Private lending continues to play an important role in Canada’s residential mortgage market. According to the Canada Mortgage and Housing Corporation (CMHC), private lenders account for up to 12% of the country’s mortgage market and facilitate 8% of all new residential loans as of 2023. These figures are expected to grow as more borrowers get excluded from conventional lending programs and seek alternative lending avenues, such as private investors.
Recognizing this opportunity, more investors are getting involved in the private mortgage market. However, not every mortgage investment opportunity is the same. Working with a reputable non-bank financial services provider is the first step to ensuring that essential risk management practices are followed in mortgage lending.
CMI Financial Group is one of Canada’s fastest-growing private mortgage lenders. It is a leading partner for private mortgage investors, providing comprehensive support in servicing, administration, and guidance.
Understanding the Private Lending Market
While private lending has been a staple of the Canadian mortgage landscape for decades, its popularity began to grow following the 2008 financial crisis when tighter federal regulations made it harder for borrowers to qualify for a conventional mortgage. Fast forward to 2024, and private lenders facilitate tens of billions of dollars in mortgages each year.
Borrowers can apply for a loan from a private lender for a quicker and more efficient approval process rather than going to a bank. That’s because, unlike the major banks, private lenders aren’t bound by stringent regulations or stress tests. In exchange for this flexibility, borrowers are typically prepared to pay higher interest and fees on their mortgages.
In whole mortgage investing, an investor purchases a specific mortgage or multiple mortgages, thereby serving as the primary funding source for borrowers. In exchange for lending their capital, investors collect fees and interest payments charged to the borrower.
Private lending was traditionally reserved for high-net-worth investors with significant capital to deploy as an investment strategy. Typically, investors managed all aspects of the process, including sourcing opportunities and vetting borrowers, with the assistance of a lawyer for the legal work. Now, however, it is available to more investors through whole mortgage investment programs, which are typically administered by experienced mortgage corporations.
The biggest upside to private mortgage investing is the returns. Leading private mortgage portfolios have historically outperformed traditional fixed-income securities, offering predictable cash flow that can be optimized in retirement and tax-deferred accounts.
Of course, no investment opportunity is inherently risk-free. In private lending, the risk of default is slightly higher than in conventional mortgages. That’s why evaluating loan affordability and credit risk is critical. However, these risks can be mitigated using technology and quantitative methods to measure and monitor a borrower’s credit risk over time. Investors can also minimize their risk exposure by investing in mortgages that meet their risk profiles. Further, every mortgage is backed by tangible real estate collateral.
The Importance of Risk Management in Private Lending
Although private lenders can set their own lending guidelines, they must abide by a wide range of rules and regulations regarding data privacy, consumer protection, and fair lending practices. That’s why mortgage companies have in-house compliance teams that consult with legal and regulatory specialists regularly.
Some of the most common risks involved in private lending include credit risk, market volatility, and regulatory risk.
Credit risk is the potential that a borrower will fail to make their mortgage payment, potentially resulting in loan delinquency or foreclosure. To mitigate this risk, private lenders employ rigorous underwriting guidelines by carefully evaluating the borrower’s credit and employment history. Lenders can also reduce their overall credit risk through diversification or extending a mix of low-to-moderate-risk loans.
Market volatility refers to the full spectrum of risk factors that can impact the residential real estate market. Although private mortgages are generally non-correlated with public markets, changes in mortgage lending conditions could impact the real estate sector. Similarly, economic conditions could affect home prices, which would impact the loan-to-value of the mortgage and the value of the property used as collateral. The most common mitigation strategies include geographic diversification, internal stress testing, and monitoring economic, regulatory, and monetary policy developments.
Regulatory changes refer to any policy developments that could adversely affect how private lenders do business. So far, most of the regulatory tinkering in the mortgage market has affected banks and traditional lenders, which has driven more demand to private lenders. However, mortgage corporations maintain a high level of awareness of regulatory developments so that they can respond appropriately if needed.
CMI’s Role in Supporting Whole Mortgage Investors
CMI Financial Group has been involved in Canada’s private mortgage lending market for more than a decade, having facilitated nearly $3 billion in successful mortgage placements across the country. In 2023, CMI placed 113th in The Globe and Mail’s business ranking of Canada’s Top Growing Companies. This exclusive list is reserved for emerging companies with outsized three-year revenue growth. CMI earned it’s spot with revenue growth of 415% over the three-year measurement period.
CMI’s success has long been rooted in providing investors with some of the most lucrative mortgage investment opportunities in Canada. CMI’s whole loan mortgage program provides investors with end-to-end support services, including loan origination, underwriting, servicing, and administration.
CMI’s private mortgage investing program is a passive investment opportunity that’s managed by our in-house team of mortgage experts. CMI’s investment process removes the complexity of private lending, enabling investors to put their capital to work in the most efficient way possible. We do this by applying strict underwriting guidelines and safeguards throughout the investment process.
Risk Management Strategies with CMI
CMI employs comprehensive risk management strategies on behalf of investors, ensuring a rigorous process for evaluating and selecting lending investments. This includes loan diversification, a process of reducing overall credit risk by investing in a mix of lower- and moderate-risk loans, all of which fall within CMI’s underwriting parameters. Our focus is on risk-adjusted lending. We constantly monitor the market to ensure our lending criteria appropriately reflect prevailing conditions.
Diversification also means geographic diversification or the process of investing in mortgages across various geographic locations. Unlike most private lenders, which are regionally focused, CMI lends coast-to-coast in major and smaller urban centres, and we assess rural properties on a case-by-case basis.
Due diligence and underwriting are another pillar of the risk management process. Our team of underwriters carefully evaluates each mortgage applicant to verify income, assets, debt, repayment history, and the quality and location of the underlying property.
Through continuous innovation and the embrace of new technology, CMI has strengthened its risk management process by monitoring and servicing loans once they’ve been fulfilled. Our technological capabilities ensure that all aspects of the mortgage lending, adjudication, and portfolio management processes are streamlined.
Through verifiable risk management practices, CMI funds high-quality mortgages at the individual and aggregate levels, ensuring our investors have access to some of the best lending investments on the market.
Leveraging CMI’s Expertise for Investment Success
Through our industry-leading due diligence and risk management practices, CMI is committed to helping investors achieve their goals. CMI’s expertise in managing mortgage investments is evidenced by the growth of its assets under management, low historical loss rate, and historical consistency in meeting competitive yield targets.
CMI keeps its investors ahead of market trends and regulatory changes, so they know what to expect in the future. For 2024, CMI identified several major trends that could impact the private mortgage market, such as artificial intelligence, interest rate volatility, and stricter mortgage limits in the traditional banking sector. CMI has guided its investors through these complex changes, putting them in a position to capitalize on emerging trends in alternative investments.
Conclusion
Investors thinking about entering the private mortgage market should do so with a trusted partner. At CMI, our verifiable due diligence and risk management practices make us an ideal partner for private mortgage investing. We offer investors a comprehensive solution to managing and mitigating risks, ensuring that they can confidently invest in the private mortgage space.
Learn more about CMI’s industry-leading risk management practices and how you can get started as with private mortgage investing by filling out the form below. A CMI specialist will contact you with more information.
This article is provided for informational purposes only and is not intended to be a substitute for professional financial, legal, or investment advice. Investors should be aware that all investment involves risk, including the potential loss of principal. Private lending, as discussed in this article, carries its own set of risks and may not be suitable for all investors. The effectiveness of risk management strategies and the performance of investment portfolios can vary widely and are influenced by a range of factors, including but not limited to market conditions, interest rates, and regulatory changes. Investors should conduct their own due diligence and consider the risks and uncertainties involved in private lending and other investment opportunities. Past performance is not indicative of future results, and there is no assurance that any investment strategy will achieve its objectives or avoid significant losses. By reading this article, the reader agrees that neither Canadian Mortgages Inc. (CMI) nor the authors will be held responsible for any decisions or actions taken in reliance upon the information provided. All investments are subject to risks, and it is the investor’s responsibility to evaluate and manage these risks.
