Lender of last resort keeps home buying dreams alive
TORONTO • When prospective borrowers sit down in the boardroom to negotiate a loan at one of Canada’s largest alternative lenders, they’re greeted by a sculpture of a gun with its barrel twisted back toward the shooter.
“We tell the borrowers if you are dishonest to us, it’s like pulling a loaded gun on yourself,” says Eli Dadouch, 52, founder and chief executive officer of Toronto-based
Firm Capital Corp. The company lends to home buyers, builders, developers, and landlords that bigger banks can’t or won’t touch, charging more than twice as much for the risk.
It’s been a lucrative business. In addition to the gun sculpture, Dadouch’s extensive contemporary art collection at the company’s office in the city’s north end includes pieces by U.S. pop artist Steve Kaufman and photographer Rodney Smith. With new mortgage rules pushing more home buyers to alternative lenders like Firm Capital, business may be about to get even more lucrative.
“We think there will be some opportunities because the credit unions will pick up the vast majority of the bank rejects. It goes down the food chain.” said Dadouch, sitting in Firm Capital’s boardroom, where espresso and cookies are served. “We’ll get their business.”
Alternative lenders are playing a growing role in Canada’s real estate market as the industry searches for new sources of financing, risk-averse banks become more picky, and investors look for yield.
The march to the private market has been driven in part by a desire to reduce taxpayer exposure to housing, which has until recently, been on steroids. Federal and provincial governments have gradually been tightening the screws, reducing amortizations, instituting foreign-buyer taxes and making it tougher to get a mortgage.
The moves have begun to bite. About 49 per cent of all outstanding mortgages were uninsured at the end of last year, up from 36 per cent five years ago. And the housing market in Toronto has abruptly slowed, with average prices plunging 14 per cent in March from a year earlier, the biggest drop since 1991.
That doesn’t worry Dadouch, who thinks any slump is temporary in Toronto due to the simple fact that more people want to own a home than there is land or homes available. He met Firm Capital’s Chief Financial Officer, Jonathan Mair, buying distressed debt from him in the early 1990s, when interest rates reached double-digits and several trust companies collapsed in the recession. Even at that time, portfolios of residential mortgages sold to investors at only a slight discount to face value, Dadouch said.
“I think single-family always does really well in this country,” he said. Singlefamily mortgage lending currently makes up about 15 per cent of the company’s business. The company has about $1.3 billion in mortgage assets, including $562 million in its publicly traded mortgage investment corporation at Dec. 31.
MICs will likely grow to about 14 per cent of transaction volume in Canada under new the new mortgage rules from about 10 per cent now, according to research from Canadian Imperial Bank of Commerce last year.
Firm Capital’s specialty is lending for terms up to 24 months, after which the borrower will ideally refinance the loan at one of the country’s big banks, or if things aren’t going well, head to another private mortgage investment corporation. Its public mortgage portfolio has an average interest rate of 8.3 per cent, compared with about 3 per cent for home loans at the big banks.
“In this liquid market, whenever there’s a problem, somebody refinances us,” he said. “You never want to be the last guy on the stick. Leave enough room to get taken out.”
Dadouch got into real estate as a teenager managing properties for his parents before starting a mortgage business with his father in 1988. He kept growing Firm Capital after his father’s death in 1990, and it currently employs 80 to 90 people, he said.