The Canadian Securities Administrators might soon come down hard on syndicated mortgages, but it begs the question: Why now?
“The trouble with the regulatory changes proposed by the Canadian Securities Administrators is that they are reacting to a few bad apples with a broad brush stroke that affects a whole industry, rather than taking a direct look at the cause and effect of major problems caused by a few bad actors,” said David Mandel, president of First Source Mortgage Corporation, adding that the bad actors in question disguised syndicated equity investments as syndicated mortgages and duped unwitting, unsophisticated investors.
“These investments are actually securities and should have been caught by the Canadian Securities Administrators several years ago when they made their entrance onto the corporate construction financing stage. The Canadian Securities Administrators have showed up a little late to the party. The mortgage industry has adequately dealt with the loopholes in disclosure to better protect consumers.”
The CSA recommends removing any jurisdictional prospectus and registration exemptions that currently apply to syndicated mortgages, as well as an amendment to the offering memorandum that would require providing investors with greater disclosures, including property appraisals by qualified and independent bodies.
However, Mandel charges that, in a fit of atonement, the CSA’s proposals may enforce more instructive protocols upon all private lenders, including conscientious ones.
“That the Canadian Securities Administrators may seek well-behaved conventional private lenders provide either a prospectus or an offering memorandum, or both, for simple first- and second-mortgage syndications is very troubling. Syndication simply means more than a single investor. Can you imagine the industry fallout from a requirement to provide a prospectus or offering memorandum for a $300,000 residential first mortgage at 65% LTV, or a 75% LTV $50,000 second mortgage?”
Private lender Wasah Malik of King Lending Capital says scrupulous players within the syndicated mortgage subset of the industry are paying the price because of a few insubordinates, but contests the notion that more oversight is unnecessary.
Moreover, he always provides investors with prospectuses and offering memorandums.
“We already do that, but now everybody will be forced to do that for their investors, which is good, which is necessary,” said Malik. “I do that with every private mortgage, whether there’s one investor on it or a syndication of investors. We provide those documents, those disclosures and risk assessments for every single deal.”
Given the delicacy with which investors’ monies should be handled, even if the risk presented by predatory players is minimal, Malik supports the CSA’s proposed regulatory changes.
“Once you get one bad player, it becomes a cycle, and you have to control that,” he said. “[The proposed oversight] isn’t a bad thing; it’s an amazing thing, because you’re still working hard to protect borrowers and investors. When someone is investing in something, they should have full disclosure of what they’re investing into.”
But whether or not all private lenders agree with Malik’s assessment is another question. Mandel thinks the CSA’s proposals could exasperate and repel private channel lenders.
“These proposed requirements and increased associated costs will either remove these lenders and products from the industry or drive them underground, both of which leaves the industry and consumers in a worse place,” he said. “Firstly, all government agencies have to stop referring to these ‘syndicated equity investments’ as mortgages. Additionally, the MOF (Ministry of Finance) needs to step back, depoliticize this topic, own their mistake and back off, leaving a perfectly healthy, functioning industry to continue in its current form, and remain subject to current regulatory bodies.”
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