Ten on the 10th: Private lending and the mortgage industry Q&A with Len Shorkey of Shorkey Mortgage Corp.
Ten on the 10th
Published February 10, 2020
Citified's Ten on the 10th is a monthly question-and-answer segment connecting our readers with the insight and knowledge of Victoria's top real-estate and business professionals.
February's Ten on the 10th features Len Shorkey, mortgage broker and owner of Shorkey Mortgage Corporation (SMC). As a boutique mortgage brokerage, Shorkey Mortgage distinguishes itself as a source of alternative private lending solutions for the local real-estate market on Vancouver Island.
Asking the questions is Ross Marshall, Senior Vice President of the Victoria offices of commercial real-estate brokerage CBRE. As a leader in facilitating large-scale commercial real-estate transactions throughout the Capital Region – which include apartment complexes, industrial retail and office properties, and land/development opportunities – Ross and his team are at the forefront of market-leading real-estate transactions on Vancouver Island.
Would you like to be featured as part of a future Ten on the 10th Q&A? We'd love to hear from you.
What services does Shorkey Mortgage Corp. provide? Can you give a brief description of the organization?
Shorkey Mortgage Corp. is both a traditional mortgage corporation, providing residential and commercial mortgage services, but really stands out in providing private lending brokerage services for both lenders and borrowers.
How is that different from other mortgage brokerage services?
SMC excels at bridging private lending solutions with conventional lending practices. Specializing in private lending allows for more aggressive and tailored solutions to conventional lending obstacles. Private mortgages are an investment arranged through a mortgage broker.
What is private lending?
Private lending has its origins before banks, credit unions, credit cards and finance companies, existed. It simply started with individuals borrowing and lending money to one another for an agreed interest payment.
Private lending is now more commonly recognized as alternate lending. It has all the same mechanics of a mortgage but with a couple of profound differences. The rate is the most obvious, usually 2 – 10 percent higher than what is offered at a conventional institution.
Qualifying for a private mortgage is also very different than a conventional lender’s criteria. Private lenders will place more emphasis on the equity in the subject property than they might on the client’s credit report, income or reason for the loan.
Isn’t that type of lending risky from the perspective of a private lending investor?
Private lending is not without risk. However, the lender can “price” the risk into the rate charged for the loan. The lender is really investing in the borrower. The return of this investment should reflect the nature of the risk associated with the loan.
Factors that can mitigate the risk are: employment of some simple investigations by reliable and proven professionals; designated appraisers; legal staff specializing in real estate conveyance; and an experienced broker that understand the local market.
You can also tailor the mortgage to fit your investment timeline and goals. Terms of three, six and twelve months, are the most common. You can include terms of payment and provide an open- or closed-term mortgage.
What types of private lending are there?
Today’s private lending has grown to include a number of different types of private lending:
- Someone with surplus capital will loan to some other individual or company. This loan is based on the expectation that the loan will be repaid within a specific period of time, with interest.
- There is secured lending, which involves a security such as real estate, property or chattel.
- Unsecured lending like a credit card or line of credit, is reliant on the borrower’s strength of covenant.
- Personal lending is a loan without security other than a promissory note outlining the terms of the loan; this is more reliant on the borrower’s reputation and standing in the community.
Why do people borrow private capital?
There a couple of good reasons to borrow private money:
- Cost-of-funds and flexibility. Traditional lenders have lending guidelines that are often too restrictive, inflexible or intolerant for many borrowers. They can also be slow to fund due to administrative bureaucracy.
- Private lenders can be easier to work with as they may be able to look at all aspects of the lending scenario.
Who are your clients?
A borrowing client is someone who just needs a helping hand to follow up on their outlined intention and plan to achieve their goal.
A lending client would be someone with enough of an investment background to understand the risks involved in their specific mortgage/loan.
Tell me more about the private lending process; what role do you play?
As a mortgage broker, I collect the initial information from a mortgage applicant on behalf of prospective private lender. We collect details that answer the questions required by most lenders, such as:
- Where is the property located? (Is it local or abroad?)
- Why is the borrower asking for the loan? (Is it to purchase, refinance, bridge, build or develop?)
- What type of property is it? (Residential, commercial, industrial, or land?)
- What are the use-of-proceeds? (Where is the money going?)
- What is the value of the property? (This is always best answered by a third party, arms-length, reputable and certified appraiser.)
- What is the amount requested vs. the value of the asset? (Loan-to-value helps determine the equity and inherent risk of the mortgage.)
- How strong is the borrower? (What is their income and net worth?)
- Why is the borrower coming to a private lender? (What is the situation?)
- What is the exit strategy of the loan? (Is it a sale or refinance?)
- What could go wrong? (What intangibles could change the narrative of the deal?)
Making sure the lender and borrower are represented by an experienced, reputable and active conveyancing lawyer is a recommendation we strongly suggest. The sophistication of this type of mortgage benefits from as many perspectives as the transaction can afford.
What role is private lending playing in today’s marketplace?
Private lending demand has grown substantially since the introduction of the B-20 regulation and the bank/borrower’s stress test. In the very recent past, banks, credit unions and trust companies offered more products focused on equity lending. Multiple sources and types of income were recognized to service the mortgage loan at a specific rate. Now the loan underwriting process limits rental income offsets and business-for-self income.
Interest rates are always a hot topic so let’s talk about rates and where they are likely headed.
With the upcoming American elections and pretty much everywhere else in the world, trading in negative-rate interest rates, we don’t see any evident upward pressure on conventional mortgage rates and bond yields. We believe the Canadian residential 5-year fixed mortgage rates offered by Canada’s big banks, credit unions and monoline lenders will dip into the 2.5% range starting in late spring of 2020. C
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- Would you like to be featured as part of a future Ten on the 10th Q&A? We'd love to hear from you
- View CBRE Victoria's website here
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