1. Closing the Gap: Private Mortgage Lending Fills the Void
In the wake of the recent credit crisis, sub-prime lending came to a grinding halt.
The landscape of mortgage lending changed irrevocably. There is now a void
that the Alt-A lenders and banks cannot fill. Hence, there has never been a better
time to explore the private mortgage industry in order to service clients who may
require a temporary fix to allow them to stay in the real estate market.
Private mortgage lending and Mortgage Investment Corporations (MICʼs),
although not new, remain a mystery to many, both inside and outside of the
mortgage industry. MICʼs are funded pools of investment money that are
regulated and audited by the Securities Commission and Provincial governing
bodies. In addition, there are ongoing audits and fees to maintain the fund in
good standing.
Investment money can also originate from individuals. Individuals who wish to
become a private lender, need to be registered with the province through Service
Nova Scotia. Interested individuals must complete an application which can be
located at (http://www.gov.ns.ca/snsmr/paal/snsmr/paal033.asp). It should also
be noted that a group of individuals could also form a holding company to lend
money. Shareholders of the holding company would effectively share in the risk
and profit on each deal. Additional licensing requirements would be necessary to
complete as well. These represent the two major options for private lenders to
utilize.
Individuals who lend out their money can pick and choose the deals they wish to
fund based on their own preferences and their risk tolerance, ie.. a deal that most
people would not think of funding maybe completely acceptable to someone who
understands the area or business that the borrower is in.
Private lenders tend to use an experienced mortgage broker who is familiar with
underwriting both residential and commercial deals. A good broker will provide a
complete deal summary outlining the who, what, when, where and why of the
deal. The summary document will address the 3 Pʼs of the deal: Purpose,
Plausibility and Payout.
This is a relationship based upon trust built over a period of time. Private lenders
also value support from a broker in cases where the deal goes south. The broker
then needs to step in and be the go-between to get things back on track.
Although brokers are there for their borrowers, they are also there for their lender
if needed. Catalyst Financial currently provides this role for the individual lender.
Investors who traditionally invested into mutual funds are now looking to private
lending on real estate as an option for their registered and non-registered
portfolios. Traditionally, if there is a downward move in the stock market,
investors experience a decline in their overall portfolio with no recourse to reclaim

2. their loss. With private lending, investors have the opportunity to earn a good rate
of return in addition to having recourse to recoup their loss as they hold a
mortgage on the subject property. Although there are risks inherent in this
market, more investors are looking to this sector as a valid alternative.
Private lenders prefer to stick to a maximum of 75% LTV (loan to value), fees
included, although on occasion, may go higher on a case-by-case basis. Interest
rates range from 10% to 16% with fees ranging from 3-10% on a deal by deal
basis. Generally speaking, the lender keeps the interest portion of the mortgage
and shares the lender fee with the broker. The fee generally includes both the
lender and broker fee to facilitate the mortgage.
Private mortgages are short term in nature, typically one year, for two main
reasons. One being that investors do not typically want to have their money tied
up for long term. The quicker a private lender recoups his/her advance, the
quicker they can lend it out again, hence the attractiveness of this type of
investment. Secondly, borrowers also benefit if they have worked to improve their
credit over the short term, they can then move to a lower interest rate mortgage
sooner. These mortgages can sometimes be renewable if a clients
circumstances have not improved enough to allow the client to refi to an Alt-A or
A Lender. Additional fees may apply in this case.
Generally speaking, the application process is roughly the same: An application
for mortgage financing to a private lender may include:
• The Deal Summary
• Mortgage Application
• Credit Bureau
• Recent Appraisal
• Current property tax bill
• 2 Years of Company Financials
• Environmental Reports
• Tax Returns – Corporate and Individual and NOAʼs
Above all, deals that are well presented and cover off all of the facts and tell the
real story are the ones that will get reviewed and possibly approved the quickest.
Private lenders are more concerned about what the borrower is doing now and in
the future as apposed to what he/she did before they came to the table. Lenders
want to know that the client, although they have experienced duress, is now able
to service their debt on a go forward basis and need a temporary fix to get them
back on track.
In summary, private lending is essentially closing the gap. The credit crisis has
changed the landscape of the mortgage industry for good. Borrowers have fewer
options to choose from with regards to their mortgage financing. Lending
institutions are now much less tolerant of derogatory credit than they were two to
three years ago. Hence there is an upswing in the amount of private deals in the

3. pipeline. Private lending encompasses both purchases and refinances, from
residential to commercial and from construction to land development and
everything in between. Never has there been more of a need to establish a
strong relationship with private lenders than now.