. Our mortgage will allow us to pay an extra $70,000.00 in prepayment without penalties over and above our $5,000 in monthly supplemental payments.  The $416 is a lot easier done monthly than trying to come up with a lump sum once a year.

We took a 35 year amortization to make the payments as low as possible in the event that there is a fluctuation in our monthly earning abilities.  Yes, we could have amortized the mortgage over 25 years or less but we would have been locked into much high monthly payments without the desired flexibility.

And this is the real kicker.  Almost nobody really focuses on early prepayment privileges when they are pursuing the cheapest interest rate mortgage.  Your banker won’t bring it up unless you do, although the terms will certainly be in the contract you sign.

But your mortgage should suit you, and fit your own circumstances and goals.  If you work with a mortgage professional and do a full mortgage analysis before making a decision on either the type of mortgage or term of mortgage you need, you will be made aware of the features of the mortgage that will allow it to be tailor-made for your needs.

Penalty Shock – Prepayment

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IRD Sudan Panel

IRD Sudan Panel (Photo credit: crespoevents)

Having huge penalties for paying off mortgages early shocks many clients. While this is true for fixed term mortgages, it is not normally true for variable rate mortgages, where the penalty is generally three months interest.

Interest Rate Differential (IRD)  from Canadian Mortgage Trends

The IRD is a compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges.

The IRD is based on:

  • The amount you are pre-paying; and,
  • An interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.

Most closed fixed-rate mortgages have a prepayment penalty that is the higher of 3-months interest or the IRD. Most variable-rate mortgages do not have IRD penalties.

New language is now required by lenders when charging an Interest Rate Differential under recent changes in Federal regulations

If the lender used the IRD to calculate the prepayment charge, the lender will inform the borrower of :

  • the outstanding amount on the mortgage
  • the annual interest rate on the mortgage
  • the comparison rate that was used for the calculation
  • the term remaining on the mortgage that was used for the calculation

This also means that the lenders will now have to use “plain language” in the mortgage documents when a borrower is signing at the beginning of the mortgage contract.

In the future, the size of the penalties should surprise consumers less when repaying a mortgage early.  Forewarned is forearmed.

A few tips about your Interest Rate Differential

Lenders use different formulas to calculate the amount a borrower will have to pay, so you have to check with your lender to find out exactly how that is.

  • Some lenders lock-in the mortgage so that there is no early prepayment permitted at all, except when the property is sold, so before you go shopping for a new mortgage make sure that your mortgage can be paid out early.
  • If what you need is more money from refinancing your property, it may be cheaper to obtain a second mortgage loan, even from the lender on your first mortgage.  Most will set up your second mortgage so that its term ends on the same date as the term on your first mortgage so that when you do refinance you won’t end up with penalties on the second mortgage.

Many mortgage consumer groups and broker organizations have expressed disappointment that the federal government didn’t impost a standard formula on bank lenders, so that a more fair comparison between lenders at the time of the mortgage could be done.  Regardless of how obvious it may seem, the government chose not to make this change in regulations. This desirable change won’t likely happen.

Info from the English WP http://en.wikipedia.o...

Info from the English WP http://en.wikipedia.org/wiki/Image:1896_phone.jpg: 1896 Swedish Telephone Edited version of http://runeberg.org/teleapp/0004.html (Photo credit: Wikipedia)

One point bears repeating – find out the cost of your interest differential before committing to any new course of action.

Portability – Not so much guaranteed

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CMHC logo

CMHC logo (Photo credit: Wikipedia)

Portability is one of the most misunderstood features of Canadian mortgages.

Most Canadian borrowers believe that if you want to take your mortgage with you when you move, you can if your mortgage has a clause that allows you to do that.  This is only true if your basic financial situation hasn’t changed for the worse before you make your move,  you have never been in default on the mortgage, AND the Loan to Value of the mortgage on your new property is better (i.e.: the same or lower).

Portability – from a mortgage commitment letter to a client

Fixed rate mortgages can be ported to another property, with increase and blend/extend options, subject to certain requirements being met. For variable or flexible rate mortgages, you may be able to port the mortgage balance and remaining mortgage term to another property, subject to certain requirements being met. Full details on portability can be obtained from your servicing branch following acceptance of this financing offer.

This option allows you to transfer your lower rate if the going rates are higher, as well as avoid any penalties if you were to break that mortgage. If you need a larger mortgage for the new property, your existing mortgage amount can be increased. As for the associated costs, since a new mortgage document must be registered on title, legal fees and normal appraisal fees would be applicable.

My Mortgage Docs to be Reviewed by an Expert

My Mortgage Docs to be Reviewed by an Expert (Photo credit: Casey Serin)

What all of this means is that you probably will be able to transfer the mortgage from your existing property to a new purchased property, but the limits to the transfer are quite stringent, and at least as stringent as the qualifications for a new mortgage by the same lenderon the new property.Watch out for the following surprises:

  • Debt servicing ratios are important – If your outstanding credit balances have increased on your credit cards, lines of credit or other debt you may discover that you no longer qualify for the mortgage you already have, let alone getting an increase to buy a new property
  • Changes in employment – if since you qualified for the mortgage you have changed employment you may discover that the lender won’t accept your new job and income for qualifying purposes for a port of your mortgage.  So while they can’t cancel the contract if you stay in the same property, they can refuse to port the mortgage to a new property, which means that you may face significant penalties to get out of your old mortgage, with no guarantee that you will be able to qualify for a new mortgage with another lender.
  • Missed payments.  If you have missed payments, even without having gone more than thirty days in arrears, (ie: NSF check replaced immediately) the bank is under no obligation to port your mortgage to a new property
  • Negative changes on your credit report.  If you have had negative reports on your credit report as a result of late payments, over credit limit reports, or other such reports, your credit  rating may have declined, making you ineligible for the mortgage, either by the lender or by their insurance provider.

So if it sounds like you have to qualify all over again for your mortgage, in order to transfer it to a new home, you are hearing me correctly.  The principle benefit  of portability of a mortgage is that IF you qualify for the mortgage they will port it to a new property without penalties.  You will still have to pay the legal and administrative costs to the lender, however.

It is not guaranteed by any means, so make sure that you have the commitment of your existing lender before you remove subjects on any proposed purchase.  Be sure to check your existing mortgage with your mortgage broker.  You could save yourself a lot of grief and money.