ISSUE 05 • SUMMER 2017
tech
talks How technology is shaping the private lending industry PAGE 12
Top 10 Tech Tips
Manage your MIC with these tips from Dolphin Enterprises PAGE 16
NEED FOR SPEED
Lendesk takes you through why every broker needs a CRM PAGE 18
IMPACT OF TRUMP
AAPL explores Private Lending under Trump administration PAGE 08
YOUR DEDICATED SOURCE FOR PRIVATE LENDING & INVESTING
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CONTENTS
CONTENTS SUMMER 2017 EDITION 06 EDITOR’S NOTE With the events that have unfolded in the Canadian alternative mortgage market, we explain why private lending is here to stay.
12 COVER STORY Private Matters Today caught up with our industry’s tech gurus to gain their insights into how technology is shaping private lending.
08 U.S. PRIVATE LENDING UNDER TRUMP AAPL explores the state of Private Lending in America under the new Trump administration.
10 RISK MANAGEMENT LMS ProLink’s Derrick Leue guides you through mortgage impairment insurance in his quarterly feature “From Derrick’s Desk”.
16 MIC MANAGEMENT »»p.12
»»p.10
4 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
Top 10 tech tips every MIC needs to know from Shannon Dolphin of Dolphin Enterprises Ltd.
»»p.16
FEATURES 20 CAN TECH REPLACE THE HUMAN TOUCH? Vector Financial Services explores pivotal moments in the transaction where human intelligence outweighs technology.
18 WHY EVERY BROKER NEEDS A CRM SYSTEM »»p.20
Lendesk’s Lee Noble takes you through the top reasons why every broker needs a CRM system in place.
22 ATLANTIC CANADA PRIVATE LENDING Matthew Hennigar of Aroi MIC comments on the state of private lending in Atlantic Canada.
25 HOME VALUATION CONCERNS IN GTA Private Matters Today caught up with Bryan Jaskolka of CMI to see how they are dealing with home valuation concerns in GTA.
26 AD INDEX »»p.25
Get a snapshot of our advertising partners in this edition.
WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 5
EDITORIAL
EDITOR’S NOTE PRIVATE LENDING IS HERE TO STAY The last few months have been rather eventful in the mortgage industry. Governments at all levels are trying to tame a sizzling real estate market in the GTA and the recent set of measures announced, which includes a foreign home buyers tax, may have done the trick. The amount of uncertainty now is at an all-time high and lender policies and underwriting approach on prime side is anything but consistent. To make matters worse, there is a tremendous disconnect between what brokers think a channel lender can do for them and what the reality may be. To make matters worse, the loss of confidence amongst investors is taking a toll on institutional alternative players in the market. While this optimist firmly believes that alternative institutional lenders in Canada have a strong footing and their fundamentals (geographic exposures, reserves, average LTVs and delinquencies) are strong, we as an industry and in fact as a country need to continue our work on educating investors, short sellers, and our own policymakers that there is a significant difference between subprime lending and alternative lending. To some these may be buzz words but to anyone who has underwritten an alternative file for any major alternative player in Canada knows the difference is stark and unmistakably clear. You can’t get a mortgage unless you demonstrate and verify a borrower’s ability to repay the loan. One thing has become categorically clear with the events that have unfolded in the Canadian alternative mortgage market recently; Private Lending is here to stay and will play a crucial role in years to come. What has in the past been referred to as “shadow lending” and been written off by market analysts as an insignificant segment of the overall mortgage market has now taken on a new meaning. The liquidity issues that plague the institutional alternative players has and will continue to also affect MICs and private pools will dry up but once the investor psyche recalibrates, they will no doubt demand better returns and institutional alternative lenders may have to raise more expensive capital while continue to operate/lend under tighter guidelines. When we planned the summer issue of Private Matters Today, we anticipated private lending will continue to flourish and become a more significant part of an average broker’s playbook. Thus, we dedicated this issue to how technology will shape the private lending world. We, at Private Matters Today, firmly believe in value that brokers add to private mortgage transactions, and are very interested in how brokers will embrace changing and evolving technology in a world previously defined by face to face meetings and a hands-on approach to lending and underwriting. We interviewed and consulted key players in the private world and are happy to share their insights. We are also pleased to provide our readers an exclusive comparative perspective on state of private lending in the U.S. courtesy of our friends at American Association of Private Lenders (AAPL). Happy reading! - Harry Singh 6 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
WWW.PMTODAY.CA ISSUE 05 • SUMMER 2017 EDITORIAL
CONTRIBUTORS
Editor Harry Singh
Bryan Jaskolka Chrissey Breault Derrick Leue Jerry Lo Joe Fakhri Joseph Valenti Lee Noble Matthew Hennigar Shannon Dolphin Vector Management Team
ART & PRODUCTION Production & Design Kayla Patullo
EDITORIAL & ADVERTISING INQUIRIES
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Private Matters Today Inc. is a B2B publishing company that produces a quarterly magazine dedicated to providing educational content surrounding private lending and investing, as it relates to mortgage brokers and agents operating across Canada.
Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributors are invited, but copies of work should be kept, as the magazine can accept no responsibility for loss.
FEATURE
STATE OF PRIVATE LENDING IN U.S. UNDER TRUMP ADMINISTRATION ELECTION IMPACT, ECONOMIC SLOWDOWN, & CROWDFUNDING
After an intensely fought U.S. election, Donald Trump rose on a wave of populism to be elected the 45th President of the United States. The Republicans retained control of the House of Representatives and the Senate, the first time since 2006 they controlled both the executive and legislative branches. Global investors are still waiting to see whether the new and incoming administration softens its anti-establishment campaign rhetoric in favor of a reasonable yet still more conservative agenda. For the time being, the economic expansion remains on track seeing the healthy state of consumer spending and payrolls. Nearing almost ten years after the worst financial crisis in modern history, the U.S. recovery has accomplished a lot. Balance sheets have
healed, the labor market continues to gain strength, wages are rising and corporate profits are reported to be strong. Still, the rate of growth is disappointing with the economy failing to duplicate the successes of previous recovery cycles. The base case remains that current recovery will slowly continue, but the outlook for growth is anticipated to be shaped by a shift in policies over the coming months. There appears to be enough fundamental growth for the U.S. Federal Reserve (Fed) to move forward with another interest rate increase soon. In March, Economic Indicators showed that financial markets predicted just a 30 percent chance of the Fed raising interest rates in March; but just seven days later comments from Fed officials, including Chair Janet Yellen, traders saw an 80 percent chance. After a series of false starts in 2015 and 2016, policymakers need to ensure that global markets are ready for a rate increase and additional increases later this year. The Fed seems to be prepared to run “hot” therefore continuing to take a more measured approach to monetary tightening. If the inflation expectation takes a strong hold on the back of a large stimulus package, expectation of rate tightening may also – accordingly - move higher.
HOW DOES ALL THAT IMPACT PRIVATE LENDING? Greg McBride, Bankrate.com chief financial analyst stated it simply as, “When rates go up, not only does it increase borrowing costs, it could slow corporate profits, and it makes other investment options more attractive on a relative basis.” The rising interest rates has sparked discussions among real estate professionals at industry events across the country. Specifically, investors who are worried about the impact of rising interest rates on property cap rates and valuations. As we watch the emerging trends of 2017, we try to consider real estate’s domain which covers a lot more space, and requires thinking across economic, social, political, and technological dimensions. Because our membership base varies, we often see beginners who extend themselves swiftly and aggressively into the fray, always looking for quick rewards but overlooking impact of countermeasures that are obvious to more experienced professionals. Strategic thinkers see beyond the next move and anticipate the development of a series of moves, that taken together, create a more powerful control across the board. MULTIFAMILY HAS SEEN A SLOWDOWN Multifamily deals, particularly in the gateway markets (Los Angeles, San Francisco, New York) have been a major factor in the yearslong recovery but with cap rates now low for the asset classes for those markets, investors are extending their gaze to other asset classes.
The most marked change in multifamily may be a reduction in new product coming online. Some developers are running into problems getting construction financing, in part due to confusion among banks regarding how to comply with the highly-volatile commercial real estate loans (or HVCRE). The banks want to keep them off the books since those loans require the holding of 50 percent more capital on hand than the more traditional loans. High-end properties could be facing funding challenges. Lenders in New York, particularly, are getting a little more careful with their underwriting in the high-end residential projects as identified by Law360. Interest in Other Asset Classes. While investors turn their gaze away from multifamily, other asset classes like senior living, hotels, cannabis, and industrial are receiving more attention. As companies like Amazon.com Inc. expand their operations amid desire from consumers for same-day shipping, investors are looking more and more into industrial properties. Anthony Geraci, Esq., Managing Partner at Geraci Law Firm said at a recent private real estate lending conference in Newport Beach that we may soon be entering a “golden era” for industrial properties as e-commerce continues to take away market share from brick-and-mortar retail shopping. Infrastructure and logistics are seeing higher levels of interest from overseas investors. We are watching the conversations shift from this time last year, in that area. Even self-storage is becoming a more attractive interest as investors are looking to other less traditional asset classes among the low-cap-rate environment. FUND MANAGERS WILL NEED TO COMPETE FOR ASSETS As we have grown our Certified Fund Management programs, we have noticed a larger number of investors have come to believe in the virtues of investing some portion of their private equity allocation directly into deals, without the sourcing or management assistance of a third party. In bypassing managers, they are avoiding fees and investing larger sums of capital in one go than would be the case through fund commitments. Palico’s
recent survey indicated that 91 percent of these investments had matched or outperformed their fund stakes. More than half of all investors noted that they were shortening internal decision-making processes, in part to engage in fast-moving direct investments. Growing numbers of investors who go solo mean more will find their resources severely tested by the complexities of direct investments in 2017. All the while, rising competition from direct investment will force fund managers to refine fundraising messages for intense competition. SWITCHING GEARS: FINTECH In 2015, real estate crowdfunding experienced red-hot growth. Investors started to realize the attractiveness of crowdfunded real estate investments. Crowdfunding gives investors access to deal and deal flow they didn’t have before. Crowdfunded real estate loans close faster and come from alternative sources outside banks. It makes for it easier for borrowers to inject new capital into operations faster-– so owners and operators benefit, too. We’re watching all types of crowdfunding grow up. But the industry is also growing up. There hasn’t been much consolidation moving through 2017. As we listen to our members and partners we are hearing discussion about several IPOs plus banks and REIA groups building their own platforms. Consolidating and maturing will mean better security, service, and product mix. It’s good news for new and seasoned investors. As the market continues to mature, debtbased products will do some time in the spotlight. Debt deals offered through real estate crowdfunding platforms typically round higher risk and higher returns than opportunities attract bank financing and institutional investor interests. Real estate crowdfunding firms will start to specialize as the market consolidates. The marketplace will offer investors
more specialized debt products with the trend. It would open more avenues for potential returns and reduce friction on both sides of the transaction. The conclusion of 2016 included twists to the outlook for commercial and residential real estate. The unexpected victory of President Trump (following the equally surprising Brexit referendum) placed populism firmly on the agenda of major global economies. So far, it seems that U.S. investors have reacted calmly. Investors are adopting a wait and see approach and seemed to be prepared to take the view that likely stimulus and infrastructure spending being outlined by the new administration will provide additional positive momentum to the U.S. economy. Initial investor reaction has proven that increased economic activity could add some tailwinds to rent growth, even if the cost of capital does rise. The glass half full view seems to be prevailing right now. Still, too much about new policy framework is remaining unclear, which warrants that this organization to retains a generally cautious view. _____ Chrissey Breault is the Director of Marketing & Member Services of the Americian Association of Private Lenders (AAPL). She is also the Editor-inChief of Private Lender Magazine.
WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 9
RISK MANAGEMENT
FROM DERRICK’S DESK
IS YOUR PORTFOLIO UNDER WATER?
As I write this article from my desk in Toronto, I wonder if I’ll see the sun again. We are into our sixth straight day of rainfall. According to CTV news meteorologist, Anwar Knight, Southern Ontario experienced its soggiest first week of May since weather records were kept. However, those of us in Southern Ontario should not feel sorry for ourselves when you see the thousands of people displaced by the flooding throughout Quebec. Unfortunately, water has become the new fire when it comes to the greatest exposure facing Canadian property owners. Alternative mortgage lenders need to manage their portfolio risk for widespread water damage. Many MIC managers and mortgage syndicators underwrite mortgages in a specific geographic area. Specialization in a marketplace is valuable when underwriting; however, concentrated risk in a small geographic area is fraught with catastrophic weather risk. If your portfolio was concentrated in Gatineau then the security for your mortgage portfolio could be underwater. DIFFERENT TYPES OF WATER RISK The widespread flooding we are witnessing in Quebec makes the news headlines; however, water damage comes in many forms: 1. Burst pipes or malfunctioning appliances in the home; 2. Back-up of sewage entering homes from the sudden accumulation of water after heavy rains or spring run-off; 3. Water enters the home suddenly and accidentally through basement walls, foundations or floors due to rising water tables and groundwater. 4. Water entering your property from the overflow of lakes or rivers.
The challenge for lenders in protecting their investment will be understanding what type of insurance coverage residential and commercial mortgagors have in place. There is no standard when it comes to coverage for water damage. Insurers provide different amounts and different types of coverage for water damage. PROTECTING YOUR SECURITY The mortgage agreements utilized by alternative lenders always require that the borrower maintain an insurance policy covering fire; however, with the changing climate it is water that needs to be covered. Thankfully the insurance industry responded after the flooding in southern Alberta and flash floods in Toronto in 2013. There are at least 7 to 10 insurers in Canada now offering coverage for the different types of water damage outlined in the list above. Almost 90% of homeowners in Canada are eligible to purchase “overland water damage” coverage. The challenge for lenders is determining if mandating the coverage within their mortgage terms will reduce the number of mortgages they can fund as borrowers select lenders with less stringent insurance requirements. MORTGAGE IMPAIRMENT INSURANCE FOR THE PORTFOLIO Mortgage impairment insurance may represent a cost effective way to transfer the risk and administrative costs associated with water damage insurance. Mortgage impairment can be viewed as a “blanket” property insurance policy for a lender’s portfolio of residential and commercial mortgages. Some of the mortgage impairment insurers will provide coverage for water damage leading to an impairment of the mortgage as a result of the borrower’s insurance policy excluding coverage for water damage. A borrower with a mortgage loan-to-value exceeding 80% may not have the funds or motivation to pay to fix the property damage caused by water then leading to a default on their mortgage. With proper risk management, the lender’s mortgage impairment policy may cover the cost to fix the property damage or payout the outstanding mortgage principal, whichever is less. Climate change, aging infrastructure and building near rivers and lakes will unfortunately result in more water damage to properties throughout Canada. Lenders should consider ways to manage this growing risk before their portfolio is underwater. _____ Derrick Leue is the President of PROLINK Insurance. Please contact PROLINK Insurance to learn more at 1-800-663-6828 or DERRICKL@PROLINK.insure
10 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
COVER STORY
HOW TECHNOLOGY IS SHAPING PRIVATE LENDING LEARN FROM THE INDUSTRY’S TOP TECHNOLOGY GURUS
In today’s mortgage world, technology is no longer considered a luxury, rather an essential requirement for supporting borrowers, brokers and lenders alike. The push towards digital solutions has grown and the demand for connectivity has exploded. The everevolving digital advancements make it possible to meet growing consumer and business demands many industry professionals previously thought unrealistic. With the creation of technologies such as artificial intelligence, the opportunities presented are limitless for mortgage companies seeking to innovate. Today’s innovations increasingly produce cross-platform synergies that streamline operations and increase the efficiency in underwriting procedures, while maintaining the highest level of accuracy. Private Matters Today asked some of the industry’s tech gurus how the private lending industry is being shaped by emerging digital advancements: WHAT TECHNOLOGICAL TOOLS CURRENTLY AVAILABLE ALLOW LENDERS TO MANAGE WORK-FLOW FOR THE LIFE CYCLE OF A MORTGAGE?
A.
The private lending sector is certainly technology poor in comparison to other lending sectors. Private lenders are often faced with deciding between the limited options available or configuring/ developing their own proprietary systems, which can be quite costly. With the most recent regulatory changes in the A Lending space, we are definitely going to see another shift towards private lending, which will hopefully open the doors for new technology firms to come in and offer competitive products. – Joe Fakhri
A.
There are many solutions available in the market place for lenders. Those tools range from commercial and custom offerings through traditional technology companies, to proprietary or “home grown” solutions. To name a few (in no particular order) PROJECT37’s LUCAS, Teneda, D+H, Newton/Velocity, Delta360, Lendesk, and Dolphin. That doesn’t however, account for the many proprietary technologies that exists as well. Not all cater to the Private/MIC space, and not all are complete work-flow for the life cycle of a mortgage, as some focus on aiding the lender in building their business rather than process and work-flow. – Jerry Lo 12 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
HOW FAR ARE WE FROM A FULLY DIGITAL PROCESS?
A.
The mortgage industry regardless of its line of business being A, Alt A or private lending is one of the most under served from a technology perspective in comparison to other financial sectors. There are a few attempts towards a digital mortgage process but we don’t seem to be there yet especially in Canada. I would say we are at least 4 to 5 years away before a fully digital mortgage process becomes the norm. – Joe Fakhri
A.
We’ve been close for years. For the most part, there are already solutions that ingest deal flow regardless of distribution. Those systems have auto adjudication abilities, document management abilities, e-signature abilities, condition management, underwriting and closing abilities. There isn’t much more left unless you want to move into a function point where the technology is making the final decision, and I believe we are not too far from that either. – Jerry Lo
A.
The core technology is certainly already here. All the underlying infrastructure exists, and commercially-available tools are available to fully digitize the mortgage process for brokers. Extending these available tools to lenders and underwriters can be accomplished at modest cost and with very low risk. It is all about collaborating with the right software partner. Fully digital automobile-financing, life insurance and bond-trading have been realities for some time now. The issue is no longer “how close?” but rather “what will motivate brokerages and lenders to change their practices?”. Pressure will certainly come from borrowers to make the process more accessible, secure, and convenient. If you can pay for a parking spot from your smartphone, or buy car insurance, or trade stocks, why can’t you arrange for a mortgage in the same way? There is no practical reason that a lender or underwriter cannot have a fully digital process in 2017. – Joseph Valenti WHAT’S THE BIGGEST OBSTACLE LEFT?
A.
In fact a few obstacles. To begin, the lack of innovation even on a smaller scale. Most technology firms seem to be reactionary to market demands and no one seems to be pushing the envelope
by creating disruptive technologies. Secondly, the lack of major and significant technology investments. Moving on to the lack of big technology player. Finally, regulations and compliance obstacles. – Joe Fakhri
A . Acceptance to use and having dependence on such available technology. The world is moving in this direction and there are already solutions that are fully digitized. So the major obstacles are the same obstacles that have always existed. Things like the old guard, discomfort with all things new and change in general, or the fear of being replaced because really, once you start replacing humans with machines, where does it end?. The “but”, that still exists, is the ability for technology to read the “story,” understand the risk, and make the call, in that order. I’m not talking about auto adjudication as that is old technology, but rather a machine that can think outside of the rules and regulations. A machine that can do what artificial intelligence (AI) is actually supposed to do. Think, weigh and decide. – Jerry Lo A . In my opinion, the biggest obstacle is no longer technical, but rather organizational. Humans are slow to change, even when the benefits are well understood and the risk is low. Business managers throughout the financial services industry are, regrettably, not leading-edge adopters of new technology. Brokers and lenders will eventually recognize the advantages of a fully digital process, but they must take the time to learn that there is a positive return to be earned on the initial investment. – Joseph Valenti HOW HAS TECHNOLOGY STREAMLINED THE UNDERWRITING/ QUALIFYING PROCESS THUS FAR?
A.
Technology has certainly contributed to making private lenders more efficient and able to turn around deal approvals or responses quicker than before. Still a long way to go especially with the millennial demographic, customers are expecting instant responses otherwise known as, “instant gratification syndrome”. – Joe Fakhri
A.
Business rules, auto adjudication, condition management, document management, e-signature, income verification, and identification verification…it all exist in part or whole, in most of the solutions available out there. The technology available today, allows you to come pretty close to completing the full mortgage process, with some exceptions. Those exceptions are usually because of risk and/or business process preferences. So as far as tools streamlining the process, it’s all there today. – Jerry Lo
A.
In my view, it is actually surprising how little technology has streamlined the process. Human beings are still largely responsible for moving deals forward, filing documents and retyping information. Even if the data and documents are digitized, the decision-making is still unstructured and prone to human error. We should be letting the machines/software do what they are good at, and thus free up time for the human beings to focus on relationship-building, strategy
planning, marketing and all the many other tasks for which the machines are poorly suited. I don’t see a “robo-advisor” occupying a significant part of the mortgage consultation market anytime soon. I do expect that the large institutions will continue to invest in technology that will ultimately displace employees. – Joseph Valenti HOW HAS TECHNOLOGY ASSISTED WITH THE CLOSING, FUNDING AND POST-CLOSING PROCESS?
A.
Most of the lenders and monolines today have their system integrated with closers and funders systems. Privates depend more on manual processes when it comes to closing and funding a deal. – Joe Fakhri
A. By providing abilities and functions to aggregate the majority of the process such as, documents in one place, e-signature abilities, closing service integration, and a place to underwrite it all, technology has already played a vital role in streamlining efficiencies and tightening processes, which ultimately lead to bottom line savings and greater efficiencies, if it’s done right. – Jerry Lo WHAT OTHER EFFICIENCIES HAVE TECHNOLOGY BROUGHT TO THE PRIVATE LENDING LANDSCAPE?
A. The private landing space has lots of potential. One area which is a must for all private lenders is real time business intelligence (BI) and reporting. With so many powerful and competitively priced products, a lenders ability to understand their business key performance indicator’s (KPI) is key to their growth. BI tolls empower management to quickly understand how their business is performing, diagnose potential problems for quick an confident decision making. – Joe Fakhri A. Private/MIC lenders have always had the same access to technology as the big lenders. The difference has always been affordability. Private/MIC lenders more often than not, do not have the budgets to spend on implementations, which also includes technology staff they would need to hire to embark on a project. But on the side of functionality, much of these technologies are actually too thick in function and feature. In the same breath, many of the Private/MIC lenders are not interested in technology tools, as they have a process (and often their own home grown tools) that works well for them based on their goals and budgets. When you think about scalability, running thin doesn’t leave you the luxury of taking on new processes with new technology. It is a similar story in which the broker has. If it takes them weeks or months to adapt, they see it as a risk to their business, which could lead to loss of business and ultimately revenue. Long term that may not be true, but it’s difficult for people to risk their bread and butter unless you can prove your return on investment (ROI). Is your technology really adding value? How? Saving time which equals money, isn’t enough anymore in my humble opinion. You have to be a partner, and you have to be a tool that aids in building revenue, or replace a cost center. No one wants a pretty version of what they already have. – Jerry Lo WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 13
COVER STORY WHAT ROLE HAVE REGULATIONS PLAYED IN FURTHERING AND/OR DETERRING NEW MORTGAGE TECHNOLOGY?
A . Regulations have both positive and negative roles to play in any sector, mind you the private lending sector. Regulations and especially over-regulations, tend to slow down the advancement of any sector. However, with more complicated regulations, comes a more complicated process. This usually results with investments made in further technology automation. The digital mortgages process is no different. It’s not there yet but more attempts will be taking place over the next couple of years. – Joe Fakhri A . Regulations and internal policies are always a staple in roadblocking progression. The MIC and Private space (currently) isn’t as heavily regulated today as traditional lending. Because of this, they have the ability to move past the market, as far as technology offerings are concerned, and be significantly more progressive in their offerings. – Jerry Lo WHAT ABOUT E-SECURITY ISSUES, HOW IS TECHNOLOGY OVERCOMING THIS PERCEIVED OBSTACLE?
A.
Security is a manageable challenge. It’s all about risk mitigation. Systems are becoming more secure day after day. There is a wealth of products, devices, services, and best practices to help mitigate security breaches. There is no doubt, it’s better to do your homework and hire the right people. Apart from preventing a security breach, I always advise my customers to ensure a plan B in place. Plan B comes in the form of security measures after a hacker managed to breach your security walls. Apart from the vanilla security challenges, another issue which comes to mind is fraud and fraudulent transactions. Those types of issues can be managed by ensuring proper processes, work-flows, and transactional footprints are enforced and always in place. – Joe Fakhri
A . Our industry lags behind others in this regard and I see a real threat that must be addressed in 2017. In order to solve the problem, mortgage professionals must first recognize that their current daily practices are in fact very dangerous, and that conversation begins with plain-old email. Effectively all email is unencrypted and thus, by definition, it is potentially available those who would do harm. Brokers and lenders must employ tools which encrypt and protect personally identifiable information (P.I.I) at every stage. Regulators in both Canada and the USA must enforce the rules currently in place, and in my opinion, should impose financial consequences to those who do not provide appropriate means to securely protect sensitive information. Behaviours will not change until regulators take action. It doesn’t mean that borrowers will immediately stop sending email, but those borrowers must be presented with options which protect their personal information. A last comment would be this…Brokers have many more software options available to them today than they had just 18-months ago. If you are using (or being compelled to 14 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
use) a software product that doesn’t protect your clients’ well-being, you should be doing something about it. This month. – Joseph Valenti WHAT TECHNOLOGICAL TRENDS DO YOU SEE IMPACTING LENDERS AND ADMINISTRATORS IN THE NEAR FUTURE?
A.
In a nutshell, mobile and real time data. – Joe Fakhri
A. It’s a trend to try and build technology tools in the Private and MIC space (specifically) because D+H pulled out of the space sun setting LenderBASE and all their other legacy platforms without replacing them. There are a lot of new systems and offerings out there. But claiming you have the best tool, is a thing of the past in my opinion and if that is your value proposition, I think you’re going to find yourself struggling. A growing trend in technology is focusing on a component of the process, rather than trying to completely solve the entire equation. The one-stop shop, is not as attractive as it once was 10-15 years ago when dual entry was the root of all evil. Today’s technology players understand that if you try and be all things to all people, you are more likely going to be average at all your functions. There is so much choice out there now that you don’t have to worry about things like a single data repository any more, or dual entry because the API’s are plentiful and common. If they are not, that usually eliminates the solution right out of the gate. I don’t think technology is the thing that keeps Private’s and MICs up at night. I think there are some desires to want to progress like any business, but I think they want a solution that simply brings them deal flow, and finding deals is only as important as ensuring they can find the money. But if I was MIC or Private Lender, I would want a seamless system that merely sends me business and offers me a way of weeding through all the stuff I don’t want, to ensure it doesn’t end up on my doorstep wasting my time. Because most are a small business, and simply don’t have a lot of time. – Jerry Lo ____ Joe Fakhri, President & CEO of Axiom Innovations Inc. to learn more visit axiominnovations.com or contact joe.fakhri@axiominnovations.com Jerry Lo, Mortgage Technology Guru to get in touch contact jerry.lo2010@gmail.com Joseph Valenti, Co-Founder & Customer Advocate of Brokr Bindr. To learn more visit Brokrbindr.com or contact joe@brokrbindr.com
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MIC MANAGEMENT
TOP 10 TECH TIPS THAT EVERY MIC NEEDS TO KNOW
As the Canadian private lending industry continues to grow and change, particularly with new regulations, implementing a software system to manage all your related MIC transactions and reports will reduce the potential for errors in compliance, as well as, provide transparency for successful reporting and audited financials. Similarly, implementing a software system will greatly reduce administration time, thus, providing more opportunity and time to grow your private lending MIC business. SOFTWARE SYSTEMS Generally, there are three reasons to implement any business software: record, report and analyze. Software is implemented to record all business transactions for successful record keeping, provide an ability to report internally, reports to your clients (investors or borrowers) and analyses corporate performance to manage growth, cash management and underwriting decisions. Excel or manual systems will provide a framework to record. However, without integration of a transaction based reporting system, MIC Managers will need to manually produce reports which are prone to error and costly in time. Similarly, to analyze corporate performance, MIC Managers will need an integrated accounting system to provide valuable information for corporate analysis and underwriting decisions. REDUCING ADMINISTRATION ERRORS Implementing software will reduce administration time for managing your MIC as well as reduce the chance for errors. Having a system that removes the need to enter duplicate data entry, such as accounting entries into a third-party accounting system, will reduce the chance for data entry errors and costly corporate errors. INTEGRATION As an alternative to Excel spreadsheets, one of the biggest values in using any private lending software system is integration. For instance, a transaction posted against the mortgage will be linked to the borrower, the broker and all other contacts within the mortgage. Similarly, transactions posted against an investment will be linked to the investor, the ledger and related referral agents if applicable. Having an integrated system not only enables users to avoid duplicate entries but also empowers users to analyze a MIC’s performance with more integrity. COMPLIANCE REPORTS Currently MICs should comply to the CRM 2 rules and regulations. Due to the complex nature of 31-103, having technology to produce and display related reports is important in the reduction of errors. Similarly, using a system that is MIC specific will also provide more accuracy in the interpretation of the related regulations due to the standardization of the content of the report.
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ONLINE PRESENCE Using an integrated software system also provides your MIC and private lender a platform to produce online reports. Enabling investors, borrowers and potentially agents to login to a customized website saves time by reducing investor queries, as well as, demonstrates a modern and up to date web presence.
TRANSACTION BASED SYSTEMS There are many great CRM and front end systems that are available for different industries. These systems provide good CRM tools, such as, for marketing and email campaigns. However, for a private lender to be compliant and produce audited financials, the system needs to manage transactions. A transaction-based system which includes an integrated Chart of Accounts is recommended for successful MIC Management. AUDITS Using a software system with an integrated general ledger allows the system to easily provide required audited financials. Accounting firms can log into your secure Cloud and review transactions as well as the Ledger, greatly reducing accounting costs. FLEXIBILITY Software systems should be responsive to the changes in the industry and be flexible enough to be customized. For software that is specific to the private lending industry to be at its best it should accommodate changes to existing and new regulations in addition to allow customization requests from clients. Software systems will provide most value when they can be configured and customized to suit the MIC and handle its changing needs of the business. INDUSTRY SPECIFIC SOFTWARE Using a system designed for MICs will provide many more features and functions for MIC specific operations than a system tweaked for the MICs’ business. Similarly, Using a MIC specific software that has been tried and tested in the industry also provides value with functions only realized upon an extended implementation period and extensive use by industry specific individuals and corporations. Without the experience and real world application, those MIC specific software developments would not be translated into the updated software. Because of this, MIC specific software creates an expertise that can be relied on and will assist in providing greater confidence in the management of the MIC. DIVERSITY Strength and diversity of software will generally be of more value to your private lending business when the software company develops exclusively for the Canadian private lending industry. As the industry changes and grows, so should your software. Ideally the software system that helps you administer and grow your MIC will have the functions and features to help you grow your business with continued success. _____ Shannon Dolphin is CEO of Dolphin Enterprises Ltd. and has been working with MICs for over 14 years. Dolphin and its new Underwriting and MIC Manager software solution is the only software to provide administration for MICs from the application of the loan to the back-end transaction based Chart of Accounts/ Accounting system. For information about MICs or MIC Manager please contact info@dolphinent.com or 604-685-6721 or visit www.dolphinent.com
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BUSINESS STRATEGY
SATISFYING THE NEED FOR SPEED THE IMPORTANCE OF CRM TO CANADIAN MORTGAGE BROKERS
There are certain milestones in every Canadian Mortgage Broker’s career that signify their growth and level of experience. The first time you sign a deal, the first time you sign a deal of a certain size. Or the when your “call sheet” truly becomes a database. At a certain level, it makes sense to start subcontracting or delegating parts of your work as you get busier. Chasing down documents and financials, submitting paperwork, making copies— these are things that can be offloaded to team members or assistants. But the one area of a Broker’s business, the one that should never be offloaded, is that of relationship building. If you’re good, and you end up being busy, building and maintaining relationships will become your main focus. To paraphrase one successful Broker, in a recent Facebook thread: “On the phone time is up, admin time is way down.” Sounds like she is successfully delegating, with her priorities in check. TIME TO EVOLVE BEYOND THE SPREADSHEET While we all agree that the personal touch makes the difference when it comes to dealing with customers, there’s absolutely nothing wrong with letting technology give you a bit of an advantage. In fact, these days, you have to have plenty of technological automation just to compete. In terms of value to you and your business, the single most important bit of record-keeping you do is tracking the exchanges you’ve had with your clients, and the various files you keep on them. Sure, you can painstaking build a manually-updated system using spreadsheets, and cut-and-paste. But why would you, when customer relationship management (CRM) software will do all of that for you, by keeping a record of the email exchanges and meetings you’ve had with a client, as well as the associated documents? When you really begin to nail the art and science of CRM, you’ll be pre-scheduling all of your client follow-up into your calendars, and you’ll have access to the entire history of your exchanges with a customer. Here’s the good news: you don’t have to remember which college all three of your client’s daughters attended, of where they grew up, or the other places that they’ve held property. Add them all to your client files in your CRM, and access them as needed. Updates to the file will be made automatically with any email exchange or update of a note. BE A BETTER VERSION OF YOU The biggest benefit of CRM is that it allows you to successfully manage a larger database than you would be able to using analog systems, or worse — your memory. That ability to show professional and personal service to a larger network of potential borrowers is what enables you to succeed. If there is one way that you can compete with the banks and win, it’s here. It’s not simply that you will work harder for your clients or negotiate a better rate; it’s also that you can work smarter, and offer a personalized and consistent level of service that a bank simply cannot maintain. And no one has to know about the wizard behind the curtain. WHEN A PROSPECT BECOMES A LEAD Some of the people on your list are friends and acquaintances, even family members. Others are actually on the lookout for a mortgage, 18 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
or have done business with you before. Having a purpose-built CRM software lets you distinguish between these details, or stages of lifecycle, of your clients. For example, when an acquaintance or newsletter subscriber asks a question or expresses interest in working with you for their mortgage, it is time to upgrade them to a “Lead” in your records, and start thinking about how you can show them value. Should you be scheduling more frequent check-ins and follow-ups? Is there any information you can pass along that they will find useful? Is it time to set up a meeting? Good systems allow you to take the worry and guesswork out of these questions, and build a process that will scale up as your business does. WHEN A PROSPECT IS JUST A PROSPECT One of the other key benefits of a good CRM is that you can protect yourself against becoming complacent with the folks on your list who aren’t “ready right now” to pursue a mortgage. As indicated above, while sometimes it makes sense to avail yourself when someone has expressed interest, it’s also useful to know when your follow-up should be scaled back. Checking in less regularly is sometimes prudent, and you can skillfully navigate the cadence of the appropriate follow-up by maintaining good records. Someone told you to check in in six months time? Put it in your calendar, and track the exchange when you touch base. When you do this right, you will be top of mind, and the first choice when it comes time for them to buy property. WHEN YOU ARE NOT ENOUGH As we touched upon above, sometimes it makes sense to delegate some of the work involved with getting a deal done. Often, this means that you are not involved with the more tedious but crucial elements of the deal process: financials, documents, and other sundry required follow-ups. When you entrust these duties to a team member or assistant, the last thing you want is for those details to be collected onto disparate systems, and hidden from your view. After all, since you’re the one managing the relationship, you’re going to need to know all the details, and have them readily available. CRM saves the day here too, as it lets you work in a collaborative fashion. Add team members to your account so that all of your recordkeeping is in sync, and the exchanges that your team has with your clients are consistently tracked and accounted for. With all of these benefits, it seems a folly for a licensed Broker to do it any other way. ____ Lee Noble is VP Business Development of Lendesk. Want to be among the first to try Lendesk? Visit lendesk.com and apply for an invite.
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1-800-853-5979 info@lendesk.com Data in Canada 19 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
FEATURE
CAN TECHNOLOGY REPLACE THE HUMAN TOUCH?
VECTOR FINANCIAL TEAM COMMENTS ON THEIR USE OF TECHNOLOGY
As private lenders, we must acknowledge that every deal and every Borrower is unique and deserves to be treated as such. Often the relationship lenders forge with a specific Borrower gives us the confidence and insight needed to either dismiss or pursue a deal. At Vector, we get to know the borrower, analyze their character and inquire as to their business plan. Through these relationships, we distinguish ourselves from institutional lenders. Technology benefits Vector Financial Services in a variety of ways, and has made the private lending business more accessible and intelligible to the average investor. It provides valuable tools to enhance the evaluation of potential deals and streamline the fundraising process. No one can dispute that technology compliments the private lending landscape. Consider for example, how quickly automation has become apart of the mortgage process. The industry is still highly pen and paper focused, but automated underwriting, electronic signatures and borrower portals are streamlining the mortgage approval process and quickly becoming the norm. Yet, even with this technology, many borrowers prefer to talk with a mortgage broker, investors rely on forging good relationships and lenders are forced to find ways to incorporate the need for technological growth and human expertise. To further elucidate this point, I will outline the respective steps Vector Financial Services undertakes in any deal that we decide to fund, and elaborate on the interplay of technology and traditional business practices that are applicable throughout our operational process. ATTRACTING INVESTORS For over 40 years, this process has been guided by personal relationships and word of mouth. Our track record is our most valuable advertisement. We pride ourselves on always having investors best interests at the forefront of our decision-making. 20 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
This has lead to long lasting and meaningful relationships that have not only sustained Vector Financial but provided us the ability to cautiously expand while never sacrificing our professional integrity. Even with marketing and communication opportunities through online platforms such as Facebook, LinkedIn, Twitter or Email, our experience with investors is more positive when in person. Once a relationship has been established a mutual understanding that if the investor has an issue or question and would like to meet us in person, or give us a call, we are always willing to accommodate them. ORIGINATION Like ‘attracting investors’, this part of our business is still very ‘oldschool in nature’ and is comprised primarily of networking and personal relationships. Borrower’s need to be able to trust the Lender they are dealing with, as they are typically looking to close quickly on a transaction and require speed and flexibility, along the way. Whereas standard residential loans focus on numbers and ratios, we believe there are certain other intangibles that must be factored in when evaluating a loan and a borrower. PRELIMINARY LOAN INTRODUCTION At Vector, a potential Borrower will initially call or meet with our originators to discuss the parameters of a potential business opportunity, and subsequently email us an executive summary. At this stage, technology can be very useful in providing us some quick data to guide our preliminary decision-making. We apply online resources such as google searches on the Borrower and utilizing google maps to look at the property and do some quick research on the area. Even though these may not be considered innovative technological applications, it should be noted that these tools were not as effective or even available to us even 10-15 years ago. They have revolutionized the speed at which we can quickly get a better sense of a deal and do some preliminary due diligence. After these preliminary computer processes, our most reliable tool is a personal
on site face to face meeting with the Borrower. Not only does it help us know the client but we gain more direct insight into the specific development. EVALUATION PROCESS Once we have tentatively decided to fund a loan, the more comprehensive due diligence process begins. Technology is invaluable in providing us the ability to access and organize data quickly and effectively. Some of the of the due diligence steps where we incorporate technology include: • RealNet searches on comparables in the proposed lending market TeraNet to run title searches • Google Maps to get digital photos of the property or development • Excel analysis to create our own valuations on the property • Personal background and Equifax checks on the Borrower • Comprehensive write-ups for our investors Despite all this technological assistance, nothing can replace the human element in the due diligence process. Our underwriters are consistently talking to and engaging other real estate experts, third party planners, environmental consultants and cost consultants who then provide us detailed peer reviewed reports. Our analytical skills are applied to extract important information, ask the right questions, and make informed conclusions and decisions. FUNDING THE DEAL Technology is very prevalent at this final stage. In most cases,
we have funds wired both to and from our investors. Perhaps the most important implementation of technology at this final stage of our operational process, is that it assists our fund-raising efforts. Through customized computer software, we can tailor investment opportunities to specific investors by digitally tracking their investment history and risk aversions. Based on this information, we can glean which of our investors may be interested in participating in specific deals based on a variety of factors (i.e. low rise vs. high density development, rate or return vs. risk, shorter term financial commitment vs. longer term financial commitment). This assists us in funding a deal quickly and efficiently while still providing our investors with customized service. Additionally, this software contains all the relevant information pertaining to every loan and all the details of every investor’s financial contribution. CONCLUSION In sum, while the use of technology is ever increasing it does not substitute the human element. Technology is a tool, that if properly used can assist with streamlining lending and investing efforts. The adage “everything in moderation” seems a particularly apt sentiment for the application of technology in private lending through our perspective. ______ The Vector Team. Vector Financial Services Limited is a Private Mortgage Lender Specializing in Land and Development Financing throughout Ontario. WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 21
FEATURE
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WHAT’S GOING ON IN ATLANTIC CANADA?
MATTHEW HENNIGAR OF AROI MIC
DISCUSSES THE STATE OF PRIVATE LENDING IN ATLANTIC CANADA -
Although the Atlantic Canada market has not been pursued by alternative lenders as aggressively as the hotter and larger markets of the GTA and Vancouver, most of the players have been lending in the region for much of the past decade. During that period they have developed their individual preferences. This is evidenced by an affinity for larger opportunities of the MURB and commercial construction flavor in the cases JW Capital and Moskowitz Capital while the balance of the players gravitated toward majorly owner occupied, small MURB or small commercial Mortgages. The largest Atlantic region players in the alternative lending environment appear to be Graysbrook Capital Ltd., JW Capital Ltd., Moskowitz Capital. Aroi Mortgage Investment Corporation and Atlantic Signature Savings and Loan also have a significant presence in the market however it is for the most part limited to Nova Scotia. A number of lenders began lending in NL, likely seeking continued growth after competition in the urban NS and NB markets intensified. Non-NL lenders wishing to break into the NL market have not been as successful as expected and it is unclear if this is the result of a “buy local” philosophy or if the downturn in the NL economy reduced owner equity to a critical low point just as some lenders were entering the market. Although the recent CMHC changes were expected to drive more Atlantic Canadians into alternative Mortgages a quick April 2017 over April 2016 comparison of the number of properties financed in Nova Scotia by a specific group of the more visible alternative Mortgage lenders shows virtually no change (336 vs 328 properties respectively). It is important to recognize the underlying Mortgage balances may fluctuate up or down significantly while the property count remains the same however this is the best data available in Nova Scotia. There are a number theories to explain this relatively unchanged alternative Mortgage volume ranging from lower average incomes than most of Canada rendering many potential borrowers unable to cashflow the resulting payment to a reality that the more stringent bank Mortgage criteria have elevated both the minimum borrower quality acceptable by many Alternative lenders and the quality of the borrower must achieve before a bank will extend credit. Tougher qualification criteria for CMHC insured Mortgages is further slowing sales of new homes which were already at multi year lows. This continued downward pressure on new homes have taken many builders out of the market and those who are left are reluctant to build spec homes which were another good business segment for Alternative lenders. New home construction may turn out to be the greatest opportunity for new alternative lending business when demand for new homes rebounds If banks remain reluctant to finance special _____
Matthew R. Hennigar is the Co-Founder of Aroi Mortgage Investment Corporation Inc.
WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 23
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FEATURE
DESPITE HOME VALUATION CONCERNS, IT’S BUSINESS AS USUAL FOR CMI
BRYAN JASKOLKA
The Ontario government recently announced new regulatory measures to tame Toronto’s surging housing market, which many argue is in the middle of an unprecedented bubble. Overvaluation concerns reached a boiling point last month after the Canadian Real Estate Association (CREA) reported that home prices in the Greater Toronto Area (GTA) surged 33.2% annually in March. For policymakers, that was the last straw. At Canadian Mortgages Inc. (CMI), a Thornhill-based mortgage broker, we have had a front-row seat to Toronto’s real estate boom over the past decade. We have seen the listing euphoria expand gradually from the downtown core straight across the GTA and golden horseshoe. The net effect is not that this has become one of the world’s most competitive housing markets, but one that is facing skyrocketing valuations and affordability challenges that are likely unsustainable over the long term. Although overvaluation is an industry-wide concern, it’s business as usual for CMI. We have certainly taken a more cautious approach to underwriting, with an emphasis on overleveraged borrowers who routinely take money out of their property. But otherwise, we’ve maintained the same approach to lending we always have and our results speak for themselves.
means. However, things start to go downhill when borrowers max out their leverage on a regular basis. We’ve found that these folks also tend to be maxed out elsewhere, including credit cards and lines of credit. CMI continues to lend at 85% LTV, like it has all along. Although our guidelines have remained largely unchanged, our Toronto-based underwriters are scrutinizing the higher risk category more closely. This means paying attention to borrowers who want large cash-outs on high LTV loans and who do not have any income to support their debt. In my view, this is an immediate red flag that simply cannot go unnoticed. CMI maintains operations in four provinces (Ontario, BC, Alberta, and Manitoba) so we have a good handle on the national and regional markets. Our firm has gained national exposure over the past five years as our lending programs continue to diversify into various markets and niches. Our lending division, which focuses on residential non-bank lending for debt consolidation, credit repair, bridge loans, renovation, fast purchases , and helping people avoid power of sale, has experienced rapid growth across the country in borrower segments looking for competitive mortgage solutions.
In terms of affordability risks, the biggest concern is borrowers who habitually draw equity from their home as its value rises. Although house valuations continue to skyrocket, relying on double-digit percentage growth year after year is not sustainable. Valuations like we saw in March will surely be put to the test as the Ontario government rolls out its 16-point plan.
Having been around for well over a decade, CMI’s success is mainly due to large capital flows tied to our mortgage investment division. CMI has attracted more investors to its private mortgage and Mortgage Investment Corporation (MIC), with our long term and steady track record. As CMI’s brand continues to emerge, our company will be in a stronger position to navigate the region’s complex mortgage market.
CMI’s approach to affordability hasn’t changed very much amid the latest buying frenzy, but our firm is taking a closer look at borrowers’ ability to repay at the highest loan-to-value (LTV) ratios. In the current market environment, the biggest concern continues to be undisciplined borrowers who use their house as an ATM.
The jury is still out as to whether Ontario’s new regulatory guidelines will slow the GTA’s housing market. Our goal is to continue making good deals and to remain well capitalized, regardless of what the market throws at us. _____
As a mortgage company, we’re all about making deals on all types of mortgages and for borrowers of various backgrounds and financial
Bryan Jaskolka is the Vice President of Business Development at Canadian Mortgages Inc. WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 25
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