A Threat to Private Financing

Wayne Strandlund, Special to CMT

Borrower choice and the success of mortgage brokers is tied to the availability of a wide variety of mortgage funds. Apart from conventional insured and uninsured mortgages, there are Alt-A and B, 1st and 2nd mortgages available through the private mortgage market.

For years, Mortgage Investment Corporation (MIC) lenders have provided billions of dollars of this private alternative mortgage financing. But under proposed regulations, this opportunity for borrowers and brokers will be severely curtailed, causing measurable economic harm.

Some background…

Have you ever heard of an Exempt Market Product? They’ve been growing in popularity, becoming an attractive alternatives to stocks, mutual funds and other publicly traded investments.

Exempt Market Products are basically investments that are not required to be offered to the public by Prospectus. Instead, they can be offered by way of an Offering Memorandum, a disclosure document that is well-established and proven effective.

In Ontario, however, there is no Offering Memorandum option. Only wealthy individuals can make investments in Exempt Market Products, which is eminently unfair to the average — non-wealthy — investor.

Over the last few years Canada’s Federal government has been trying to create a national securities regulator. Ottawa’s goal has been to address inefficiencies that stem from 13 provinces and territories having their own securities commissions.

The federal government took the case all the way to the Supreme Court of Canada in 2011. While the Supreme Court ruled that securities regulation is a provincial responsibility, it also recognized that the Federal government has standing with the provinces.

Last fall the Federal government and the governments of British Columbia and Ontario announced that they were forming a new single Cooperative Capital Markets Regulator (CCMR), which hopes to attract other provinces to join. The goal is to commence operations by July 1, 2015.

The Ministries of Finance of British Columbia and Ontario are now drafting new securities legislation of their own that will transfer regulation and oversight to the CCMR. Harmonization of securities regulation and oversight between British Columbia and Ontario is the goal of the new regulator. While efforts to streamline capital markets is a positive step, concerns are mounting over this proposal in question.

What's Proposed

The changes proposed will severely diminish investors’ rights to guide their own investment choices. They will also restrict the amount of capital that can be raised through the Exempt Market, thus limiting access by Canadian borrowers to private non-conventional, non-insured mortgage financing.

There are two worrisome changes in particular:

  1. Investors will be subject to drastically reduced investment limits (a maximum of either $30,000 or $10,000 per year for all Exempt Market investments combined, as determined by their income and “net investable assets classification”), and;
  2. Investors will be prohibited from dealing directly with related issuers, and instead be required to make investments through a third party (stock broker, financial planner, investment advisor, EMD, etc.). This introduces news costs, inefficiencies and potential information barriers for Canadians who wish to participate in this growing investment class. 

These changes will have severe repercussions on the amount of private mortgage financing available to Canadian borrowers.

Why is this issue important to investors?

Ontario has traditionally stood against the public's ability to invest in Exempt Market Products, which include mortgage investments. In British Columbia and elsewhere, virtually anyone can make such investments.

In an effort to make Exempt Market Products more widely available in Ontario, the Ontario Securities Commission (OSC) recently published a proposal to create a new Offering Memorandum with guidelines for Exempt Markets. These proposals make substantive changes to both investor qualifications and dealer requirements.

Some changes are positive for the industry as they further enhance investor protection. As one example, investor decision-making will now be aided by improved investor suitability, oversight and enforcement. That said, these are already common standards for Offering Memoranda in provinces like British Columbia.

Under British Columbia’s long-standing Offering Memorandum exemption anyone can invest in an Exempt Market product in any amount they choose. They can do it through any dealer they choose, with no investor eligibility requirements or investment limits. They do, however, have to meet suitability requirements and then read and sign the traditional risk acknowledgement.

As a result, British Columbia investors presently have a clear advantage. It is this advantage that the proposed British Columbia-Ontario alignment will eliminate. We must therefore ask the question: Should investment rights be eliminated because Ontario, the larger of the partners, wishes to impose its will on British Columbians?

The Canadian Securities Administrators (CSA) — Alberta, Quebec, Saskatchewan and New Brunswick regulators — have proposed and published for comment similar, but more flexible, Offering Memorandum exemptions: National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). Like in B.C., under CSA’s Offering Memorandum exemption anyone can invest in an Exempt Market Product.

What you can do

To defeat this proposal, Canadians must voice strong opposition to it. It is regulatory policy that could severely limit private mortgage funds, increase borrowers' costs and limit their choices. Governments and regulators need to understand that this hurts borrowers, investors and brokers.

To achieve this, you the consumer and/or broker need to provide your voice on the proposed regulations.

Provincial regulators are seeking feedback, and the deadline to provide input is just 10 days from today: June 18, 2014.
Where to send your response (Individual investors)

British Columbia — Click here for instructions.

Ontario — Click here for instructions.

Alberta, Saskatchewan, Quebec & New Brunswick — Click here for instructions.

Where to send your response (Mortgage brokers)

British Columbia & Ontario — Click here for instructions.

Alberta, Saskatchewan, Quebec & New Brunswick — Click here for instructions.

About the Author: Wayne Strandlund is President & CEO of Fisgard Capital Corporation, one of Canada’s largest private MICs.

  1. Thanks Wayne .. I have always said that the private mortgage market in Ontario has worked incredibly well over the years despite the opportunities for abuse (of investor dollars). However, with people getting 1% at the bank and the stocks going up and down, many “investors” are looking at other ways to improve their returns. Unregulated, (new) large sums of money coming in to (new) mortgage broker “hands”, who have little knowledge, skill or the desire to serve these investors other than using these funds to place the next deal and earn a hefty commission is truly scary.
    But this surgery of planned legislation to save the investor patient will have huge side affects that will impact negatively on: 1) the consumer – less funds available, and where available more time and monies needed to access these funds
    2) the investor- removing many who would not qualify as “high rollers”, and who, if they did quality, would have dramatic cuts to their investment choices
    3) the mortgage broker – less flexibility to respond to the needs of both his investor clients and the consumer clients who benefit from these funds
    Change is required, and it should be consistent across Canada, but let’s look at holistic medicine options before we jump for the scalpel.
    After all, we are simply trying to protect the patient from hurting himself / herself -not inviting government legislation in to kill the patient.
    Be pro active; send your concerns as Wayne has suggested

  2. Thanks Wayne, for taking our lead on this very important subject. Your time is very much appreciated!

  3. Excellent, now I can invest less, leaves me money to head to Vegas then maybe take the kids on as cruise. No need to worry about saving for retirement I am sure the Ontario Government will take care of me and thank goodness they did not let me invest in something with any risk. Always wanted a convertible and luckily I can finance it over 8 years. Going to make a fortune on it when I sell it later because cars always are good investments.

  4. Good point, but don’t forget that home buying also has risk. I think for the safety of consumers, all home sales should first be approved by the OSC. We simply cannot let innocent Canadians lose money on anything, under any circumstances!

  5. This is a very well presented article. Just one point of clarification: if I understand it correctly the Exempt Market Product changes applies specifically to MICs and not to a group of people brought together to syndicate one mortgage at a time as many mortgage brokers do in Ontario right now?

  6. While I appreciate the sarcasm (some were truly lol funny), and the points in the various comments above were adequately made loud and clear, it is important for Ontarians to speak up loud and clear specifically about what we want to see happen. Tell our government and regulators what our position is and why. Private lenders and borrowers should not be limited by government legislation and interference. Yes it is incumbent upon us as Ontario Mortgage Brokers to follow our due diligence as set out in the MBLAA. I question, is all this coming about because others want to be part of the action of private lending and borrowing? Is moving some investments from Stocks, Bonds and Mutual Funds lowering the pay check of the financial advisor community and they want a piece of this? I’m just putting that out there wondering what others are thinking. The fact that the government has made mortgage borrowing much more challenging; was it not obvious that individuals looking for a reasonable income for their retirement portfolio might step in and fill the gap created by new government regulations? Who, (what specific individuals and what is their background), is behind petitioning for new private mortgage investment laws and regulations? Where are the precedents that show Mortgage Brokers are not doing their job with disclosures and qualifying both lenders and borrowers in Ontario? It does seem that these new rules may affect BC more than Ontario but show me where the need is to fix something that is not broken and is even running smoothly?

  7. Democracy at it’s finest ;). The government is going too far to control our choices available. There are a lot of diligent mortgage brokers and investors. An investor should be able to invest in what ever they want to. It’s their money, NOT the governments. If this is about due diligence, why not impose stricter rules and a list of documents required, to prove affordability. But we all know this is not what this is all about. Banks and lending companies can charge up to 30% and more for unsecured loans and credit vessels. Why not impose rules on unsecured loans instead? Are they not riskier? Because the government makes money off the banks, and NOT the private guy trying to make a living. That’s why. Pure rubbish! I must add that I, as a mortgage broker, will not even present a private deal to an investor if I wouldn’t lend my own money to the deal. Enough said!

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