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The Ascent of Money

The Ascent of Money by Niall Ferguson is a worthwhile read for anybody who saves money, owns a home or makes a living paid in some form of currency.  In other words, it is for just about everybody, but most importantly, it is useful for those who make our living in the mortgage investment field, and those whose income is derived from mortgage investments.

"Of far greater interest is Mr Ferguson’s general theory, which does not emerge until the end of the book. He thinks that finance evolves through natural selection. Although the professor cautions against the sort of Darwinism that sees evolution as progress, he believes that new sorts of finance are constantly coming into being as the environment changes. The sequence of creation, selection and destruction is what has generated many of the financial techniques that modern economies depend on." The Economist Book Review

And then there is the tendency of the United States to have a major financial services conflagration every fifteen to twenty years, the last one being the most severe since the Great Depression.

No one should ever bet against the Americans coming to the forefront again. They still have the world's largest economy despite its difficulties with its fundamental financial and regulatory institutions. It may even be that these fundamental flaws allow for an evolutionary die-off of participants including major banks and other financial institutions every few years to allow the new growth of a entirelyh new generation.
The rebirthing of the American economy allows the weak to die and the strong to thrive. This may not be what Adam Smith (the Scottish economist who founded economics as a discipline) had in mind when he talked about the "invisible hand." However, unfortunately for the weak, economic Darwinism may be just what the doctor ordered for a stronger economy long term.

Beyond the Age of Leverage: New Banks Must Arise

Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt....Niall Ferguson in "The Ascent of Money"

Why Use a Mortgage Broker?

My understanding is because you/Trillium shop around and can get better rates/terms, and can give loans to riskier borrowers like entrepreneurs such as myself, is this right? Why else?

As far as it goes, the above probably is what most people understand as the main advantage of using a mortgage professional.

The result of this belief is that most people only consider going to a broker to get the best interest rate rather than the best mortgage for them. And this distinction is the foundation of what a mortgage professional should be doing for most consumers. Far more consumers would use brokers if they truly understood the advantages to them of doing so.

There are actually many differences between lenders, and between mortgage products marketed even by the same lenders. Mortgage products are highly nuanced in their design, and actually there are major differences simply based on the type of mortgage obtained.

I’ll briefly cover some of the major differences:

1. Open vs closed mortgages. An open mortgage is simply a mortgage that can be paid off at any time without any penalty for being paid out early. Although an open mortgage always has a specific term, the term is simply the period at the end of which it must be paid out or renewed by the lender and borrower. Open mortgages are therefore more desirable for someone who may wish to pay off his mortgage prior to the end of a normal mortgage term, and are often preferred by real estate investors who buy and sell real estate as a business proposition. There are good reasons for the average consumer to avoid an open mortgage, primarily the fact that open mortgages have signicantly higher interest rates for the same term as a closed mortgage.

2. The term of the mortgage. Mortgages range in term from six months to forty years. In Canada there are mortgages available from six months to 10 year terms. The term is simply the period at the end of which a mortgage must be paid out or renewed by mutual agreement of the lender and borrower. Popular terms for mortgages are six month, one year, two year, three year, four year and five year. Seven and Ten Year mortgage terms have been recently reintroduced to the market and are gaining some popularity with people who want a high level of certainty in their mortgage costs over a long period. Different terms often reflect different interest rates to be charged for the duration of the loan. Sometimes longer term mortgages are more expensive and sometimes less. These changes in interest rates, based on terms, are critical to a borrower getting the right deal to meet their situation. A wrong choice for a consumer can have serious long term consequences including major cost differences upon the sale or refinance of a property. Picking a mortgage term and rate without analysing a borrower’s situation is like buying a vehicle without knowing what it is going to be used for. Would you drive a dump truck back and forth to work every day? Not likely, but sometimes a mortgage picked without consideration of various issues is at least as inappropriate as using a sportscar to haul cement to a construction site.

3. Amortization. The period of time over which the principle of a mortgage is paid off by periodic payments. Historically most mortgages in Canada are twenty-five year amortizations. In the last few years the lenders have made other, longer term mortgages available. This has the effect of reducing the monthly payment needed to pay the mortgage payment, but increasing the length of time that a person has to pay that payment. The net effects of a longer amortization period are both good and bad, including making housing more affordable for new home buyers, but also keeping people paying mortgages long after their retirements, or forcing people to postponing their retirements. Historically Canadians paid off their mortgages long before retirement. This is no longer true in major urban markets due to a combination of high housing costs and other economic factors that determine the relative allocation of income to paying off a borrowers debts.

4. Variable vs fixed mortgages. Variable mortgages are mortgages where interest rates fluctuate over the term of the mortgage, based on a relationship to the bank prime rate. Historically variable mortgages were considered to be superior to fixed rate mortgages in assuring the lowest possible cost for mortgage financing over the term of the mortgage. However, since the collapse of cheap money from the US bond market, variable rates have fallen out of favour due to their increased costs. Bank have increased variable rates significantly since the US financial collapse. Most brokers today recommend against variable rates except under special circumstances. There are still situations where variable rate mortgage make sense, and a mortgage broker will consider those alternatives when making a recommendation to a client.

5. Conventional vs insured mortgages. If you want to purchase a home in Canada, and you have less than 20% of the purchase price for a downpayment, and you want the best interest rate in the market, you will be required by your institutional lender to qualify for and pay for mortgage insurance. This specialized insurance product insures the lender against loss caused by default from non-payment for any reason. In other words it eliminates the risk that a borrower will fail to pay the mortgage, and allows the lenders to lend money at what would otherwise be an uneconomic rate of return. By the passing the risk of foreclosure off to an insurance company (CMHC) or (Genworth) banks and other institutional lenders reduce dramatically their costs associated with risk management. The insurance is paid for by the borrowers, but its direct benefit is to the lenders, as borrowers in Canada (generally) are still liable for any shortfall paid by the insurance company. The only benefit to consumers is that it makes mortgages substantially cheaper than they would be in the absence of this insurance. Insurance premiums are paid at the beginning of the mortgage out of the proceeds of the mortgage loan at range from 2.5% of the borrowed amounts up to 6.5%. Loan below 80% of the value of the purchased property do not always require insurance, and are known as conventional mortgages, however it is increasing common for lenders to insure these mortgages as well, but without charging the consumer a direct mortgage insurance premium. The advantage to a lender is that insured mortgages are marketable in the bond marketplace, whereas uninsured mortgages are not (at the present time, although they may become so again in the near future if US financial markets continue to improve).

6. First, second and other mortgages. Most people don’t know that a second mortgage is only a second mortgage because it is registered later on the title of a property than the “first” mortgage. Second mortgages have become increasingly popular as a means of obtain additional capital between the end of terms of various bank mortgages, as they may be less expensive, overall, than rewriting a first and incurring a mortgage penalty. Also, many people who cannot get a new first mortgage because their credit has been damaged by circumstances or unemployment, can borrow under a second mortgage, pay off their other debts, and improve their credit rating. This then allows them to qualify for a new insured (lower cost) first mortgage.

7. Mortgage Life Insurance. While mortgage life insurance is sold by virtually every bank and institutional lender in the Canadian marketplace there are substantial differences in the nature of the life insurance purchased from a bank compared to comparable products sold by mortgage brokers. Banks typically sell insurance where the underwriting takes place after a claim is made. As unbelievable as this seems to the uninitiated, what it means is that if someone has bank sold life or disability insurance, and then they make a claim, it is the insurance company’s policy to challenge the claim by requiring medical evidence be obtained from the deceased person’s doctor or disabled person’s doctor that the insurance company can use to disqualify any claim, by claiming that the insured person had a pre-existing condition which means that they weren’t really insured at all. The bank will refund the premiums collected from the borrower, but his heirs are out of luck as is he if he disabled. Brokers have access to mortgage life insurance that is underwritten prior to the policy being issued, so that if a policy is issued, and there is a claim under the policy, except for fraud, the claim is paid as expected. In addition, life insurance sold by the banks is automatically cancelled if the mortgage is refinanced through another lender. With broker supplied mortgage life insurance the policy is not affected by a change in lenders.

The above differences between different mortgage products and services demonstrates the value of using a mortgage professional to choose your mortgage and mortgage provider, however, a mortgage professional provides many addition benefits to a borrower including facilitiation of meeting the requirements set out by a lender when they approve a mortgage loan. A good broker will ensure that a borrower is well prepared to meet these requirements prior to actually applying for a mortgage, including advising the borrower as to the documentation to be required such as:

1. Evidence of income for at least two previous years

2. Job proof

3. Purchase and Sale document of all sorts

4. Information about property such as heat, water, local utilities, type of construction, etc.

5. Other documents needed by the lenders

Finally, a mortgage professional will monitor your mortgage so that six months before its term is over, the broker will contact you to ensure that you are given the best alternatives available to replace the mortgage.

And these are only the highlights of what a professional mortgage broker does for his clients. It’s a lot more than just shop for a cheap rate. However, that’s not the end of it.

Brokers don’t generally shop your mortgage at all but rather place your mortgage with a lender based on a complex set of considerations one of which is the best rate available for the client under the circumstances. As discussed above, the cheapest rate is not always the best rate for a given client’s situation and a lender with the cheapest rate for a given term and type of mortgage may still not be the best choice. Banks and lenders generally are in a service business, and the quality and diversity of their services also enters into consideration. In addition lenders decide which brokers have the right to submit business to them and reward their chosen brokers very well with bonuses and other financial and other considerations for sending them business.

In an ideal world brokers would never choose to send a deal to a bank just because they would receive a higher commission for doing so. Given human nature, and the fact that banks and lenders would not provide bonuses and other compensation unless it worked to cause brokers to send them deals, it is highly likely that brokers are influenced by the compensation earned.

In most provinces there is Conflict of Interest legislation which requires disclosure of a financial relationship between a lender and mortgage broker. I generally don’t believe that it goes far enough but disclosure rules are designed to flush out bad apples, not professionals operating ethically.

But lest you think that the banker isn’t in the same potential conflict of interest, think again. Your bank loans officer has no conflict of interest, because he or she has NO DUTY OF CARE to the borrower at all. His obligation is to meet bank policy and write loans that fit bank rules. If a borrower doesn’t fit the bank criteria, well, then it's just too bad, and the borrower will be declined, in a manner that will leave the borrower feeling less than satisfied with the outcome, and without any assurance that any alternatives have been considered or presented.

By the way, shopping the mortgage as it were, putting up a deal for bidding by multiple lenders is not permitted by most lenders. Brokers are expected to submit deals to one lender at a time, only submitting it elsewhere after a reasonable period of time for the lender to respond.

There are many issues related to getting a mortgage for the average person, and despite the potential for conflict of interest by a broker, a person is far better off getting advice and support from an Accredited Mortgage Professional (AMP).

Choose a professional broker who has earned his Accredited Mortgage Professional accreditation from the Canadian Association of Mortgage Professionals, and ask questions. Is he or she really interested in you and your needs as a borrower? Or is he or she simply in a rush to get your mortgage done quickly, without being particularly concerned about the details of your situation.

Summer Outlook - August 2009

News in the headlines today.

Real Estate Sales in Greater Vancouver hit highest sales level ever!

There can be no doubt that the real estate market is returning to a sellers market in the Vancouver marketplace and that values are beginning rise significantly, up 10% in price since January of this year, and now down only about 5% from the peak of the market prior to the recent downturn.

One of the hazards of the new confidence in the markets, however, is that there is still signficant bad news out there on the jobs front as well as continuing instability when it comes to lenders and mortgage finance. Bonds are still suspect, and alternative lending is fragile where it exists at all because of the US experience and lack of confidence in the secondary mortgage markets that used to exist.

Citizens Bank withdraws from retail banking.

Citizens Bank was a noble experiment in the retail marketplace by its owner VanCity Savings. However, it was badly capitalized from the get go, and their value proposition never really took off with Canadians. The irony to me is that the owner, VanCity, is a high touch extremely human oriented company, and yet Citizen's Bank was the furthest thing in the world from high touch, not matter how good their corporate intentions were in the beginning.

CAAMP says new home buyers are more likely to use brokers than banks to finance new home in Canada.

Mortgage brokers seem to have a made a major impact on new home purchasers in Canada with 48% of new home mortgages obtained through mortgage brokers in the past year. However, until we can make inroads into renewals (10%) and refinances (15%) brokers will still continue to be marginalized with the majority of consumers.

New home prices fall more than expected

An article last week by Garry Marr in the Financial Post published on Wednesday, March 11, 2009 had the headline as given above this blog.



The problem I have with the article is that it doesn't say higher than whose expectations. From all the negativity in the news lately about housing, particularly in the Metro Vancouver area my own expectations were that housing starts would be down substantially and new house prices even more so. In the last few months everyone has become aware of the sale going on in presale properties finally reaching completion and occupancy. The impression all these stories have given is that prices would be down anywhere up to 25% to 30% for product now coming into the market.



It turns out that prices are down, but a small fraction of that amount. In fact new housing prices are down .8% year over year from last year. Significant in that it is the first time since 1997 that this number is actually lower than the previous year, but hardly large enough to justify the headline. .8% is a whole lot smaller than 25%.



The news media keeps trying to find evidence that Canada is following the US example in housing declines, only with a delay of maybe eighteen months. There is no evidence to support this but all the negative reporting is driving an atmosphere of anxiety unsupported by hard facts.



Investors need to be cautious about declining markets, indeed hopeful about them, as revenue properties could become cost effective if price decline enough. But in a market where rental vacancy rates are under 2% of the market, and there is less than six months of inventory of new home product based on demographicly demanded housing, investors should also be cautious about missing out on opportunities to make investments in the current market place.



House prices generally are lower than a year ago, whether 10% or higher, they are lower. Lenders need to be sure that any appraisals used are current, which in today's environment probably means within 45 days of the loan advance date. But the bottom has not fallen out of the market, at least, not yet.



Demand is lower than previously, which basically means that you might have to wait for a while to find a buyer. Instead of being able to get your price in three months it might take six months, and in rural markets even longer.

Conflict of Interest

Conflict of Interest is something that few people consider in their day-to-day lives that absolutely must govern the conduct of a financial services adviser, such as a mortgage broker, yours truly.

There are any number of ways that a conflict of interest may arise for a mortgage broker, any of them significant to the potential victim of the conflict of interest.

I will define a conflict of interest as follows, "A confict of interest is the result of an imbalance of power created by an advisor's ability to gain the trust of a client, when in the present of that trust, the client relies on information provided to the client that fails to disclose relevant information known to the advisor but not to the client, such information causing potential harm to the interests of the client."

Another way to put this, is to say that, "anything known which may have a tendancy to cause a client not to engage in a contract, must be disclosed prior to the client completing the contract. This is particularly true when an advisor acts as an agent for the client, and using superior knowledge or skill on a client's behalf."

For brokers there is certain information they are expected to provide as a part of their normal due diligence, and while the precise information required depends upon the specific details of a given mortgage arrangement, due diligence is required of a broker. It is not enough for a broker to say, "I didn't look, so I therefore didn't know."

In the day-to-day lives of mortgage brokers there are several situations which commonly occur, particularly when a broker is representing a borrower and a lender in the same transaction. It is a rule of ethics, and of law, that the broker fully disclose any compensation he is receiving from either party to the other party, and that there be no secret commissions or compensation, as the party not in possession of this information may conclude that the broker is being influenced by such an undisclosed payment.

There are other potential conflicts of interest, such as when a borrower client tells a broker confidential information, which if disclosed to a lender would result in a mortgage loan being declined, such as information that the borrower is just about to lose a job. In such a situation, where the right to confidentiality of one party potentially violates the right of the other party to full disclosure the broker may very well find himself in a position of having to withdraw entirely from the file and cancel the application for the mortgage prior to completion, as this situation would result in an improper outcome if the information is withheld. On the other hand the borrower has a legitimate right to have his or her confidentiality preserved.

In such a no-win scenario a broker has no choice but to withdraw from the transaction altogether because there is no way he can legitimately balance the rights of both parties.

Many times a potential conflict of interest arises because the lender is paying the broker's commission or finder's fees while the broker is simultaneously acting for the borrower. This is the most common conflict of interest experienced by mortgage brokers acting to place mortgages with institutional lenders such as the banks, who generally pay all of the broker's fees. Just because the bank is paying the freight does not mean that the broker has no obligation to the borrower, on the contrary. The broker must balance his duties to the two parties carefully, to ensure that he fulfills his fiduciary responsibility to his borrower while at the same time ensuring full disclosure of all relevant information to the lender.

In most provinces there is legislation mandating specific forms of disclosure of this last type of conflict of interest, which allows the broker to deal with the potential confict of interest, and the harm it could cause a borrower, by fully disclosing that conflict of interest in the course of the transaction.

Although much more could be written about the potential conflicts of interest arising out of a brokers responsibilities to both borrowers and lenders, the bottom line is full disclosure of all material information to both parties at the time of any transaction. Any deficiency in disclosure, either statutory or ethical, is unacceptable as it has the potential to harm the financial interest of either the lender or the borrower.

Ultimately, both lenders and borrowers (ie: investors) need to accept personal accountability for their own lending and borrowing decisions, something only possible if they are in possession of all relevant information.

There are severe potential financial, legal and regulatory consequences for the financial advisor who does not takes his duty of disclosure seriously or his obligation to his clients to balance fairly the interests of both the borrower and lender.

In the context of investing in mortgages or mortgage investments generally it is critical that investors read the disclosure documents closely whether the Mortgage Investment Disclosure Form as defined by the Form 9 in British Columbia, or by an Offering Memorandum for an investment in a mortgage investment corporation. It is extremely important to review all documents provided by your broker or other investment advisor in order to satisfy yourself that everything needed for you to make a decision is present.

MORTGAGE UNDERWRITING CRITERION

I was asked the other day to provide one of our larger investors with an outline of the basis on which loans are made by private investors, and what type of returns may be earned on different levels of riskiness of the mortgage loans.

The following is a discussion for the purpose of providing general information to mortgage investors without attempting to be comprehensive in its description of all potential risks involved in mortgage lending for private individuals.

In broad terms Trillium-Accessible Investment Fund (MIC) Inc. is focused on residential first and second mortgages placed on properties located in British Columbia and Alberta. Trillium – Accessible Mortgage Corp. also manages private mortgages for investors in the same jurisdictions and beyond throughout Canada. Lending criteria varies according to the objectives of the individual private lender, mortgage pool, syndicated lender or Mortgage Investment Corporation.

There are certain underwriting requirements that vary only slightly from one type of lender to another, regardless of their investment objectives, and these pertain primarily to the due diligence undertaken by the mortgage broker and mortgage broker manager for pooled funds or syndicates.

• Full disclosure of all material information pertaining to a mortgage application. This includes:
• Mortgage application
• Employment and/or income details and verification by way of job letter, pay stuff, bank accounts or other third party verification of income
• Telephone interview by the mortgage broker or manager of the borrower regarding in particular any details contained in the application including use of funds, employment expectation, special circumstances and any conflicting information arising out of the due diligence review process.
• Credit Reports - our firm uses Equifax for Canadian credit information, taking the time to use the credit report as an independent source of verification of current and past employment, address and trade accounts; international borrowers credit scores and other references are obtained and checked by the broker
• Formal Investor Disclosure – each mortgage funded by a private investor, whether pooled or not, is provided with a complete investor disclosure document that conforms with the regulatory requirements in the jurisdiction where the mortgage is registered.
• Full disclosure of any and all conflicts of interest. It is not unusual for the broker or broker manager to represent both the lender and the borrower in a transaction and there is a special duty of care of full disclosure to both parties of any and all conflicts of interest.
• Independent professional verification supporting property valuations in all transactions:
• Appraisers must be members in good standing of the Canadian national appraisers association – the Appraisal Institute of Canada. There are exceptions when full appraisals may not be required due to the low loan to value of the proposed loan against the provincial assessed value, or where actual value can be verified by a purchase through a Multiple Listing Service sale. Any special circumstance pertaining to a sale will result in a full appraisal being ordered.
• Property Inspectors or Engineers must be certified members of their provincial association in good standing

Conveyance law firms – Lawyers acting for the lenders provide disclosure regarding a full list of required information including property tax status, strata fees, contingency obligations of a strata corp., standing and balance of any mortgages in priority to the subject mortgage.

TRILLIUM-ACCESSIBLE INVESTMENT FUND (MIC)
The lending practices of the Manager of the MIC involve preparing the same level of disclosure for the MIC as are provided to private investors in second mortgages. Mortgages are funded on the basis of equity – no more than 85% of the value of a property based on an appraisal; on ability to pay, based on a review of the credit record of the borrower and his job situation; and on various other intangible factors – primarily the assessed risk of losing capital on an investment in a mortgage always assuming the worst case analysis, collection of the interest and principle by way of foreclosure.

Borrowers of funds from a MIC are generally people who do not obtain bank financing for a variety of reasons – credit problems, income verification, business for self, ownership of too many separate properties, etc. For this reason second mortgage based MIC’s are riskier than 1st mortgage loans, insured by CMHC or Genworth but at a similar level of risk as institutional loans from Finance companies such as HSBC Finance or Well Fargo. Rates charged to borrowers range between 10% and 16% based on various factors, but influenced by perceived risk and competitive factors in the market place.

In addition to second mortgages as discussed above, the MIC will from time to time and for a portion of their portfolio invest in other types of Mortgages within the rules and guidelines set out under the income tax act. Ultimately the decision to fund mortgages will be based primarily with the view to acceptable levels of income consistent with preservation of capital under the provisions of the offering memorandum.

Thus as covered in the Offering Memorandum:

We invest in investments permitted of a MIC under the Income Tax Act. The Tax Act provides that a MIC may invest its funds as it sees fit, provided that a MIC must not invest in mortgages on real property (land and buildings) situated outside of Canada or any leasehold interest in such property, debts owing by non-resident persons unless secured by real property situated in Canada or shares of corporations not resident in Canada.

The Tax Act also provides that at least 50% of the cost amount of a MIC’s property must consist of debts secured by mortgages or otherwise on “houses” or property included within a “housing project” (as those terms are defined by section 2 of the National Housing Act (Canada)) and money on deposit in a bank or credit union. No more than 25% of the cost amount of a MIC’s property may be real property, including leasehold interests in real property (except for real property acquired by foreclosure or otherwise after default on a mortgage or other security).
We are in the business of investing in mortgages granted as security for loans (the "Mortgages"), to builders, developers and owners of commercial, industrial and residential real estate located in the provinces of Canada.

Investment Practices and Restrictions Our investment guidelines are consistent with our articles of incorporation, the provisions of the Tax Act and real estate legislation that applies to us. Our investment activities will be conducted in accordance with the following investment practices and restrictions:

(a) Our only undertaking will be to invest funds in accordance with the objectives, strategies and restrictions of our investment guidelines;
(b) We will invest in commercial, industrial and residential Mortgages;
(c) All Mortgages will, following funding, be registered on title to the subject property in the Corporation’s name;
(d) All Mortgage investments will be made in established or developing areas in the provinces of Canada;
(e) Generally, we will only invest in Mortgages on properties for which we have reviewed and evaluated an independent appraisal and, with respect to environmentally sensitive properties and on commercial loans we will generally receive an evaluation of the property subject to the Mortgage in the form of a Phase I Environmental Audit;
(f) We will not invest in a Mortgage or loan any funds to be secured by a Mortgage unless at the date the Mortgage is acquired or funds are initially advanced (as the case may be) the indebtedness secured by such Mortgage plus the amount of additional third party indebtedness of the borrower in priority to us, if any, generally does not exceed, on a property by property basis, 85% of the appraised value of the real property securing the Mortgage, provided that the appraised value may be based on stated conditions including without limitation completion, rehabilitation or lease-up of improvements located on the real property which activities we will monitor on an ongoing basis;
(g) If the independent appraisal reports an appraised value for the real property securing the Mortgage other than on an ''as is basis", we will advance funds under a loan by way of progress payments upon completion of specified stages of construction or development supported by receipt of reports of professional engineers, architects or quantity surveyors, as applicable, or upon completion of other specified milestones;
(h) We will not make any investment, or allow an investment mix, that would result in our failing to qualify as a MIC;
(i) Subject to subsection (p) below, we will not invest in securities, guaranteed investment certificates or treasury bills unless such securities, guaranteed investment certificates or treasury bills are issued by an arm's length party and are pledged as collateral in connection with Mortgage investments or obtained by realizing on such collateral;
(j) We will not invest for the purposes of exercising control over management of any issuer;
(k) We will not act as an underwriter;
(l) We will not make short sales of securities or maintain a short position in any securities;
(m) We will not guarantee the securities or obligations of any person;
(n) We will not loan money to or invest in securities of the Manager, or the Manager's affiliates;
(o) To the extent that, from time to time, our funds are not invested in Mortgages, they will be held in cash deposited with a Canadian chartered bank or Trust Company or will be invested by the Manager on our behalf at a Canadian chartered bank or Trust Company in short term deposits, savings accounts or government guaranteed income certificates or treasury bills so as to maintain a level of working capital for our ongoing operations considered acceptable by the Directors.

PRODUCT DEFINITIONS AND REQUIREMENTS FOR LOANS

• Terms of mortgages – generally one year terms although longer terms are available upon special request.
• Interest only – borrowers pay interest only on mortgages, although amortized mortgages may be made available under special conditions.
• Pre-payment penalties – the company charges a prepayment penalty for the early payout of a mortgage, equivalent to Three months interest charge by way of liquidated charges as opposed to a penalty payment
• Rates are set based on market conditions – current rates are higher than previously due to reduction in competitor product due to USA mortgage meltdown.
• Loan to Value ratio – maximum loan to value available is 85% based on appraised value subject to review by underwriter. If the loan is made on an equity basis alone, without substantial evidence of either credit worthiness or income stability, then the loan to value will be reduced to the lesser or 75% or 65% based on an evaluation of current borrower situation.
• Beacon score is not used to evaluate credit worthiness, but is used to assist in determining Loan to Value. Beacon scores lower than 550 will result in a maximum loan to value of 80% in urban markets.
• Rural market loan to values will be reduced to reflect local market conditions, with the practical application reducing the loan to value to 75% maximum in many markets, and 65% in more remote areas. The company will not lend in communities with less than 5,000 residents with 30 minutes driving time.
• The company requires loan committee approval of any loan representing more than 10% of the loan portfolio.
• The company will make no loans to officers, directors or other management of either the MIC or its manager. It will make no loans to the manager.

TRILLIUM – ACCESSIBLE MORTGAGE CORP.

The lending practices of private lenders or syndicates involve preparing the same level of disclosure as are provided to the MIC. Mortgages are generally funded on the basis of equity – no more than 85% of the value of a property based on an appraisal; on ability to pay, based on a review of the credit record of the borrower and his job situation; and on various other intangible factors – primarily the assessed risk of losing capital on an investment in a mortgage always assuming the worst case analysis, collection of the interest and principle by way of foreclosure.
Borrowers of private funds are generally people who do not obtain bank financing for a variety of reasons – credit problems, income verification, business for self, ownership of too many separate properties, etc.

For this reason second mortgages are riskier than 1st mortgage loans, insured by CMHC or Genworth but at a similar level of risk as institutional loans from Finance companies such as HSBC Finance or Well Fargo. Rates charged to borrowers range between 10% and 16% or even higher based on various factors, but influenced by perceived risk and competitive factors in the market place.

Brokers who work with private lenders recognize that the criteria applied by each lender will be slightly different and the lender’s criteria determine the exact elements applied to each private mortgage loan. Most private mortgage investors seek to preserve capital while maintaining the highest level of interest earned possible without undue risk. The very definition of undue risk is a high personal one, which is why mortgage lenders have vastly difference lending experience and outcomes. Higher risk mortgages typically have higher levels of default, while lower risk mortgages typically earn less return on Investment when calculated over a pool of investment mortgages.

PRODUCT DEFINITIONS AND REQUIREMENTS FOR LOANS
• Terms of mortgages – generally one year terms although longer terms are available upon special request.
• Interest only – borrowers pay interest only on mortgages, although amortized mortgages may be made available under special conditions.
• Pre-payment penalties – the company charges a prepayment penalty for the early payout of a mortgage, equivalent to Three months interest charge by way of liquidated charges as opposed to a penalty payment
• Rates are set based on market conditions – current rates are higher than previously due to reduction in competitor product due to USA mortgage meltdown.
• Loan to Value ratio – maximum loan to value available is 85% based on appraised value subject to review by underwriter. If the loan is made on an equity basis alone, without substantial evidence of either credit worthiness or income stability, then the loan to value will be reduced to the lesser or 75% or 65% based on an evaluation of current borrower situation.
• Beacon score is not used to evaluate credit worthiness, but is used to assist in determining Loan to Value. Beacon scores lower than 550 will generally result in a maximum loan to value of 80% in urban markets.
• Rural market loan to values will be reduced to reflect local market conditions, with the practical application reducing the loan to value to 75% maximum in many markets, and 65% in more remote areas. The company will not lend in communities with less than 5,000 residents with 30 minutes driving time.

POOLED INVESTMENT CRITERIA

I have been asked to provide an outline of two separate types of pools for investment in mortgage investments.

POOL A – CONSERVATIVE
Targeted yield 8-9%
Blend of first and second mortgages Loan to value typically between 65% and 75%
Properties Urban, communities over 10,000 in BC and Alberta
Credit Scores Beacon Scores over 550, with score below 600 resulting in lower LTV
Mortgage Interest Rates First mortgages at 8% – 10%
Second mortgages at 12% – 14%
Employment and Income Qualifications Full time jobs – verified
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Use of Funds Purchase or Refinance
Property Tax and Strata Fees must be current at the close of the mortgage.
Cash

POOL B – MODERATE RISK
Targeted yield 12%-14%
Primarily second mortgages Loan to value typically between 65% and 85%
Properties Urban, communities within 20 kilometers of BC and Alberta towns and cities over 5,000
Credit Scores Beacon Scores reviewed, but common sense review of Credit information, all collections, legal actions and outstanding mortgage related debt on the property to be paid out of proceeds.
Mortgage Interest Rates First mortgages at 8% – 10%
Second mortgages at 12% – 14%
Employment and Income Qualifications Full time jobs – verified
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Use of Funds Purchase or Refinance
Cash

POOL C – HIGHER RISK
Targeted yield 14%-16%
Primarily second mortgages Loan to value typically between 65% and 85%
Properties Urban, communities within 20 kilometers of BC and Alberta towns and cities over 5,000
Credit Scores Beacon Scores reviewed, but common sense review of Credit information, all collections, legal actions and outstanding mortgage related debt on the property to be paid out of proceeds.
Default management and payouts of defaulting and foreclosure mortgages, other defects or charges such as outstanding income taxes owing… all to be resolved from proceeds of the mortgage
Mortgage Interest Rates First mortgages at 12% – 14%
Second mortgages at 16% – 20%
Employment and Income Qualifications Primarily equity lending without reliance on employment – prepayment of interest for the term of mortgage included as part of loan to value calculation.
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Should have a plan that allows the borrower to end up better off than prior to mortgage.
Full assignment of rents
Use of Funds Purchase or Refinance
Payment of mortgage default or legal demands on accounts
Marital settlements
Child support payment remedies paid
Cash

COSTS TO THE LENDERS OR SYNDICATES

As a mortgage originator and mortgage administer Trillium-Accessible Mortgage Corporation acts as an agent for the lender(s). Fees are charged to borrowers, in the main, rather than lenders. In syndicated mortgages there may be administration charges not passed through directly to the borrowers, where the managers are responsible for various administrative responsibilities including underwriting and placement of mortgages.

Some syndicated funds are held in trust with interest payments, and other income paid directly to the trust. Trusts may be operated entirely by the management of Trillium-Accessible Mortgage Corp. and registered as trusts with the Financial Institutions Commission with annual audits conducted and filed with FICOM. Some trusts are actively held by third parties, and managed by professionals responsible for investment or reinvestment decisions. In general, fees related to the operation and management of the trust are charged against the income and capital of the trust, whereas expenses related to the lending of funds to borrowers are charged directly to borrowers.

Trillium-Accessible Mortgage Corporation is a full service mortgage administration company and charges borrowers a variety of fees, penalties and charges related to the administration of mortgages. Costs of collection, default or foreclosure are charged against the borrower to the extent covered by the value of the property upon foreclosure or conduct of sale. Any shortfall in the value of a property at the time of foreclosure is a cost to the lender, and such potential costs must be considered when determined the nature of the mortgage to be approved, and the risk profile of the borrower(s).

High potential returns and interest also mean a higher degree of risk, including a higher risk of loss of both income and capital.

This blog is for informational purposes only. Information is intended as a summary and expansion on specific sections of an Offering Memorandum rather than an offer for the sale of any securities. Interested parties should review the Offering Memorandum and seek independent financial advice Prior to making an investment. Private investors or syndicated investors should speak to their broker and receive appropriate disclosure documents before investing in any mortgage or mortgage syndication.