Mortgage pro talks private lenders' current priorities in underwriting

Executive on what brokers should be keeping top of mind

Mortgage pro talks private lenders' current priorities in underwriting

Amid a constantly changing mortgage landscape in 2023, the underwriting process may have remained largely the same – but there are certain questions and criteria that lenders in the private space might be focusing on more than before, according to a leading underwriter in that sector.

Catalin Popa (pictured top) told Canadian Mortgage Professional that some issues, such as whether the pricing and length of term are adequate, are as important as ever in the current climate.

Still, lenders must also put emphasis on ensuring that borrowers understand expectations, suitability, and the need to have a clear and strong exit strategy in place at the end of the term.

“Our focus as a company since we started at Hillmount has always been, essentially whenever we get involved in a deal, we will always look at: Is this suitable for the client, or does it make sense, or are we actually helping this person, taking them to a better spot?” he said.

“Because [private solutions] are relatively temporary, you have to have some type of an idea of how you’re going to exit, so I think that’s where we’re spending more time with borrowers and brokers. We’ll say, ‘Look, this is what we’re trying to achieve – what’s the plan that we’re going to put in place to make sure you guys get there?’”

That might be a firm strategy for consolidating debt, he said, or a plan to maintain borrowing on unsecured debt at a set amount.  

The importance of keeping borrowers in the know at every turn

Top of mind, according to Popa, is having those conversations with brokers and borrowers up front so that there are no surprises down the line. “I think the preparation part of it has always been big for us,” he said.

“Setting up the expectations and making sure everybody’s on the same page – now more so than before, because it’s harder to go to financial institutions. Because of the increase in prime being able to qualify for a traditional, even A or B lender, is a little bit more difficult.”

With interest rates currently high through both traditional and private lenders, Popa said the disparity between the two makes “even less of a difference” at present, especially because rates in the private space are usually higher than on the A and B side.

What should mortgage brokers know about private lenders’ approach?

For brokers, then, the focus should be on other parameters rather than just rates, he added, such as prepayment privileges and whether a mortgage is arranged in an open or closed term.

“If you have a bridge loan, you probably want to have it open,” he said. “If you have a construction loan, you probably want to have it open after six months or maybe open from the beginning. And I think all of these are very relevant metrics that affect your cost of borrowing but are not necessarily apparent to brokers up front.”

Brokers should also remain fully apprised of lender fees, according to Popa, with those upfront costs sometimes cancelling out the apparent benefits of a lower rate.

“You could have someone offering an 8.99% rate and a 4% fee versus someone offering a 9.99% rate and a 2% fee,” he said, “and if you’re just focusing on the rate, you’re going to miss out on the fact that you’re probably on an annualized basis paying more because of the higher fee up front,” he said.

“Also, if you do stay for less than a 12-month term, then obviously that cost will amplify on an annualized basis if you’re paying the fee all upfront.”

Plenty of brokers have also been raising the issue in recent times of borrowers not being able to renew at the end of their term with a private lender, Popa said, a trend that’s making it especially vital to have a conversation about options well in advance.

“I think that’s a really important parameter – the opportunity to discuss renewal terms and options with borrowers and brokers, especially in this climate,” he said. “Because it’s harder for borrowers to refinance, [there’s a] need for renewal at something hopefully manageable, something transparent, something that you can provide to them upfront so that they know what to expect.

“Being able to have that is a very important thing, because I do think that many private lenders will be looking at renewing, maybe staying in loans for longer than they originally anticipated, given the higher rates and the difficulty in getting people qualified with financial institutions.”