Private mortgage lenders: what is their future in Ontario?

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It has now been three years since the stress test was implemented in Canada, which made it harder for first-time homebuyers to land the homes of their dreams. What this has now brought is a potential plan for a registry for private mortgage lenders that could shed light on a corner of the market that has been gaining traction in the wake of federally mandated stress tests for uninsured loans. Please note that this researched information is not a straightforward read.

Ontario’s Ministry of Finance has recently recommended “incentivizing registration for private lenders,” as borrowers increasingly turn to private sources of funding, such as mortgage investment corporations or other individuals.

“Because these lenders are unregulated, governments have no clear line of sight on their activities and may not know the extent of their market participation,” said the OMF, part of a review of the province’s Mortgage Brokerages, Lenders and Administrators Act (MBLAA). “This has resulted in a lack of understanding of the level of financial risk in the private lending sector.”

It appears that in British Columbia, private real-estate lending could be susceptible to money laundering, prompting the Ontario government and the Financial Services Regulatory Authority of Ontario ought to gain “additional insight” into the sector to help combat fraud.

“During the review, many stakeholders noted that private/unregulated lending should not be restricted, but could be better understood or quantified,” the OMF said. “As such, it is our recommendation that the Ministry of Finance work with FSRA to create a registration regime for private/unregulated lenders that meet certain monetary or activity thresholds.”

There could be voluntary registration as well for those not meeting the thresholds, it added, and those who register and lend to “sophisticated entities” could do so without the need for licensing under the MBLAA, the report said.

FSRA should work with the Law Society of Ontario to exchange data around private lending facilitated by lawyers, the report recommended, and registered lenders should be required to report periodically to the regulator on their activities.

“This would make Ontario the only jurisdiction in Canada to directly collect data from unregulated mortgage lenders, facilitating a better understanding of these lenders’ participation in Ontario’s housing markets and their broader role in the provincial economy,” the report said.

The Ontario government is eyeing 2020 for any registry, according to Stan Cho, the parliamentary assistant to the province’s Minister of Finance and co-leader of the review.

“We spoke to non-private and private lenders,” Cho said. “And really it’s something that the industry overall wants, because it is a growing sector of the market and it’s something that is here to stay.”

Data from a provincial regulator showed private lending was still a small part of Ontario’s $132-billion mortgage brokerage market, but that it accounted for around eight per cent, or $10.6 billion, of the total dollar value of all mortgage transactions reported in 2017 by brokerages, which was up from $6 billion in 2014, the report said.

Robert McLister, founder of mortgage-comparison website RateSpy.com, said requiring private lenders to register would provide “much-needed data” about their activities in the province.

“I’d like to see this rolled out nationwide by all provinces, so long as it does not restrict the vital flow of private capital,” McLister wrote in an email. “Private lenders are often lenders of last resort and keep borrowers afloat until they can bail themselves out of financial difficulty.”

Private lenders have been estimated as having gained mortgage market share in the Greater Toronto Area following the imposition of the stricter underwriting rules at the start of 2018, which included a stress test for uninsured loans. Housing is also one of the key campaign issues in the federal election, and the report arrives amid pushback against mortgage stress tests.

The report said the underwriting changes “have created significant challenges” for prospective homeowners.

“Additionally, more consumers are now forced to seek mortgage loans from private lenders, often at much higher interest rates,” it said.

Ontario’s Progressive Conservative government says it is now considering the report’s recommendations, which also included cutting red tape around commercial mortgage transactions between “sophisticated entities,” such as big companies and financial institutions.

The report recommended reviewing fine maximums as well, as some commenters said “(administrative monetary penalties) that FSRA is permitted to levy under the MBLAA are not high enough for certain offences in order to properly ensure compliance.”