Tier 2: The Mortgage Industry's, Private Equity Mortgage Sub-Sector

The non-institutional, non-syndicated, non-regulated, free-trading, private equity mortgage capital market & an introduction to what is peer-to-peer and private lending

Tier 2: A Capital Market Industry of its Own

When referencing the non-institutional, non-syndicated, non-regulated, real estate debt industry, the Private Equity Mortgage Institute applies the term: Tier 2. Tier 2 is more than a term. It distinguishes a specific industry sub-sector of its own.

Finance: Financial Intermediaries - Financial Markets

The world's economies consist various capital supply components. Two important components are the financial intermediaries and the financial markets. Financial intermediaries are best identified as banks, credit unions, insurance companies and related institutions. Financial markets are where people and corporations are able to trade assets [monetary (capital) and non-monetary (goods, commodities)] with one another.

Raising Capital

One feature of the financial intermediaries and the financial markets is to enable parties to raise capital in the form of debt or equity. Debt (loan) occurs when one party (lender - bank or capital market entity) exchanges money with an owner of an asset (borrower - individual or corporation) and in exchange, the party who provided the money, is granted the right to secure the asset as collateral until such time as the principal money is repaid with an interest premium. In the event of default by the borrower, the lender has the right to seize or sell the collateral in order to retire the debt obligation. Equity occurs when the owner of an asset grants ownership rights to another party (bank or capital market entity) in exchange for money.

The difference between the financial intermediaries and the financial markets is that the former is regulated by national and international governing bodies to a greater degree than the latter. As a direct result of rigorous regulatory oversight, financial intermediaries tend to be very conservative in their approach towards business. Moreover, financial intermediary transactions (loans, mortgages, investments) are not traded in a secondary environment whereas financial market instruments are. Finally, financial intermediaries are less expansive than financial markets, which include capital markets, derivative markets, commodity markets, money markets, currency markets and more.

Two Tiers of Bank Capital

One feature specific to the banking sub-sector of financial intermediaries, is the requirement to maintain a level of regulatory capital (a percentage of their over-all assets) called Tier 1 and Tier 2 regulatory capital. The tiers were defined in the Basel II Accord, issued by the international Basel Committee on Banking Supervision. The Accord describes recommended standards of practice for banks, internationally. In the banking sector, the difference between Tier 1 and Tier 2 regulatory capital is that Tier 2 is subordinate and supplementary to Tier 1 regulatory capital.

Two Tiers of Finance: Tier 1 & Tier 2

At a macro-level, the regulated sectors of both financial intermediaries and financial markets can be considered as Tier 1 capital suppliers. Tier 1 capital suppliers are those entities that are regulated by governing bodies and are considered the primary source of such services within a country's economic framework. In the case that a Tier 1 capital supplier is unable to supply capital, then consumers of capital have the option to seek capital from the Tier 2 market. Tier 2 capital suppliers consist of entities that are classified as: non-institutional, non-syndicated and non-regulated. Tier 2 capital suppliers possess privately held capital that is free-trading.

Debt & Mortgages

One form of financial capital is debt. Debt is a financial obligation (loan) secured with an asset by way of a legal instrument (written contract). When the asset used as security is real estate, the debt instrument is called a mortgage. The mortgage sector is complex with rules and a sub-market of its own.

Two Tiers of Mortgage Capital

One feature specific to the mortgage market sector is that different types of lenders serve different types of borrowers, based upon differing segments within the mortgage market. There are multiple segments within the mortgage market with no uniform classification system to define any one segment. Two segments of interest are Tier 1 and Tier 2. The Tier 1 mortgage industry segment consists of borrowers who work with lenders that are classified as Banks, or other regulated major financial institutions. Tier 1 lenders also include financial intermediaries, credit unions, mortgage investment companies, syndicated mortgage pools or other regulated credit granting bodies.

Tier 2 Mortgage Industry Sub-Sector

Within the mortgage (debt) industry, there are normally three groups of participants: banks/near-banks, non-banks and private equity mortgage lenders. It is important to distinguish and understand the difference between non-private and private mortgages. Banks and non-/near-banks are highly regulated mortgage lending entities whose lending processes are constrained by legislation or other rules. Private equity mortgage lenders (also known as private lenders), Individual mortgage investor-lenders (also known as peer-to-peer lenders) have no such regulations and are free to lend as they please.

Technically, investors or Lenders who trade in private equity mortgage instruments included wealth management departments of banks, but are typically private individuals or organizations classified as: non-bank, non-institutional, non-syndicated, non-regulated or regulatory exempt and free trading; also known as Peer-to-Peer (P2P)/Private/Crypto/Secret/Shadow mortgage investor-lenders.

A purely private^TM finance transaction is normally considered "free trading" and does not require the rigorous disclosures that accompany publically funding (pooled/syndicated) transactions. This private, free trading capital market is the segment known as Tier 2.

Additionally, private equity mortgages are not the same as typical mortgages. One of the main differences are that rates and terms are more than what a bank or trust company would be posting. Another difference is that private equity mortgage lenders are willing to assume a higher degree of risk than traditional lenders. Consumers will go to the private equity mortgage sector when the traditional lenders simply cannot compete. Our research section has several reports that explore this subject.

The trade in private equity mortgages are a distinct sub-sector within a country's mortgage industry and for safety's sake, it is recommended that private equity mortgage transactions are conducted primarily through specially trained licensed mortgage brokerages, who have sufficient professional liability insurance to cover their private equity mortgage activity, in the event of a claim of negligence.

Tier 2 Certified Mortgage Broker and Agent

Tier 2 certified mortgage brokers (T2MB) are those licensed mortgage brokers who are specially trained in the business of private equity mortgage transactions, act for the lender or private equity mortgage lender, have sufficient professional liability insurance to protect them in the event of a claim of negligence, have systems in place that allow them to Beat or Bypass^TM their jurisdiction's banking system and have retained employees or agents with the Qualified Private Equity Mortgage Advisor (Q-PEM®-A) designation. Click here to learn more about Tier 2 certified mortgage brokers.

Licensed to Beat or Bypass^TM

The Private Equity Mortgage Institute licenses it's Beat or Bypass® trademark to licensed mortgage brokers who fulfill the requirements of T2MB and retail licensed mortgage agents who have earned the Q-PEM®-A designation. Licensure ensures that the public will not be negatively, materially affected by inexperienced or incompetent mortgage brokers.