Do the proposed amendments to syndicated mortgages go too far?

Two industry professionals wade into the debate

Do the proposed amendments to syndicated mortgages go too far?
Depending on whom you ask, syndicated mortgages have the potential to destroy investors’ finances, much less yield healthy – if any  ROIs, but with the Ontario government’s proposed amendments, one industry professional believes they go too far.

Wasah Malik, a private lender with Mortgagepedia Inc. – which also deals in syndicated mortgages – says that the $25,000 cap doesn’t make sense in the wake of the Office of the Superintendent of Financial Institutions’ recent rule changes to underwriting practices.

“It doesn’t make sense to me,” said Malik. “It’s going to restrict the lending market even more in light of the new OSFI regulations.”

However, he agreed with every other stipulation, especially when dealing with high stakes investments.

“More disclosure is needed,” he continued. “When these companies go and secure investors, they’re not giving enough disclosure of where their mortgage will be positioned. In some cases, you might not recover your money in a building if something goes south.”

Malik added that it would be unethical to play fast and loose with clients’ money. Mortgagepedia offers syndicated mortgagesa, but mostly on commercial and residential mortgages, maxing at 85% loan to value. However, on select construction projects, which tend to be smaller in scale, he caps loan to value ay 65%.

“There’s no way I’d ever put my investors’ money into these,” he said. “Underwriting-wise it makes no sense, it’s a dangerous product. The reason syndicated is dangerous is they put money into development products, and they’re risky because of exits. If the developer defaults on their mortgage payment, who will take it over and sell it? If the building is only 50% complete, how will you recover the money and get your investor’s money?”

He added that in such a scenario, another developer would step in to complete the project, but with maximum bargaining power, further reducing the likelihood of recovering investors’ money.

However, Ron Butler of Butler Mortgages says complex syndicated mortgages aren’t safe, and he’s in favour of the proposed amendments because they’ll protect unwitting investors by curtailing predatory practices.

“I don’t think they intend to do much with simple syndications. If a mom and dad and their two adult sons want to get together and syndicate a mortgage, that’s fine,” he said. “The real concern is what they refer to as complex syndications. There are human beings who are not sophisticated about mortgage lending, getting involved in very exotic projects of multi-million high-rise condominium projects. Up until recently – the last 10 years or so – no mortgage broker has considered that sort of syndication appropriate for unsophisticated individuals and people with no prior experience with mortgage lending.”

Butler echoed Malik, stating the unsophisticated investor won’t always know they’ve been bumped from second to fourth or fifth.

“Syndicated can keep getting bumped from the second to the third or the fourth,” said Butler.”

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