Unregulated mortgages are a bigger problem than housing prices

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Sabrina Almeida

Government measures to stabilize housing prices have had an unintended consequence – the rising popularity of unregulated mortgages. With residential real estate offering the fastest return on investments, everyone wants a piece of the pie. And when banks and credit unions say no to home loan applications thanks to the new stress test, there are scores of private lenders willing to step in. Many realtors (especially from the South Asian community) will point you in this direction. They will even assist you with the paperwork by ‘providing’ necessary documentation for the approval. For a fee of course…

With few if any regulations governing the growing underground mortgage stream, these lenders have the freedom and flexibility to set their own rules. Meaning, they can lend to whomever they choose and on whatever terms they want. Less stringent qualification criteria and faster approvals are thus turning hundreds into house poor Canadians and creating an unstable housing market. Blind sighted by dreams of becoming homeowners and real estate investors, they are not averse to putting most, if not all of their income into the property market.

While these borrowers do not intend to default on payments, higher interest rates than regulated lenders and no savings can create a situation. But there is little concern even if this were to happen as other private lenders will offer second and third mortgage loans to fill any financial gaps. However, many of these homeowners are unaware that in the event of a distress sale (or foreclosure) they might have to step away from the property empty handed. The lenders may have more equity in the home than they do. One Brampton family with a regular mortgage and two liens from private lenders on their home almost lost it in this way. In addition to sky-high interest rates they paid rising annual penalties on the unpaid private loans. As a result, after two years the amounts they owed had doubled. Selling the home was not an option as they had virtually no equity. A B lender bailed them out with a debt consolidation proposal at the time of their mortgage renewal.

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Few borrowers of private home loans also care to examine where the money is coming from, money laundering being a huge possibility. Whatever happened to the old adage – if it is too good to be true, then it usually is.

Realtors and mortgage brokers are not the only ones who are in with private lenders. Some employees of large financial institutions are guilty too. One mortgage specialist was only too happy to make this arrangement for a client whose loan application was refused by his bank. In fact, it was his sole purpose for the meeting in a coffee shop knowing the said person’s financial history.
As media reports alleged, some officials in the banking industry and credit unions are channeling disappointed customers towards riskier B lenders and the private stream. And being rewarded for it handsomely no doubt! How else can individuals with an annual family income of $50,000 or less own two and three properties? Their apparent success and the ease with which large private loans can be obtained encourages others to follow their lead.

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Several reports also point to a relationship between money laundering and real estate. This is not merely reflected in the high cost of housing. Private mortgages are the unexplored link and could be the answer to why the stress test has had little if any effect on the housing market. Perhaps the only impact has been felt by banks and other regulated lenders who are seeing fewer people walk through their doors.

It is difficult to believe that regulatory bodies are unaware. For example, signs for private mortgages can be seen everywhere in Brampton and Mississauga.

With most real estate markets in the GTA remaining out of reach and landlords taking advantage of the situation with high rents, potential first time homebuyers are starting to get desperate. Newcomers who don’t have parents to chip in or finance down payments are thus looking to alternate means to finance their homes. Faced with a slowing market, realtors are offering these ‘additional services’ to increase sales while putting borrowers at the mercy of unscrupulous private lenders. Thus, the government now has an even bigger problem on their hands with few if any resources to deal with it. But with real estate investments fuelling the economy and the new lending rules making it tougher to obtain home loans, it remains to be seen if the government is willing to crack down on unregulated lenders. After all home sales may come to a virtual halt and the resultant domino effect on allied industries and the economy can’t be good either!!!

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