The private mortgage industry has seen runaway growth in Canada in recent years. And the Ontario government is starting to notice.
The Ministry of Finance released a meaty report this week on the mortgage industry, with one recommendation being it's time to create a registry of private mortgage lenders.
Private mortgages are a wild west of lending where anything goes. While private lenders have to work through a licensed brokerage to lend out their money, there is no oversight or regulation on how they lend out that money. Anyone can provide private mortgages as long as you have large amounts of money to lend and can find willing borrowers who will agree to your terms. While most brokers these days are advertising mortgages with interest rates below 3%, the average private mortgage rate is around 9% (and it's not uncommon to see rates above 10%).
While getting data on private mortgages is hard, experts believe that the industry is booming after last year's mortgage stress test went into effect.
"More consumers are now forced to seek mortgage loans from private lenders, often at much higher interest rates," the Ministry of Finance said in its report. "Economists estimate that private lenders have increased their market share in housing markets like Toronto by 50% over the past year and now account for almost a tenth of Canada’s mortgage market overall."
Which brings us back to the registry. The proposal suggests requiring private lenders be forced to register with the Financial Services Regulatory Authority of Ontario if their lending is above a certain "monetary" or "activity threshold". Anyone lending below those thresholds would only have to voluntarily sign up to the registry.
A registry to prevent money laundering
The report notes the goal would be to track the flow of money, as there have been growing concerns that private mortgages are becoming a way for criminals to launder money.
"FSRA and the Government should have additional insight into this sector to support the broader fight against fraud and to remain consistent with other initiatives, such as the recent establishment of the Serious Fraud Office," the Ministry of Finance said in its report.
The Serious Fraud Office was announced back in April as a way to tackle fraud in the insurance industry in Ontario.
If the province moves ahead with creating a private mortgage registry, it would be the first province, territory or municipality in the country to have such a list.
The registry could go live as soon as 2020 said Stan Cho, the parliamentary assistant to the province’s Minister of Finance and the co-author of the report, in an interview with the Financial Post.
“We spoke to non-private and private lenders,” Cho told the Post. “And really it’s something that the industry overall wants, because it is a growing sector of the market and it’s something that is here to stay.”
The Ministry of Finance did stress in its report that this registry would not restrict private lending — instead, it's a way for the government to track money flows and ensure that criminal cash isn't being funneled through the system.
Of course, one question we have is what the threshold for getting onto the registry will be. For instance, if the threshold is $1 million, will money launderers simply start lending smaller amounts to avoid having to register? Hopefully these are questions that get answered when we have more details soon.