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FSRA High Risk Syndicated Mortgages

Letter Summary:

FSRA is seeking feedback on a proposed supervision approach to address the risks related to syndicated mortgages for retail investors. The notice includes the use of a proposed additional disclosure form to investors (who do not fall with a designated class), meant to highlight the risks typical of such investments, including high loan-to-value ratios, subordination and conflicts. Similar to other disclosure forms, once completed the form will need to be filed with FSRA for its monitoring purposes in real time. 

Overview of the Council’s Comments:

The council supports the targeted approach to concentrate resources on investments that could put retail investors at the highest risk of loss. The description of the red flags found by FSRA based on its analysis of past transactions is particularly helpful in understanding the policy rationale for the Proposal. We specifically commented on the red flags as follows:

• One of the red flags identified by FSRA is a high Loan-to-Value (LTV) ratio. In addition to the LTV ratio, we believe that for construction loans the Loan-to-Cost (LTC) ratio should also be disclosed, as it may be more objective of the level of risk associated with commercial real estate debt investments.

• The second red flag identified is the existence of a subordination clause. The importance of the potential impact of the subordination clause may not be fully appreciated by all retail investors that invest in junior mortgages and thus, we propose that a further requirement to explain the ramifications of the clause could be considered.

• The third red flag is the existence of a conflict of interest where the borrower or developer is related to the mortgage administrator and thus the administrator may not properly represent the interests of investors against the borrower. We are of the view that the description of conflicts and the risk of conflicts (and potential conflicts) should be more broad and consider other conflicts that investors would want to know, including any potential conflicts with the appraiser.

We are also broadly supportive of requiring additional information to be provided to retail investors for riskier investment opportunities. The description of the appraisal of the property being financed in the proposed forms could be enhanced with disclosure that addresses the risk of the assumptions that may be used in the valuation, or changes to those assumptions (such as the effect of a change in the discount rate used in the valuation).