Welcome to the 13th episode of the #AskAPrivateLender Podcast brought to you by Mortgage Automator. Our guest is Pino Decina, President and Founder of Abbey Ridge Mortgage Investment Corp and Falcon Ridge Management Ltd. operating in Ontario.
Pino has focused much of his career in the Canadian residential mortgage sector—in particular, the alternative mortgage market. He shared with us some of the lessons he learned on his career path and the processes that make Falcon Ridge a highly successful private lending business. This is a very educational episode, so be sure to check it out!
Listen, watch, or read the interview below. And stay tuned for more episodes coming up!
Lawrence: The alternative market, private mortgages, it’s not something people just dive into out of nowhere or go into when they finish school. How did you find yourself in a situation where you’re running a private mortgage fund or you’re in that space?
Pino: That’s an interesting question, Lawrence. For me personally, it started several years ago. I had started my career in institutional lending doing prime mortgages.
And back in those days, there was a little more flexibility on providing mortgages to individuals that qualified across Canada. As mortgage rules continually changed in Canada, and rightfully so, that became more and more difficult when dealing with a prime institutional lender.
So my career started to move closer and closer into the alternative space, and present day, it’s, I guess you could say, totally in the alternative space as we’re running various liquidity sources for Falcon Ridge Management. And that includes different private equities, a mortgage investment corporation, so all different types of liquidity to bring mortgage solutions to qualified borrowers.
Lawrence: So you got into it the same way that most did. You were in the mortgage space; you saw there was an opportunity in the alternative space, and you got into that way.
And I think that now the need for private funds is way greater than it was even a couple of years ago. I mean, the banks continue to tighten the screws, and there are great borrowers that are underserved in the market. Is that the experience that you’re seeing as well on the day-to-day when deals are coming onto your desk?
Pino: Yeah, I think that that’s a fair statement. Look, at the end of the day, there will always be a need for the alternative mortgage space. And traditionally, it’s about 20%-25% of Canadians, one in five to one in four Canadians, that are able to get a mortgage at their main institution.
And that number hasn’t changed. Now, the reasons for it have certainly changed. As mortgage rules continue to tighten, the types of deals that we’re seeing are certainly changing from what we saw five years ago, ten years ago, etc. And that’s really the question we ask ourselves here at Falcon Ridge.
When an application or a deal does come in, we hope to ask ourselves, why can’t this borrower get a mortgage at a bank? What’s missing? Why don’t they qualify under the mortgage rules?
And we do that very simply. If there are mortgages that we like… and when I say we like, all fly under our rules… for us, that’s an opportunity. Is there a new space in the alternative mortgage market to bring mortgage money to qualified borrowers?
And because of that, our products are always evolving and always changing and always being updated. And I think that’s the key to this space.
Lawrence: So Falcon Ridge, what kind of deals are you writing? What are you looking for, and what areas do you lend in?
Pino: We’re focused in Southern Ontario. That’s our market. We do deals across the Golden Horseshoe, within the greater Ottawa area. Obviously, in that market, the GTA would make up the majority of the business that we underwrite and fund, just because that’s where the heavy population is.
But to answer your question, yeah, we do urban-suburban centers across Southern Ontario. Typically, what we’ve been seeing is first mortgages.
Certainly, the alternative space in this market, there’s a lot of second mortgage money that’s available, and with the latest mortgage rule change of a few years back, there’s more and more need for these borrowers in these regions to get alternative first mortgage money. And that’s a little harder to get, and that’s really the focus of Falcon Ridge Management is to bring those solutions to Canadians in these markets.
Lawrence: Is it harder to get because of the size of the loans or because the rates that borrowers are demanding on first, or is it a mix of both?
Pino: I think it’s more a function of the dollars, the size of the loans. In the alternative space, there are different sources, and each source and each lender really have the same challenges in this space. And one of them is liquidity.
How much money is there to put out? And when you’re dealing with a certain amount of liquidity, it’s easier to spread it across, say, ten 2nd mortgages versus one. And for that reason, there was less and less money available to first mortgage borrowers who really needed solutions in the wake of the most recent changes.
Joseph: How have you guys as a company adjusted to the obvious downward pressure of the cost of the first mortgage capital that’s essentially flooded the private mortgage market today? Because we can talk about and say, two, three years ago, first mortgage would yield 7%-8% without batting an eyelash.
Today, you’re seeing not only a ton more private first mortgage companies promoting cheaper rates, but just in general, the cost, even with the bond yields and fixed rates going down, cost of capital has gone down, but there is definitely something coming where home trusts, which used to be 5%, and now they’re at 3.5%. And so I feel like it’s the MICs that are stepping up to replace that previous home trust business, especially on the lower loan-to-value stuff. We all know, realistically, at 85% or 80%, no one’s complaining about rates.
It’s about getting the deal done, but in that sweet spot of the 60%-75%LTV, where everyone wants to have their money exposed, how have you guys adjusted to the downward pressure of rates?
Pino: Yeah, that’s an excellent, excellent comment. Well, certainly, as you said, a couple years back, 7%-8% on a first mortgage, you can get it without batting an eye. But it’s certainly become more difficult today. And it’s really a function of, as a lender, understanding the needs of your investors. For us, what we give our investors is peace of mind.
We do all the due diligence. We do all the underwriting. We do all the service, and we really position ourselves as the experts in the alternative mortgage space, having a team of individuals with over 50 years of experience in this space.
For our investors, they want peace of mind. Yes, they want a return. Yes, they want a return that right now is going to do better than some of the equities that they hold, obviously, keeping cash in a bank and a GIC in a term deposit, but they want peace of mind.
They want mortgages that are going to perform. And I stress that with our borrowers, number one, and I stress that with our investors. We have a very strict underwriting guideline that we follow.
We have risk appetite statements that we share with our investors, and we stick to those. At any given time, rates are going to change, so my message to investors is yes, I can get 8% mortgages, but that’s going to veer away from our risk appetite and potentially the performance of the portfolio that you would have had a year or two ago.
And when you lay it out that way, if current first mortgage rates for the same type of borrower in the alternative space are now 6%-6.5%, then that’s a good return. Let’s continue on that path, and if it ever does return to 7%-8%, then obviously we’ll move back with it.
But it’s really a function of not rate but performance. Stick to your knitting. Stick to the borrowers you want to lend to. Rates are what they are. They’re on a downward trend right now, but the returns are still good.
Lawrence: Investors know what’s going on out there. I mean, they know the interest rates are at an all-time low, right? It’s not like every sector has high-interest rates, and you’re going down; everything’s going down.
So they can probably expect that when they get the call from you saying, “Hey, returns this year aren’t going to be as great as they were previously, but performance is great. Defaults are low. Your money is still safe. Let’s keep it going.”
I’d also say on the other side, it’s about managing the expectations of the investor for the rates. But also, for the borrower’s interest rate, a lot of that also goes into the relationship you have with the brokers that are sending the file to you.
So they may say, “Listen, I can get a cheaper rate from some other guy on the street, but I know Pino. I like dealing with Pino. It’s worth the extra half a point or a point to go with him because I trust him.”
And for the listeners, I mean, we were talking a little bit before we started recording, and Pino, you made a statement: the lender you know and the commitment you trust. And I think that has a lot to do with your relationship with brokers so they know what they’re getting their clients into.
Joseph: It’s not the APR that the borrowers pay at closing. It’s the APR they’re paying at discharge, and if you’re two weeks late, you know that Pino’s going to look after you.
And I think that’s where a lot of the companies who are doing business are standing out, showing brokers that they’re able to work with them. I bet you, if you look at your portfolio, probably 85%-90% of your business doesn’t pay out exactly on the day of maturity, either before for sure, or definitely a week, five days, three days, two months after maturity.
And privates are about flexibility and giving borrowers that understanding. Yes, I am paying a premium on the rate, but there is a bit of understanding that we’ll work with you.
And you never know, clients might come back to you because people are looking for flexibility with privates. They’re not dealing with a bank that has to go through 18 levels of management to get something approved or declined, or exceptioned.
And I think that’s where it’s imperative to make sure that those relationships are solid. Now, one thing that I wanted to talk about, it’s the interest rates. It’s on the news: HSBC, .99% five-year fixed insured money.
Never seen anything like this in my life, I think the reality is what people were earning in the private mortgage space was exceptionally high for the risk that was being taken. I think if you look at an overall portfolio, especially with a MIC where the risk is shared within all the loans you have, 8%, 7%, 6% is considered very good because people put money into equities and the stock market.
And then something like COVID hits, and people are down 25%-30% of their portfolios, whereas these mortgage investments are puttering along at 6%-7% consistently year over year over year. That’s sleep at night money for the risk of putting it into real estate.
Pino: Yeah, that’s an excellent point. For example, we have a MIC in-house, Abbey Ridge, that we manage under Falcon, and it is obviously one of the sources of our liquidity. And we have a target rate in the MIC of 7% to our investors.
And in 2020, we’ve been paying out consistently around the 8% mark. But we do that, and certainly, we give ourselves a pat on the back, but we also tell investors that that’s not going to be the long-term norm. And it’s what you said.
It’s about managing the expectations of investors. And for us, investors are more concerned about portfolio performance versus getting an extra half-point or a point on their returns.
And we do get investors that also say, “Look… ” As you said, Joseph, I traditionally got 10% in a fund I was in. And my answer is, “Look, I’m not the answer for you then, because I know where the 10% money is, and that’s not in mortgages. That’s in our risk appetite statement right now.
And it’s not to say that that’s a bad mortgage, but it’s not something we do. Here’s what we do. Here’s our knitting. Here’s the performance that we’re after and the type of borrower we’re after, and here is the correlating rate in today’s rate environment that you can expect for this type of portfolio.
And if you lay it out that way and, as you said, manage those expectations, then you’ve got an investor that’s going to be happy in the long-term. And that’s what our business is built on.
Joseph: But in fairness, the private mortgage space has become so much more mainstream. It’s no longer this hidden gem that only a few people knew about.
It’s becoming a very common investment vehicle in today’s world. I think as more and more of these vehicles roll out and there’s more competition, and obviously cost of funds is cheap, it’s obvious that the price of these returns or the return of these investments have to organically go down. Otherwise, you won’t survive.
If you’re the only guy offering first mortgages at 65% LTV and a 3% fee, you could offer it all you want, but you’re not going to get a single deal from anyone in the industry. So you’ll be out of business pretty quickly.
And I think it’s important and imperative that people are adjusting to current market conditions. And I can say for the first time in a very long time, it’s definitely been adjusting.
All of a sudden, rules changed, more private businesses happening, and that’s unfortunately just the lay of the land now.
Pino: Yeah. No, I totally agree, and it’s going to continue to evolve. I mean, you look at the space again 10-20 years ago, it looked totally different than it does today.
And I’m sure every lender in this space will agree and tell you the same thing, that there are borrowers that we’re advancing mortgages to that I would never dream that they’d have to go into the alternative space to get their financing. And that’s probably going to change 5 years down the road.
But at the end of the day, it’s a space that will always exist. It’ll provide really nice returns and safe returns to investors but also provide the right solutions to the borrower. And you touched on it when you talked about flexibility.
There are different things you can do as a lender to differentiate yourself, and we have sort of an in-ho