Syndicated Mortgages - What you should know
As with all investments, there are risks
Return on Investment (ROI) on syndicated mortgages can be high, usually 8% annually or higher. But there are risk that every investor should know and consider before they decide to invest. Let us go over some of those risks with you.
For starters you should know that investments in syndicated mortgage are considered as high risk investment by FSCO. There is no insurance for money invested in syndicated mortgages. Therefore, mortgage brokerages must ensure that investors in syndicated mortgage investments understand potentials risks, such as:
No early withdrawals. It may be difficult, if not impossible, for investors to withdraw money early from a syndicate mortgage investment. The investor may need to find another investor to take over the syndicate mortgage investment. Typically, an investor is locked in for two to four, or even five years if there is delay in the project.
Construction loans carry additional risk. If a syndicate mortgage is for a construction loan, investors need to understand the current value of an undeveloped property and the projected value of the project upon completion.
Unforeseen circumstances. Investors need to understand what could happen if the project cost more than expected and the developer runs out of money and cannot complete the project.
Know the mortgage rank. Investors need to know whether the syndicate mortgage investment is a first, second or subsequent mortgage. Investors should also be aware if the position of this mortgage may change in the future.
Requirements to invest more money. Investors need to understand situations where they may be required to put in more money. For example, if the borrower defaults on the mortgage, investors may incur additional costs to take legal action against the borrower.
Check all the information upfront. FSCO warns that it is misleading to advertise syndicated mortgage investments if the advertisement fails to reflect the information that must be provided on the Investor/Lender Disclosure Statement. For example, it is misleading to advertise syndicated mortgage investments that promote the projected value of a completed construction project without also providing the project’s current value.
No guarantees. The MBLAA also prohibits a brokerage from guaranteeing a mortgage investment. This includes using the word "guarantee" and other words that may suggest to an investor that the investment is risk-free.
As part of our commitment to honesty transparency to our clients, we think it is important that you have this information before considering an investment in syndicated mortgages. We are always available if you have more questions or comments.
For more information, see the following links by FSCO:
Compliance Checklist for Mortgage Brokers, Brokers and Agents