Category Archives: private lending

Shadow Lending Growing as Canadians Chase Housing Dream

Mortgage broker Samantha Brookes is trying to figure out how to get one of her clients out of a housing-fueled debt hole.

The couple, a 59-year-old Toronto city worker and her husband, 58, have so much debt that they stopped making payments on the C$410,000 ($318,000) mortgage for their suburban home. They wanted to refinance but regulations imposed last year will disqualify them. In a few weeks, they won’t even qualify for an uninsured loan at an alternative lender as more rules come into effect.

They opted for a third route: adding a second mortgage with an interest rate of 10.5 percent to pay off their debt. Their salvation came from a private unregulated lender, a move many other Canadians are making as the government tries to rein in a home-price surge that’s driven household debt to a record. But like a giant game of Whac-A-Mole, the risk to the financial system from tapped out borrowers is merely shifting — this time to a market where there’s no oversight from the country’s national bank regulator and new stress-test rules don’t apply.

“We’re transferring risk from the regulated segment to the unregulated segment of the market,” Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said by phone from Toronto. “If we have a significant correction, clearly the unregulated markets will suffer even more because that’s where the first casualties would be. And then you will see it elsewhere.”

Erik Hertzberg / Bloomberg

Brookes says more than 90 percent of her business in the last two months has been lining up funding from non-bank and private sources, or shadow banks — versus a 50-50 mix previously. “People aren’t going to stop buying, they’ll just find different ways of doing it.”

For the government, it may be a case of careful what you wish for. Anxious to prevent a repeat of the kind of taxpayer-funded bank bailouts that occurred in the U.S. after its housing crash a decade ago, the federal government has been moving to reduce its exposure to the mortgage-insurance market.

Read More: Canada’s Bank Regulator Toughens Mortgage Qualifying Rules

Rules last year added a stress test for insured loans backed by the government. That sent more buyers to the uninsured space, where a 20 percent down payment is required. As of Jan. 1, these borrowers will also need to qualify at a rate two percentage points higher than their offered rate, a move which could lower mortgage creation by as much as 15 percent, Canada’s bank regulator has said.

Earlier changes have already had a dramatic effect. Uninsured mortgages made up about three-quarters of new loans at federally regulated banks this year, up from two-thirds in 2014, according to the Bank of Canada. Roughly 90 percent of new mortgages in Toronto and Vancouver this year are now uninsured, in part because government insurance is forbidden on homes priced over C$1 million ($780,000) and prices have risen, the bank said.

Initial Bite

On the one hand, taxpayer risk has dropped as insured mortgage origination fell 17 percent in the second quarter compared with a year earlier, the bank said in its semi-annual financial system review. About 49 percent of all outstanding mortgages are now uninsured, up from 36 percent five years ago. The credit quality of some of the loans at the big banks have also improved as borrowers buy less expensive homes, the Bank of Canada said.

The rules, along with other measures such as a foreign-purchase tax, have had an initial bite — with Toronto house prices falling 8.8 percent from May to November and the average price of a home posting the first annual drop since 2009. Vancouver prices have reclaimed new heights after cooling earlier this year.

But the risks to the financial system haven’t gone away. In the uninsured space, mortgages are increasingly going to highly indebted households and for amortizations for longer than 25 years, the central bank said. And like Brookes’s clients drowning in house debt, more borrowers are turning to lenders whose activities fall outside federal regulatory scope.

These include credit unions and mortgage-investment corporations, pools of money from individual shareholders, which aren’t subject to the new rules, Tal said. Credit unions hold about 17 percent of uninsured mortgages, according to the Bank of Canada.

‘Sub-Optimal’

Canada’s patchwork regulatory system also doesn’t encourage comfort, Tal said. Banks are regulated by the Office of the Superintendent of Financial Institutions, but credit unions and brokerages are overseen provincially. Mortgage-finance companies are semi-regulated, and MICs and other private lenders are unregulated.

MICs currently make up about 10 percent of mortgage transaction volume, or 6 percent of dollar volume, according to research from Tal at CIBC said. Transaction volume will likely grow to about 14 percent under the new rules, and in the event of defaults in a housing correction, those MIC investors would be open to losses, he said.

“Anything over 10 percent is sub-optimal,” he said. “You don’t want this market to be too big because you don’t want to increase the blind spots.”

Sound underwriting is an important element in maintaining a strong and stable Canadian financial system and OSFI will continue to monitor the country’s housing and mortgage markets under the new rules, Annik Faucher, spokeswoman for Ottawa-based organization said in an email.

Need Solutions

Like her clients, Brookes said borrowers will get creative to get around the new rules. Options include companies like Alta West Capital, Fisgard Asset Management Corp. and Brookstreet Mortgage Investment Corp. or just a wealthy individual willing to lend at interest rates starting around 12 percent.

Fisgard didn’t respond to request for comment, Brookstreet declined to comment while Chuck McKitrick, chief executive officer at Calgary-based Alta West said MICs are regulated by the country’s securities commissions and various real estate bodies.

“We’re scrutinized a hundred different ways,” said McKitrick. “There’s very little difference between us and other regulated entities.”

Despite the expectation that MICs will see more business, McKitrick said the big financial institutions will adapt to new regulations to keep lending. Shawn Stillman, a mortgage broker at Mortgage Outlet Inc., said banks could lower their mortgage rates so homebuyers would still qualify under the new stress-test rules.

“The bank doesn’t care because they’re still going to make their fees and get their money,” Stillman said by phone from Toronto.

Alta West predominantly lends to entrepreneurs and new Canadians, groups that typically have a harder time getting a mortgage at one of the big banks. Its rate of mortgages in arrears is about 2 percent, he said. That compares with about 0.2 percent at the big banks and about 0.4 percent for the credit unions, according to data compiled by the Canadian Credit Union Association.

“People need solutions — it could be temporary, but at least they have a home over their head,” Brookes said.

Source: Bloomberg.com – By Allison McNeely and Katia Dmitrieva 

Advertisements
Tagged , , , ,

Can’t Get a Bank Mortgage? How Do Private Mortgages Work?

Not everyone can qualify for a mortgage these days. Government regulations targeting down payments, investment properties and high-ratio buyers mean that more Canadians won’t qualify for a home loan.

It’s often said that housing is the bedrock of the Canadian economy. But for years, federal regulations have clamped down on the ability to qualify for a mortgage. The self-employed, individuals living in rural areas and those with past credit troubles have long struggled with home financing. Now that struggle is extending to other segments of the population.

Against this backdrop, more and more Canadians are turning to private mortgage lenders for their home financing needs. Although many borrowers think of private mortgages as a last-resort option, they are a viable option for many people.

Private Mortgage Lenders Operate Differently from Banks

A private mortgage is simply a home loan offered by an individual or company other than a bank or traditional finance provider.

One of the biggest benefits of working with a private lender is they operate differently from traditional banks on many levels. Since they get their money through individual investors or groups of investors, they have the freedom to set their own lending criteria. This means they are more flexible in the application process and don’t have to deal with the stringent guidelines set forth by the major institutions. This means that if your situation falls outside conventional lending guidelines, a private mortgage could be your best bet.

Private mortgages are often suitable if you:

  • Are self-employed
  • Want to purchase raw land or unique property
  • Have less than ideal credit
  • Want to invest in real estate
  • Need access to equity in your home, but don’t want to refinance your first bank mortgage due to excessive penalties
  • Need to consolidate high interest rate debt
  • Are looking to renovate existing property
  • Looking for a short-term loan

How Private Mortgages Work

If you’re exploring a private mortgage, the first step is to seek out a broker who provides alternative lending services. The broker will assess your situation and determine if you are eligible for a loan. In particular, they will assess your ability to make the loan payments on time.

From there, the broker will then search for the best mortgage solution that meets your specific needs. They will then structure the deal and put in place an exit strategy so that you know how long the private mortgage will last.

It’s important to note that private lenders usually lend on location. That’s because private mortgages are uninsured, which means the lender falls back on the property should a default occur. That’s why location of the property is extremely vital in determining whether you qualify for a private mortgage and the rate that you’re offered.

Broker fees and legal fees generally apply when securing a private mortgage.

Private mortgages are growing in popularity as more borrowers fall outside the traditional lending guidelines set forth by the major banks. The good news is there are plenty of options for those looking for an alternative lending solution to finance their next property or major purchase.

Source: Canada Mortgages Inc. – 1 September, 2017 / by Sam Bourgi

Tagged , , , ,

Shadow mortgage lending on the rise as house prices soar

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank.

Canada’s housing boom is increasingly driving homebuyers to seek mortgages from private lenders, who demand rates that can be more than five times higher than those charged by the nation’s banks.

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank house price index. At the same time, Canadian banks have become more conservative and regulators are making it harder to lend, giving rise to an alternative market, including Canadians who refinance their own homes at low rates and then use the money to become mortgage lenders themselves.

Some analysts say a housing investment is increasingly risky because the pace of price increases has vastly outstripped wage growth, all amid a time of historically low interest rates and record debt levels. If and when interest rates rise, the concern is that consumers would have little ability to increase their payments, because they have so much debt.

“The risk arises if the unintended consequence of regulation is to push out the risk profile of the less regulated sector, and to encourage it to grow quickly at the same time,” said Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute.

“In dollar terms it is not a huge part of the economy (but) my concern is that we pay attention, because small problems sometimes get unexpectedly large, and quickly so.”

Mortgage broker Lou Perrotta said that in terms of volume, 20 per cent to 30 per cent of the mortgages he puts together are now privately financed, typically because borrowers are declined for a bank loan for reasons like a low credit rating or unsteady income. That represents about $4 million to $5 million of the $20 million of mortgage business he does annually, he said.

“Business is brisk, without question. (It has) probably tripled in the past three years,” said Perrotta, president of Domus Financial Corp in Toronto, where house prices have increased by 55 per cent in the last six years.

‘It’s not for the faint of heart’

Perrotta acts as a matchmaker between individuals who have money to lend – and who are seeking higher rates of return than can be had in stocks or bonds – and borrowers who are willing to pay a higher mortgage rate to get into the market.

He also invests his own money, lending between $25,000 and $250,000 each to “five or six” borrowers a year who offer a good balance between risk and return.

“It’s not for the faint of heart, and you need to understand the dynamics of real estate,” Perrotta said.

One private lender, who asked not to be named because she is close to the real estate market and fears hurting her business, took out a C$400,000 mortgage on her paid-off home at 2.49 per cent and then gave that money to a broker that lent it to a borrower at a higher rate, for a fee.

“Who the hell is going to give me 9 per cent return?” said the lender, who said she has recourse to the borrower’s assets if he defaults.

Shadow lending ‘growing very fast’

CIBC senior economist Benjamin Tal said the shadow lending market represents about 4 to 5 per cent of Canada’s overall mortgage market.

“This is something that is growing very fast, because many borrowers are not having access to banks because the banks are highly regulated,” said Tal.

In Ontario, Canada’s most populous province, private lending accounts for about 4 per cent of new mortgage originations, or $1.1 billion, or 2 per cent, of total mortgage lending by dollar value, according to Teranet.

While that’s a fraction of the sub-prime lending that got the U.S. housing market into trouble seven years ago, analysts are concerned that the market is growing rapidly and may be concentrated in hot housing markets such as Toronto and Vancouver where a sudden downturn could take hold.

Legal practice

The practice is legal, and can be done through a person-to-person loan, in which the lender is named as a lienholder on the mortgage, or through a Mortgage Investment Corp, in which investors can pool their money to lend to those who either don’t qualify for a traditional loan.

While major Canadian lenders offer five-year fixed mortgage rates at about 2.5 per cent to qualified borrowers, rates in the private market range between 7 per cent and 15 per cent, one mortgage broker said.

Traditional lenders also send business to alternative lenders, feeding the pipeline.

Royal Bank of Canada, the country’s biggest bank, said when a client does not qualify for a mortgage, the bank will recommend an alternate lender, which may include a trust company, a mortgage broker or a private mortgage corporation, an RBC spokesman said in a statement.

Canada’s financial system regulator, the Office of the Superintendent of Financial Institutions, said it monitors the alternative mortgage market but would not comment on its size, whether it was growing or whether OSFI had any concerns.

Anthony Croll, vice president of Individual Investment Corporation, a Montreal-based private lender that has been in business since 1958, said he’s seen a rise in the number of small private lenders over the last few years competing with the 10 per cent to 12 per cent interest his company would charge.

He also thinks inexperienced lenders may be underestimating the risks associated with non-payment of a loan.

“Occasionally an accountant or someone else has said – after hearing about our rates, or what the deal is – ‘I can do that myself,'” Croll said. “But you know everything is easy and fine to do until you have a problem.”

Source: By Andrea Hopkins, Thomson Reuters Posted: Jul 09, 2015 2:36 AM ET