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-house mission here that we say look, we understand that for a lot of these borrowers, it’s a shock that they didn’t get approved at their bank.
No one buys a property, no one takes on a renovation project in their home, with the thought of having to pay anything 6% plus for their money, right? They do all this planning, and they assume that they’re going to go into their bank, and they’re going to get mortgages you said today that could be under 1%, which is unheard of.
But it’s going to be a favorable rate. And so when they get the bad news, it’s a shock, and so the one thing we want to do here at Falcon Ridge is make sure that our mortgages as much as possible look and feel like a bank mortgage, that the rate is what it is; the fees are what they are; but at the end of the day, there are no hidden fees; work with the customer on payments, if need be.
If there are shorter-term solutions, work with them on that. The one thing you want is repeat business, and you won’t see that client again, but you certainly will see that mortgage broker again.
So provide the flexibility of mortgage solutions to that broker so that when they are having conversations with their clients, they know that potentially there’s a solution at Falcon Ridge. And I’m going to add one more thing.
And I applaud you guys because we built that here, but it’s easier said than done. And working with Automator was fantastic for our company because no two mortgages are alike here at Falcon Ridge.
And having the ability to maintain that flexibility and have different clauses and terms and prepayment conditions and types of mortgages on the books, dealing with a company like Automator allows us to maintain that book, and our portfolio oversight does not skip a beat. So I applaud you guys for allowing lenders to have that flexibility to build it and cater to the solutions that we offer.
Lawrence: Really appreciate the kind words.
You’ve been in the business for a really long time, have you ever had an issue with a deal going bad because of fraud? Or if not, I mean, are there certain steps that Falcon Ridge takes to try and make sure that does not occur with your fund or deals that come to your desk?
Pino: Yeah. I’d be lying if I said we’ve never had a deal that it went into arrears or foreclosure or if I ever ran into a fraud case. Knock on wood, it hasn’t happened here at Falcon Ridge in the 2.5 years that we’ve been in business.
But I have experienced it in the past, and all you can do is build on your experiences and add more policies and procedures to try to prevent it. The one main thing is know your customer, know who you’re lending to.
There’s a lot of automation in today’s world, but any time you get a chance to meet a borrower face-to-face and look them in the eye, I mean, you can’t put a price on that. The value of that due diligence for us is paramount.
So we try to visit every property before funding along with our appraiser, our site inspector, that’s doing their evaluations as well. We also continue doing telephone interviews with our borrowers prior to funding as well.
So you do all these things to really, again, get to know your customers. And whenever you get the chance, even after funding, visit the real estate. It gets harder and harder as the book grows, but I share the portfolio with the team here.
For example, last year, we’ve grown our construction books, and we do a lot of single-family construction projects, so when we’re out constantly visiting those, we’ll look at other properties that we hold in the portfolio in that area. Doesn’t mean you have to go knock on a door, but driving by the real estate 6 years later and seeing how it’s changed, if any, these are little things that you can do to prevent any damage to your portfolio.
Lawrence: Right, and of course you get title insurance on every file. The reason I ask is we talk to the title insurers quite often, and they say the amount of fraud is actually increasing in this space, particularly. Of course, we’re covered, but you still just never want to deal with it, right?
You’re working to grow a business. You’re working to get more deals. I feel like when that sort of stuff happens, it kind of bogs you down, and it’s all you’re thinking about, so it prevents the growth. But it’s great to hear that Falcon Ridge, you’ve never dealt with that. That’s great.
Joseph: They’re an insurance company. They’re not looking to pay anything out, right? Yes, you have your coverage. But at the end of the day, it could take a very long time until you see that money back.
And during that time, there are opportunity costs, losses, the stress of having to deal with it, being involved with lawyers. It’s not a pleasant process. You’re dealing with a lawsuit essentially, and that money is not available.
And the investors have to hear about that; there’s a file that’s fraudulent. Whatever you can do to avoid all those headaches, I commend you guys. I love the idea of the sites.
On a residential level, when you’re churning business to the levels you guys are and any of our other clients, I think it’s so good to have that conversation. Let them know that you’re there for them, almost build that relationship. They will feel worse for missing a payment once they’ve talked to somebody at the company.
And the other thing is if you do a good job, especially on the construction side that you’re mentioning you’re now involved in, who do you think they’re going to call or want to come back to if the experience is positive? You’re now establishing rapport with borrowers who’ve made payments, who are happy to pay you your interest, and you can start building that book of organic business as well.
So I commend you guys. I applaud you guys. That’s awesome.
Pino: Well, thank you, and that’s a great point. The construction business is an interesting one. It’s a tricky one.
If I can just add one comment to the title insurers, I really applaud them because certainly, lenders are doing more due diligence to prevent fraud, but we’re also finding that more and more title insurers are referring loans to an underwriter versus automatically insuring them as we’ve seen in the past. So certainly it takes a little while longer at funding.
If an underwriter is taking an extra hour or two to do their due diligence, it slows the process down slightly. But I think at the end of the day, it’s well worthwhile, so I applaud them for their extra due diligence as well.
Lawrence: So you are managing a fund right now. You deal with investors. You’ve been in the business a really long time.
I’m sure some of these people you deal with there, they’re wealthy individuals; they’re wealthy families; they have a lot of money. Let me ask you, what is the best money-related piece of advice that you’ve ever received from any of these people?
Pino: I can’t remember when it was, but the most common theme is, “Lend it like it’s your own money,” right? That yes, we’re putting faith in you to put this money out and get us the return. They’ll always ask, “Are you personally invested in the fund as well?” So they get comfort in that.
But at the end of the day, the biggest comment is, look, we’re not looking to make the highest rate of return. We just want a good, sound, safe investment. And if that means that you’ll get a little less, we’re okay with that. Lend it. Make those decisions like it was your own money.
And that’s the autonomy and flexibility that I really appreciate with investors. I prefer that route than trying to get to a target yield number that, as you said, Joseph, in today’s rate environment might be impossible without taking on undue risk.
And so again, it comes back to having the right conversations with investors, managing their expectations, and really sticking to your knitting. No matter what the environment is, do your risk appetite statements; do your model of underwriting; and stick to it, no matter what the landscape looks like.
Lawrence: Is there one deal that you always think about that’s your favorite deal?
Pino: Yeah. It’s interesting. The most rewarding thing for me anyway is when I see a property that we provided financing for, and I see the end product and the family that’s in there today, and that’s always very rewarding.
And I’ll always enjoy those moments. But if I think of the deals that stick in your mind, for me, it’s the deals that I didn’t do, and those stick because this is where you really learn. This is where you gain experience.
I’ll give you a real example, and I’ll leave names out… but I had the luxury of working with some knowledgeable and experienced people in this industry, and I remember some 20 years ago back in the day as an underwriter presenting a deal that I thought was very huge. And I probably got bitten by the fact that they said it was a pro athlete, a Canadian football player, played in the NFL.
And at the time of the application, he was actually between contracts. So the team that he was with had let him go. He was looking to hook up with another team and was looking for some financing in the meantime to acquire a new property.
So he’s looking for a refinance on a property that you can only imagine for me was a dream home. It came complete with probably over 8,000 square feet of living space, indoor/outdoor pool, 50-yard football field, putting greens, the whole nine yards, right? And so I’m not even 30 years old at the time.
And for me, I’m saying, “God, we could sell this all day long.” And the individual that I brought it to, I’ll never forget this, it was Gerald Soloway. I’ll give you that name, and as everyone knows, Gery is obviously the pioneer in our space.
And Gery said, “As nice as this property is, it’s unique. There’s not many buyers that would buy this type of property.” What’s interesting is we did not do the deal. The borrower himself never hooked on with another NFL, never signed another pro contract.
As far as I remember, the property ended up going to the power of sale and probably sold for about 70% of what the appraised value was at that time, so that’s a deal I will always remember because, I tell you, you can do as much due diligence as you want and fall in love with any particular deal, but there’s always a chance you’re going to make a mistake. And really, all you can do is just learn from your mistakes and re-look at your guidelines, your policies, and your risk appetite statements and make any amendments that you need to so you avoid that happening again.
Lawrence: I got a list of all the Canadian NFL players from 30 years, and I’m going to start reading them off one by one… I’m just joking. No, that’s a great story though.
And you know what? It just goes to show you that experience is everything in the business, right? Something that looks great from someone who’s new in the industry, an experienced guy will look at it and say, “Let’s think about this for a minute.”
So to have that experience that you have, it must give the investors that invest with your business that comfort to say, “I feel good about the 50 years of experience that the company has because they’re going to run into situations along the way, and more times than not, they’ve probably seen that situation before, so we’re not going to be in a scenario where something goes awry.” And not to say that things won’t over time because things happen… but having that experience, you can’t put a value on that.
Pino: Absolutely, and it never ends. You’re always learning. Even after 30 years, I’m still learning, and I think that’s the key to this business, right?
And why is that? Because the market’s always changing. The borrowers in this space are always changing. It’s a continual process.
Lawrence: So you deal with brokers mainly? Do you ever go direct to the consumer, or is it just mainly a broker type business?
Pino: Yeah, our residential products are predominantly for mortgage brokers. We do have direct products that we offer to consumers, but traditionally those are on the construction side. As I said, that’s a relationship type business. Those come to us directly and continue dealing with us on an annual basis.
Lawrence: So if brokers want to submit a file, who do they get in contact with? Do you have BDMs at the company? Who and where and how do they get in touch with Falcon Ridge?
Pino: Yeah, they can visit our website at falconridgemgmt.ca, and our entire team list is on there. They can reach out to me, Frank Femia, who’s our director of underwriting, any one of our mortgage officers. The whole team is readily available.
Lawrence: Very good. And if you want to just kind of give a little summary of Falcon Ridge, what kind of deals you’re mainly looking for? How do you work?
Pino: Yeah, that’s a great question. My view is this: you can’t be everything to everyone in this space, so brokers appreciate knowing exactly what you do so no one wastes any time. We lend up to 80% loan-to-value.
We lend in urban-suburban centers across Southern Ontario, including Ottawa. Like the first mortgage product, we have no restrictions on loan size or use of the property.
And I say that because it could be a principal residence; it could be a rental property; it could be a recreational property; it could be a small commercial property. So any one of those fits.
But the last piece is we’re looking for borrowers that literally just missed the bank, and they usually miss the bank because they have some challenges in meeting the income guidelines of those banks. We’re looking for strong credit quality, but we’re certainly much more flexible from an annual standpoint versus what the banks are.
Lawrence: Very good. Well, listen, you heard it here first if you’re listening. And maybe you’ve never dealt with Falcon Ridge before. What’s the harm of giving them a shot?
They’re going to get back to you. They’re going to let you know if it’s a deal that fits in their wheelhouse or not. And you can kind of learn as you go with them, but you’ve got to build your lender base.
So, Pino, I want to really thank you for stopping by and chatting with us today.
Pino: Well, I appreciate it. Thank you, guys. It was a lot of fun, and I hope to do it again really soon.
