Non-bank lenders attract wave of money, CMHC report on mortgages says

[Globe and Mail – July 16, 2019]

Mortgage Investment Corporations have provided billions of dollars in new lending to Canadian home buyers since 2016 as tougher mortgage qualification rules have driven far more business to private lenders, according to a new report from Canada’s national housing agency.

Canada Mortgage and Housing Corp. released data Tuesday from its first survey of Mortgage Investment Corporations (MICs), which are companies that raise financing for mortgages from pools of investors.

CMHC said a sample of 100 large MICs shows their value of total outstanding mortgage loans climbed by 63 per cent between 2016 and 2018. Canada’s 10 largest MICs had $6.3-billion in assets under management at the end of 2018, up 61 per cent from 3.9-billion two years earlier.

The housing agency estimates the value of mortgages provided by all MICs combined soared to between $13-billion and $14-billion in 2018 from an estimated $8-billion to $10-billion in 2016 as home-buyer demand climbed.

Federal regulators introduced a mortgage stress test for insured mortgages in late 2016 and for uninsured mortgages on Jan. 1, 2018, making it harder for home buyers to qualify for loans. The move pushed more buyers to turn to alternative lenders like MICs, which are not subject to the stress-test rules.

MICs lend to home buyers who cannot qualify for conventional mortgages from banks, typically charging higher interest interest rates. While many MICs are registered with provincial securities commissions because they raise funds from investors, their lending practices are not regulated.

Tania Bourassa-Ochoa, a CMHC specialist in housing research, said the agency’s new mortgage market report fills some of the data gaps in Canada about the mortgage lending sector. One area where data has been scarce is in the growth of private lenders, including companies such as MICs and other private lenders.

CMHC estimates MICs and other large corporations that do private lending held about 1 per cent of outstanding mortgages in Canada in the fourth quarter of 2018, and about 4 per cent of all outstanding uninsured mortgages, which are mortgages in which the buyer did not have a 20-per-cent down payment.

However, the report said the lenders accounted for 7 per cent of all new mortgages provided in the fourth quarter of last year.

Ms. Bourrassa-Ochoa said the fact that the market share of new mortgages is higher than level of total outstanding mortgages is due in part to the fact that private lenders offer shorter-term loans, typically six months to two years.

“Because of those shorter-term loans, it’s normal to see more flows, more new mortgages coming in,” she said. “That said, it is also suggesting that their share in that space is growing as well.”

The report did not provide data below the national level, but Ms. Bourassa-Ochoa said MICs are primarily concentrated in large cities such as Toronto and Vancouver, so it is likely their market share is higher in those markets. She said CMHC plans to issue regular mortgage market reports in the future, so more detailed data will be added down the road.

“There are a lot of differences from region to region,” she said.

CMHC’s review concluded there were between 200 and 300 active MICs in Canada in 2018, which provided mortgage loans with terms ranging from six months to two years.

The average interest rate charged by MICs fell to 8.99 per cent in 2018 from 9.67 per cent in 2016 as the sector has become more competitive. But CMHC said there is a wide range of interest rates depending on the riskiness of the borrower. Mortgage interest rates ranged from 7.3 per cent to 11 per cent in 2018, while the spread was broader in 2016, ranging from 4.5 per cent to 15 per cent.

CMHC said it conducted three round table events with MICs and private lenders last year, and participants said their typical clients were the self-employed, entrepreneurs, real estate investors, and borrowers with short-term cash needs because of factors such as bad credit, divorce or health issues.

Many lenders reported they have seen a “marked increase” in the quality of borrowers turning to MICs for loans since the stress test was introduced.

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