Call us: 1 647 808 5512

Syndicated mortgages: Proceed with care

Recent headlines were rife with news about a group of Chinese Canadian investors who lost $9.0 million dollars investing in a rather well known investment product called syndicated mortgages. These headlines hit home since I have clients who made similar investments prior to coming over to Vulcan. Most of them lost the entire value of their syndicated mortgage investments.

Syndicated mortgages are unsecured loans generally raised by property developers. These are typically second or third mortgages on a particular property, which means that though in theory the funds are secured against property the investors claim is very weak as there will other senior claims against the property from banks, first mortgage holders and construction trade claims. Syndicated mortgages are typically sold through financial advisors who receive a high level of commission from these developers. These products were once sold only to sophisticated high net worth investors and not to any and every individual investor. Unfortunately there is little by way of regulation of these products, and even less by way of readily available information on the riskiness of the projects they relate to.

So given the high level of risk why do investors get into these products? One reason is pushy investment advisors who look to their own interest and the high level of commissions these investments generate for them. In many cases advisors have been known to arrange loans for these investors (earning a commission in the process) and investing the borrowed funds into syndicated mortgages, which generate additional commission. This leaves the investor saddled with the risk of losing their money in syndicated mortgages and still being obligated to repay the loan. Second, syndicated mortgages pay a high level of interest to investors, typically over 8.0% per year which proves irresistible especially in the current low interest rate environment. Third, there is a false sense of security for many people when it comes to real estate, the assumption is that since it is a tangible asset it must be safe. Investors do not realize that real estate is extremely risky since it is not easily converted to cash more so when a project is still under construction. Most of the losses in syndicated mortgages occur before the project is completed.

Studies have shown that only a very small percentage of people question their doctors and likely an even smaller percentage of people question their financial advisors. While syndicated mortgage as a investment product is perfectly legal and not all deals go bad, investors should do their own due diligence and start asking probing questions of their advisors instead of blindly trusting their recommendations which may not be in their financial interest.

Leave a Reply