Lender of Last Resort Keeps Canadian Home Buying Dreams Alive

(Bloomberg) -- 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. 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.”

Business Boost

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 percent of all outstanding mortgages were uninsured at the end of last year, up from 36 percent five years ago. And the housing market in Toronto, Canada’s biggest city, has abruptly slowed, with average prices plunging 14 percent in March from a year earlier, the biggest drop since 1991.

Sure Bet

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 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. Single-family mortgage lending currently makes up about 15 percent of the company’s business. The company has about C$1.3 billion ($1 billion) in mortgage assets, including C$562 million in its publicly traded mortgage investment corporation at Dec. 31.

MICs will likely grow to about 14 percent of transaction volume in Canada under new the new mortgage rules from about 10 percent now, according to research from Canadian Imperial Bank of Commerce last year.

One Hour

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 percent, compared with about 3 percent 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.

Unlike the traditional bank lenders, Firm Capital doesn’t focus on a prospective borrower’s credit score when considering a residential mortgage deal, lending primarily on asset value, Dadouch said. They also rely on borrower integrity when dealing with builders and developers, making a decision within an hour about whether or not they’ll be willing to extend credit, he said. They’ll do one deal in 10 that they’re shown, Dadouch said.

“We have no pressure to lend money for the sake of lending money,” he said. “When your commodity is cash, they’ll come to you wherever you are.”

Art Financing

Firm Capital has sold a handful of real estate projects in the last 10 years after borrowers couldn’t pay. He can’t remember the last time they had to sell a single-family home to recoup their investment, he said.

“We honor every commitment we give,” he said. “We will work with a good guy who runs into trouble.”

The company provides first mortgages, secondary debt, mezzanine and equity financing in transactions anywhere from C$1 million to C$50 million for builders and developers, Dadouch said. But they’re willing to go higher -- the company provided a first mortgage for C$147 million to finance the construction of Canada’s tallest condo tower, The One, located in Toronto’s upscale Yorkville neighborhood. They also have a small art finance business, a nod to Dadouch’s passion.

Last Resort

“They’re very entrepreneurial, flexible, and creative in the types of deals they do,” Michael McTaggart, a partner in PwC’s corporate advisory and restructuring group, said by phone from Toronto. “When I go up there, I do my homework.”

The company counts former Canadian Finance Minister Joe Oliver and Frank Newbould, a retired judge who oversaw high-profile bankruptcies like Nortel Networks Corp., among its board of directors.

There’s no question Firm Capital would be considered a lender of last resort for a home buyer given the punitive fees that mortgage investment corporations can levy, sometimes around 20 percent all-in, including other professional fees, said Shawn Stillman, a broker at Mortgage Outlet. Nevertheless, he’s seeing greater demand for mortgage investment corporations from his clients that have been shut out of the housing market due to the new regulation, he said.

“Would they be the first lender I would go with? Absolutely not,” Stillman said by phone from Toronto. “But if there wasn’t this demand for the money, they wouldn’t be in business.”

Dadouch doesn’t disagree: “Nobody deals with us, or any other MIC out there, because they like any of us,” he said. “They come to us because there’s a story.”

To contact the reporter on this story: Allison McNeely in Toronto at amcneely@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net, Jacqueline Thorpe

©2018 Bloomberg L.P.