February 23rd, 2021
First Circle Financial, Stephen Cross – #AskAPrivateLender Podcast, Ep 14
Welcome to the 14th episode of the #AskAPrivateLender Podcast brought to you by Mortgage Automator. For this episode, we went back to the West Coast. Our guest is Stephen Cross, Vice President of Mortgage Lending and Operations at First Circle Financial and current Board of Directors for the BC MIC Managers Association.
Stephen talked to us about some of First Circle’s deal specialties, their present challenges, switching their lending operations to a modern approach. Check out this episode for a fresh take on the lending industry!
Listen, watch, or read the interview below. And stay tuned for more episodes coming up!
Lawrence: So, your father is the owner of First Circle. How long has First Circle been around for?
Steve: First Circle has been around for almost 30 years now. 1991 is when he started. He started with a management of a MIC that didn’t have growth objectives that met his growth objectives. So, about 10 or 12 years ago, he actually started his own MIC —First Circle Mortgage Investment Corporation. So, his career in our space has been 30 plus years. And in the MIC management space specifically with this new company here, it’s been 10-15 years. And now we’ve got $150M under management between two different mortgage investment corps, and about 300 or 400 files on the books right now.
Lawrence: Obviously you don’t go to school for mortgages or MICs, but being exposed to what your father is doing at a young age, was it something you were always interested in, you knew you were going to walk down that path? Or, did it just happen?
Steve: You know what? He explained it to me as a child every which way he could think of. And I just couldn’t wrap my head around it. I knew he was in some sort of banking world and in the mortgage world, but I really didn’t know what any of that meant. So, I went to university in Thompson Rivers in 2009, and I just knew I liked numbers. I wanted to be in business. Wasn’t a big fan of marketing, didn’t want to go into writing or anything like that. I knew I wanted to be in numbers. And the only thing I really knew was accounting.
And so, my dad’s an accountant by trade and I just figured, “Hey, I’ll take a stab at it and see how we go.” So, I took accounting 101. Everything seems okay. Well, I guess it is what it is. And then I took the next accounting, I think Managerial Accounting was what it was called. And before I took that course, I was talking to the KPMGs and all the big companies to figure out what would be required to start my career as an accountant. And I took this next course and I just felt that this is not for me. We were analyzing the manufacturing process, and how much the cost of oil is going into a certain chair, and how many nuts you need to screw the chair together. And I just went ‘yeah, that’s not for me’. And so, I was a little bit discouraged at that point. And then I realized that there was a second branch—finance.
I delved into that. And that really was where I found my passion was in school. I went back for my first summer and I had a chat with my dad and I just said, “Dad, I think I want to be in finance. I don’t think I want to be in accounting anymore.” He says, “Oh, that’s great.” And I said, “I’m not sure which facet I want to go into. The stock market and the volatility just seem too emotional to me. I’m not sure that’s really where my interests lie. But I really love housing and real estate. That’s really what I like.” And he looks at me and he goes, “Son, did you realize that I finance real estate for a living?” Well, maybe I’ll try that.
Lawrence: I was going to say, it sounds like you were buttering him up.
Steve: That happened to be the area that I wanted to go into, and he happened to be already in there. So, most people just figured I’d follow in his footsteps, but I’d like to think that I kind of found my own unique way there.
Lawrence: Interesting, because there are three people on this call, I think, who were going to go into accounting and we all just didn’t make it. So, it just shows that maybe it’s not for everybody.
Starting with First Circle, I guess that’s your first leap into this sort of business. Was there something that you wish you knew before starting to work at First Circle? Maybe, it could be anything, just the type of business it was or the way it operated. Is there something that maybe would have prepared you a little bit more for what you were really going to get into had you known ahead of time?
Steve: I don’t think there really is because I started my first, I’ll call it a co-op term through the school here, in my second year of university. And I started at reception. So, it’s not like I was placed in some management role. I really was answering calls at the front. That was my background. I was working in sales before, and golf stores, and hotels, and the customer service thing really came naturally to me. I was kind of put into that customer service role at the beginning and then slowly ended up working my way through up into management level.
Lawrence: It’s the best way.
Joseph: So, your father basically put you through the gauntlets.
Steve: Yeah. And just to add another layer to that, my grandfather is on the board too. He’s an accountant, and he was in the business before my father. So yeah, I guess he kind of saw how that unfolded and applied some of the same stuff to me.
Lawrence: Let’s talk about the types of loans that you do. I hear that the 80% product is a big product for you guys. You’re able to deploy a lot of capital into that product. But is it all residential loans? Do you do commercial? Do you do construction?
Steve: When I first started with the company, for the first maybe 15 years or so my father ran it, it was 100% construction financing. That’s all he did. And it was very cyclical, back then there were eight-month terms. The loans are $200,000, $300,000 because they’re building $500,000 homes in Surrey, right? And they’re just cookie-cutter, and you just smash them out and roll into the next one. And then he started to make some banking partnerships. And we were looking into using leverage to further boost our yield.
And what we found out is the banks really don’t like construction whatsoever. And they have certain covenants that make you require residential and some commercial financing in order to qualify for your full leverage requirements. When I first came in, I basically cut my teeth by trying to convince people that this construction lender now does residential stuff. So, we were all connected with the guys who do construction, the clients that just turn stuff over every year. And I had to go out into the main market and really push for the residential stuff. And here we are today in our portfolio, 75% residential right now.
Lawrence: What’s your personal view? Do you like doing construction jobs? Do you like those types of loans?
Steve: I love it.
Lawrence: So, some lenders say it’s a lot of oversight, right? You have to make sure that the builder knows what they’re doing. Otherwise, you could find yourself in a problem.
Joseph: I think the reality is his father was doing strictly construction. So, they understand that business.
Joseph: I think when you talk to a lot of the lenders in the industry today, they avoid it because it’s more complicated. They have to learn a lot more about the property structure. I think that when you do understand it, and then if something, God forbid, does go wrong you can then send your own crew to fix the problem because you’ve managed your budget well. There is an exit for you.
I think a lot of people are scared of that.
Steve: Yeah. And that’s certainly the main part that we’re aware of. We can look past income qualifications. We don’t want to look at EDS and TDS on construction, but we’re seeing a lot of fully income-qualified stuff because the banks just don’t want to touch it. Especially if you break ground before you apply for construction financing, the bank won’t do it.
Lawrence: I had that problem. It wasn’t fun. I bought a lot where the house was already torn down. And I had some cash and I started the construction. I had hired a builder. And I went to the broker that helps me get mortgages. And he goes to “What the hell are you thinking?” So I had to pull a couple of strings. But yeah, once you start, it’s a problem.
Steve: It’s tough. Yeah. We look past traditional debt servicing ratios by making sure the clients have enough money to get the build done. And then through a reasonable market period, if it’s specific, or they have the means to qualify for conventional take-out financing. So, we make sure that they have enough resources. If they’re at lock-up and they’re paying trades directly, we don’t want to collect $400,000 worth of invoices and checks and bank statements confirming that the work in place has actually been paid for, right?
Lawrence: Yeah no, I get it. And what about locations? Where do you lend?
Steve: Well, we’re B.C. only, right now. Basically all major lending centers in Southwestern B.C. So, greater Vancouver, Fraser Valley, all across Vancouver Island, from Victoria North right up to Courtney, Comox, and everything in between. And then we like the interior B.C. as well. So Kamloops, Kelowna, Vernon, Penticton. And we’ll go right down to Osoyoos. So, pretty much nothing north of Kamloops/Kelowna and nothing east of the interior.
Lawrence: Got it. And I assume the loan sizes are pretty hefty. You guys have a similar market to Toronto where it looks like it’s half a million dollars, at least, alone. Do you know what your average loan size is?
Steve: Yeah. So, as I alluded to before we have two funds, right? On the big MIC our average loan size, we’re probably in that $550,000 to $600,000 range. And we would put anything from $100,000 up to, I think, our largest loan right now is about $5.5M and that’s a syndication across a couple of properties. And then our other fund, it’s more like a private second mortgage fund if you will, and we’re looking at loans from $75,000 ideally up to, I think we just funded one for about $1M yesterday, second mortgage. And so, that loan size average in that portfolio is about $150M, maybe $175M.
Lawrence: Do you have a preference over the big deals or the small deals? Do you like one or the other more?
Steve: Well I mean, personally, from my point of view it’s more fun to be involved in the bigger deals, right? But from a corporate structure point of view, depending on leverage, obviously, we’d want to be 55% of the value, $500,000 cherry little loans. I would say a good mix of everything would probably be healthy for us. We’re at a size right now where more files, like the diversity that you’re going to get, it’s not really going to do much for you. So, we’re happy to look at some bigger stuff right now.
Especially for me, I’m starting to step away from the cookie-cutter residential stuff. I’m getting more into the bigger construction, the smaller multi-family projects, the heritage restorations where they’re doing strata conversions, and some row houses, single-family land development deals, larger strata warehouse stuff.
Lawrence: You want to do the exciting stuff.
Steve: Yeah. Why not, right?
Lawrence: You don’t want to do the simple $100,000 second mortgage on a single-family residence.
Joseph: I think there’s just less competition in those areas as well. If you can specialize in still doing the cookie-cutter stuff, which obviously your fund will never say no to, there’s not a lot of guys. We’ve talked to a lot of people, they tend to shy away from all this stuff you’re mentioning right now.
So, being an expert in that area, brokers will know First Circle is the company that can handle not just the typical loans, but all other types of loans as well. I think it’s important to have that diversity. But again depending on the size of the MIC that you have or the operation that you run. If you don’t have the cash to diversify into these types of projects, you will have unfortunately too many eggs in one basket. Which you also don’t want.
Steve: We really pride ourselves on having a wide array of products. And we want to be the people that can smash a deal through in 24 hours for you, clean residential first. And we want to be your one-stop-shop for the tougher stuff as well.
Lawrence: You said 24 hours, that’s not a lot of time. That’s quick.
Steve: We’ve ingested a deal from origination to being at the lawyers within three hours or three and a half hours, I think it was. And that’s thanks to you guys, of course, with the new Mortgage Automator system. We’re able to get the deals in electronically and spit the commitment out right away. And then we get all the docs back and with the push of a few buttons, it’s off to the lawyers. So, we ended up funding that deal. I think we got it at noon. We had full loan approval, off to the lawyers by 3:30, I believe it was. And it was funded the next day at 10:00 AM.
Lawrence: It’s amazing. I was going to ask you, every company has challenges, right? Not everything is always rosy, things come up. What would you say right now is First Circle’s biggest challenge? Whether it’s deal flow, money, whatever it might be. What do you guys struggle with? And how do you guys see yourself overcoming that struggle?
Steve: The biggest problem in our market right now, it’s the exact opposite problems it was two-three years ago. There’s so much liquidity in this market, lenders are having a really tough time getting capital out. And we’re in a very fortunate place where we decided not to grow at exponential rates. We very easily could have, if we raised the capital, we would have gotten the mortgage money right back out the door. And we just said well, we’ll take our 20% growth and just keep rolling as we are. And so right now, we’re at a leverage point that’s really good for us. And we’re nicely drawn into our line of credit. We still have a lot of cash that we can get out, but we’re not at a point where we’re scrambling.
I think we just set ourselves up to win in that category. And it’s been really great for us. In terms of struggles right now, I would say having to push off of our old Excel system. We’ve been running on that for so long. And you just have to trust the new one and just go with it. And the funny part is it’s not that MA’s not working properly for us. It’s actually catching mistakes that we have in our old system. It’s just a habit, right?
We have processes and procedures in place, and we like to keep everything quite tight. We’re dealing with large transactions here, and we don’t want a renewal fee to slip by, or some insurance to go unnoticed that’s expired, or something like that. I would say just putting new policies and procedures in place to set us up in the future is soaking up a lot of our time, and we feel that it’s worth it but that would be our biggest challenge right now. And then again, being enforced digitally at the same time.
Joseph: Talking about the new world, digitization. It kind of hit everybody pretty quickly. It’s been kind of slow and steady. Everyone’s doing things Excel, Word, apps come in via PDF. How have you guys been preparing for this new world with the Equifax rules, Filogix, are you embracing everything? Do you think it’s good for the industry? Or do you think they move too quickly and it’s going to create problems long-term?
Steve: Yeah. I could probably talk about this for days, but I guess I could start at the beginning. So, they came into our space and they wanted bps on our deals. And we basically saw that as a threat. If we’re making 100 bps on a deal and they initially came in at 8 to 10 bps or whatever it was, we saw that threat of 8% to 10% to our bottom line and we weren’t okay with that. And then, as we started to really understand why these changes were coming and how we could reposition ourselves to be more efficient, to be more secure, we started to realize that this was actually a great thing for the industry. And it’s going to be a great thing for us as well.
So, it’s really just repositioning costs and saving money in a different spot. I think it’s fantastic. Great for the brokers. It’s great for the end consumer. It’s great for us. It keeps everything safe. And frankly, I think they need to button it up a little bit faster because there’s still some stuff floating around out there.
I think that they’re doing a great job. And they had to move probably a little bit quicker than they had planned. But I like the direction they’re going, it’s all good.
Joseph: I think you actually hit it. I think the industry has never worried about consumer protection before. And I think there is something to be said about John Smith’s credit bureau floating around to 10 different lenders, and five employees at each company looking at that credit bureau. That’s 50 people looking at some guy’s financial situation without his permission just because some broker sent an email and let it float out into the internet. Plus with the co-brokering and the co-lending, it could even be progressively worse.
I agree with you. I think going where it’s going, looking after the consumers. I also think, and Lori always says it, something about writing something on a napkin just seems very old school. I remember brokers would just send you an email, like here’s an email, or here’s, literally, we’d meet with someone they’d write it at lunch. Here are the details of this loan. Go figure it out.
I like the idea of being able to go online, digitally submit everything. It shows up, it makes everyone’s life easy, and they in turn feel that they can get a response quicker. Even smaller guys are now embracing the fact that they’re able to actually have access to a larger pool of people because of the digital world that we’ve all come to know today. And yeah, it will actually weed out a lot of the stuff that I think has been hurting the industry for quite some time.
Steve: Yep. I agree with you.
Lawrence: You guys have $150M under management right now. I assume that’s spread out over a significant amount of investors. You deal with some of the investors yourselves, are you in charge of the investment side? Or, is that a different area of the business?
Steve: So, obviously my father’s at the top. We’ve got two VPs on the lending side. There’s myself and Jason, and we both do the underwriting and oversee the lending department. And then there’s Anna who is the VP of finance, and she handles all banking relations and investor relations.
Lawrence: Do people send you deals? Are there BDMs that they should send deals into? How do they submit deals to First Circle?
Steve: Yeah. If you want to call and chat about a deal, I’d always suggest our BDM, Kyle Williams. He’s our go-to guy. He’s our boots on the ground guy.
Lawrence: So, brokers can send them over to your BDM. And do you work direct-to-consumer as well? Or is it all through the broker channel?
Steve: We don’t love to for a variety of reasons. There are so many options on the residential side that we just wouldn’t feel like we could properly represent a borrower on a typical residential purchase. We want them to be properly advised. Our big thing is disclosure, transparency, ethics, keeping your clients’ best interest in mind. And I don’t see how we can follow any of those by working direct-to-consumer. It’s just not something that we feel comfortable with. We do get people calling us to borrow money directly. And if they have a very limited knowledge of our industry, we refer them out to a broker. It doesn’t happen very often, but we do work directly with some builders and some more experienced developers or industry participants.
Joseph: It’s also a different type of financing. These are repeat clients who’ve borrowed money from Steve before, who’ve built houses. They know the process. They know they’re already not getting the bank financing. Whereas like Steve said, a residential purchase, the guy’s got to explore his options. And so, there’s always that conflict of interest where you are doing the best for your client or are you doing what’s best for your business. Again smart, get the broker to bring it back to you if that’s the only option left.
Steve: Yeah. And the broker channel’s our lifeblood. Those relationships mean more than anything to us. And we want to keep them happy. So, our interests really lie in keeping the broker happy. And we like the brokers whose interests lie in keeping their clients happy, right?
Lawrence: Yeah. That’s good. Everyone has their own side to represent. And it makes sense.
Steve: At the time of renewal, maybe trying to take them out or something. What I say to those guys is really, I don’t care about this deal. And the brokers really go, why don’t you care about this deal? And it’s like, I want your next 10. I don’t want this one.
So, if you’re worried about this one I’m not going to steal one from you. I want the rest of your business. I want to develop the next 10 years with you.
Lawrence: So, what do you do before maturity? Do you reach out to the brokers? How long before? What’s the process like when a deal is about to expire?
Steve: Well, what we do is we charge very low renewal fees. We like to think that the brokers have CRM programs in the backend that can really tell them when it’s coming up for renewal, and good brokers do. We issue renewal letters directly to clients. On commercial spec stuff, we throw a bit of fees in there. If they’re trying to make money, we’ll make money. That’s our renewal policy. But if you’re trying to put a roof over their head, it’s $250 at current market rates. I mean, we don’t want to guide the client back to the broker, but we just hope that the good brokers have that diarized in that relationship with their borrowers.
Lawrence: Sure. And I think most at this point have some sort of a system. I mean, if you don’t have a system as a broker, it’s not a good way to run your business.
Steve: We understand our place in the market. We’re a stepping stone, we’re credit rehab sometimes, we’re non-conforming down payment, sometimes. We’re non-conforming income for whatever reason. And generally speaking, they have a plan. And they want to move that borrower to a B-lender, or a bank, or what have you. So, a lot of the good brokers have these plans and have constant communication with their borrowers. And we’re generally one, sometimes two, the odd time three-year term. And then we’re out.
Lawrence: Oh. You’ll go three? Okay. That’s good to know.
Joseph: Well, you mean you’re not going to lock up the client for three years on day one? You’re saying year and then renew?
Steve: Year after year. For any spec stuff, we’re just one year. We do everything open, interest-only payments unless otherwise requested. We offer longer terms for owner-occupied properties. So, we’ve done quite a few two-year terms. We’ve done a couple 18-month terms. We’ve done a couple three-year terms as well, actually.
Lawrence: What do you do about the fees? Do you like triple it if it’s a three-year term?
Lawrence: You don’t? Wow. That’s a good deal.
Steve: It’s a really cool dynamic that we’re getting into. I mean, from the business side of things it’s work to renew a file, right? There’s time involved in doing it. And if we’re charging $250 for that renewal, for the paperwork, you have an ability to adjust your rates and terms, I guess. But I’d rather forgo that. And the best clients that you have, the best files on your books are the ones you don’t remember. And so, just keep paying for three years, I’ll wave $250 to waive some time out of my agenda to get the file renewed.
And that’s kind of the mindset we’re leaning into now. Back in the day, we wanted to renew construction models and grow a half-point or quarter on there. Really looking at the size of our books and how big we can get it. And we’re looking at it more from an administrator point of view than an originator point of view.
Lawrence: Completely. It makes sense. And I do agree with you that the best deals are the ones you don’t remember because it just means that they’re paying and they’re doing their thing. I always love to know the ones that you do actually remember. So, one of my favorite questions to ask is what is your most memorable deal that you’ve been involved in?
Steve: I had one construction file. It was literally one of my first, probably, 10 files that I ever picked up. And it paid out in 2020. And The story there was they bought the lot, and it was just nightmare after nightmare with the permitting. So, there were power lines running through the back of the lot, and they needed to do some blasting underneath the power lines. And I think it took them two years to do that. I had my approval in hand, just sitting on my physical file at the time waiting for them to break ground. And they just weren’t doing it. Our first job was at lock-up. I think it took them three and a half years to get there.
Lawrence: Oh God.
Steve: And then after that it was, I think, a three or four-year build to reach final occupancy. They kept their head above water, bless their hearts.
Joseph: You know what though? Seven years the prices of real estate have gone through the roof. And I think that them sitting on this project for seven years probably made them more money if they’d built it and sold it right away.
Steve: I think they bought their land because it was a bit of a dog lot for like $800,000 in a very prestigious neighborhood. And before they broke ground, I think it was worth $1.5M.
Lawrence: Oh my gosh. But they were making their payments every month, right? There was no issue with missed payments?
Steve: No. Obviously, we weren’t happy with the pace of construction. For construction, we don’t take monthly payments. We accrue and deduct from the draws. So, the net advance to the clients was obviously a little bit less than what we had anticipated, but it all worked out in the end.
Lawrence: Wait, when was the first draw then? So, if they didn’t do anything for a very long-
Joseph: Three years you said.
Steve: No, I had the file on my desk for two and a half years, I think, before they broke ground. And then it was probably close to three years before we actually funded. Our first job was at lock-up. But then it was a three or four-year journey from lock-up to completion, like their actual final. They had the home done for about a year and they just kept failing their occupancy just for little things. They didn’t know the intricacies of the zonings and the bylaws and all that kind of stuff. It’s a really good story. One commercial guy told me don’t cheap out on your trades. You’re not going to save yourself any money.
Hire a good builder. Hire a good contractor. Hire good trades. They don’t have to be top-end, super expensive. But get good people in there. It’ll save you money.
Lawrence: Well, listen. No, I think this is great. Just to summarize, First Circle out in Vancouver, they’re all over B.C. They do almost every type of loan. So, legitimately they could be your first call on everything.
They go up to 80%. I think they have a make sense attitude. So, it’s not just a black and white box. They’re going to look at the deal. They’re going to understand the deal. And they’re going to give you a quick answer, which I think is the most important thing in the industry. You don’t want to send the deal to someone who’s going to sit on it for four days and not give you a response.
So, as you heard, they’ve funded deals in a day. So, you’re going to get your answer very quickly. And I think more times than not, the answer will probably be yes because they just do a lot of stuff and $150M on the books, they got a loan upwards of $6M, so they can write the big cheque. If you have a good deal, they’re not afraid to write those big loans, which is obviously good.
Any final words? Anything you want to end with?
Steve: I guess I just want to thank you guys for having me on your podcast and being so receptive to my change requests in MA. You guys have just been terrific to work with, and the vision that you guys have for your company, it’s really unparalleled to any of your competitors. And I just can’t wait to see where you guys are going to be in the next few years.
Joseph: Thank you, Steve.
Steve: Thanks for having me.