Risky business: popularity of alternative mortgage lenders increased in 2018

A rising number of homebuyers in Canada are turning to alternative lenders for a mortgage, says the Canada Mortgage and Housing Corporation (CMHC).

Mortgage investment corporations (MICs) held between $13 and $14 billion of outstanding mortgages in Canada in 2018, capturing one per cent of the market share, according to a CMHC report.

Banks led all types of lenders last year, capturing 75 per cent of the market share, followed by credit unions with 14 per cent and mortgage finance companies with six per cent.
Activity by MICs in 2018 was up from a market of between $11 and $12 billion in 2017, and one between $8 and $10 billion in 2016.

"We are finding this segment of the market is growing," said Tania Bourassa-Ochoa, senior economics specialist at CMHC.

MICs typically offer shorter-term, high-interest loans – averaging between seven and 15 per cent last year – and work with higher-risk clients. There were 200 to 300 MICs operating in Canada last year.

"They're transferring risk from the regulated segment of the market to the unregulated segment of the market," said Benjamin Tal, CIBC's deputy chief economist. "They're transferring risk from where there's light to where it is dark. That's something to be aware of."

In 2018, CMHC held a series of roundtable discussions with active members in the alternative lending segment.

"These lenders have said ... and we don't have any data to back that up for now, since the last (regulation changes) they have seen an increase in activity on their side, and they've also seen the quality of the borrowers increasing," said Bourassa-Ochoa.

"They're transferring risk from where there's light to where it is dark. That's something to be aware of." - Benjamin Tal, CIBC deputy chief economist

The mortgage stress test introduced in 2018 for uninsured mortgages – which requires borrowers to qualify at the higher figure between the Bank of Canada five-year benchmark rate and two per cent above the contracted mortgage rate – is one factor that might be leading Canadians to consider alternative lenders. The stress test is not required for borrowers who opt for an alternative-lender.

"(Alternative lenders) told us last year when we were holding these events that they did see a correlation," said Bourassa-Ochoa. "To what extent that is the cause is not clear for now.

"You also have people who have specific financial situations, either they have bad credit or not a lot of credit history. It could also be life events, health issues, divorces. You also have to take into account there are just scenarios why people would go to these alternative lenders."

The average mortgage through MICs and private lenders last year was $194,760. This segment's delinquency rate of 1.93 per cent was the highest of any lender segment in the report. Banks averaged just 0.24 per cent.

"What's really important to us is we're going to be wanting to monitor how this delinquency rate and the other metrics – performance metrics and risk metrics – are evolving through time," said Bourassa-Ochoa. "This is going to give us a clearer understanding of what's going on and the implications on the financial system in Canada."

The report also shows that 2018 posted the slowest growth rate of mortgage origination in a quarter of a century. Bourassa-Ochoa points to regulation changes at all levels of government – including the stress test – as potential causes.

"In 2018, not so much the case this year, there were rising interest rates that had a play, as well, and softening housing markets," she said. "All of these factors combined did contribute to a decline in new mortgages, which has then resulted in a slowdown in mortgage debt in Canada."