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.

Steve: Right.

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 j