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Daniels told me that there is now a booming private mortgage market in which ordinary citizens are borrowing from their home equity lines to lend money to desperate borrowers. Specifically, he noted “a homeowner acts as a subprime lender by drawing his home equity line at ~3%, and lends it to a subprime borrower at 8-12% for one year.”
I honestly didn’t believe him when he first mentioned this to me, but I then confirmed it myself. In fact, if you’re a Canadian and interested, here’s a sales pitch from one vendor. It’s only a matter of time before this shadow mortgage banking market slows, and the ramifications are likely to be enormous as defaults skyrocket, housing prices plummet, and consumer spending rapidly slows.
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I do lots of private lending in this spoooooky "shadow maket". I can't find any stats but I have been involved in looking for deals on a daily basis for several years. I look high and low, I use mortgage brokers, lending corps, kijiji, and by far the majority of the borrowers in the secondary market are non traditional borrowers....mosly people with land developments, building projects, commercial projects, stuff that normal banks won't touch. Very few deals come along with average Joe's trying to buy a home to live in and other average Joe's borrowing from their LOC's to lend.
In most cases, actually probably almost all cases, the qualifying terms for these deals are way more strict than any bank would ever create. Usually you need lower loan to value ratios (more cash from the borrower) personal guarantees, better credit, corporate security, normally part of the loan is held back to pay the interest payments so the borrower can not default in the first year.
The majority of the deals involve the borrower using the money to improve the land or building thus adding to the value of the property. So your risk goes down as the projects grows.
And most importantly, if you invest in private mortgages with a third party broker in Alberta, you have to be an acredited investor...have over a million in liquid assets or 250k a year in income. So average people borrowing off their LOC's to invest are not allowed to participate in this market. Sure, they can find a deal on their own, arrange the application and do the paper work, etc but that is not common. Most private lenders have to have enough dough to own the deals they've lent money on. Anyway, there's a diffrence between "sub prime" lending and private lending. I assure you the "shadow market" isn't American style predatory lending.
And I also think it's a mistake to not look at your house as an investment. If you have so much money that it doesn't matter, then great. Don't look at it as an investment. But the reality is, it is an investment and not treating it as such will cost you for no reason.