How alternative lenders are adapting to falling house prices

With declining home values ​​and changing economic conditions, there is growing interest in how Canada’s alternative lenders are adapting.

Last month, Magenta Capital Corp. announced that it would temporarily stop taking new loan applications until September. And last week, The Globe and Mail reported that Fisgard Asset Management Corp. no longer offered funding for new construction in some provinces.

Both are mortgage investment companies (MICs), which belong to the alternative lender space and therefore have different underwriting and funding processes than chartered banks and other “A” lenders.

The current situation in Fisgard

Hali Noble, Senior Vice President of Residential Mortgage Investments and Broker Relations at Fisgard, sat down with CMT to explain the reasoning behind its changes to construction loans and the market dynamics at play.

“Construction financing requires a tremendous amount of due diligence and underwriting time. It’s a lot more complicated than your typical first or second residential mortgage, which is our core business,” she said, adding that home construction finance only represents about 5% of Fisgard’s total portfolio. .

“We and other mortgage investment companies have seen a huge increase in volumes over the past few years,” she added. “As a result, we at Fisgard have decided to focus on our core business and put construction financing aside for the time being.”

Noble said the change was made more than six weeks ago and some construction deals were still being approved and funded on a case-by-case basis.

Of course, changing market conditions also played a role in this decision, particularly when construction costs rose and values ​​fell, Noble said.

“Part of the underwriting process is getting a current market value of the ‘full’ home. Our appraisers provide us with a value based on what they think it will be worth in the current market,” she explained. “But of course, in 9 to 12 months, when the construction is finished, the value could be quite different, maybe lower than the forecast.”

Thus, a mortgage originally financed at a loan-to-value (LTV) ratio of 75% based on the completed appraisal could become an LTV ratio of 85% if prices fall by the time the project is completed. “It’s a liability,” added Noble. “It’s a matter of risk management.”

Noble noted that this isn’t the first time the company has adjusted its product offerings in response to changing market conditions.

“We have adjusted our construction program several times during Fisgard’s 28 years of operation,” she said. “We have been through many cycles in the market, some up and some down, and our job as a MIC manager is to make sure we are protecting our investors’ capital and making the right decisions. related to risks and market conditions.”

Lenders are more selective about how they deploy their money

Fisgard is not the only lender adapting to changing market conditions. Magenta Capital Corp., as noted above, is just another example, but many others will also have discussions about how best to deploy their limited capital.

At the start of the pandemic, many lenders stopped raising capital and went into a “defensive state” amid initial concerns about a housing market slowdown, said Dean Koeller, president of the Canadian Association of Alternative Mortgage Lenders (CAMLA) and President of Calvert Home Mortgage Investment Company.

But when demand for real estate subsequently increased, Koeller said the industry moved quickly to fill that funding gap.

“But there’s a natural cycle between how much money you put into mortgages a month and when those mortgages are going to be paid off,” he told CMT. “What’s probably happening for most funds today is that their monthly installments haven’t caught up to the amount of funding demand we’re seeing in the market right now.”

“It creates a crunch in the availability of liquidity, so funds have to make careful decisions about how they are going to invest their investors’ capital, and it certainly tightens the product category,” he added.

Not only are some lenders restricting their product offering, but some will also tighten the loan-to-value ratio.

At Fisgard, the average LTV of its residential mortgage portfolio is just under 54%, Noble said, giving the company some protection against falling valuations. However, she added that there may be MICs and individual private lenders who have lent at 85% or 90% LTV, or in small communities or rural communities, who will “look very closely at their mortgage offers and their wallets right now.”

The arrears rate remains low for the time being

Another factor currently reassuring lenders is a historically low arrears rate.
Data released recently by the Canada Mortgage and Housing Corporation showed that non-bank lenders had just 0.23% of their portfolio overdue by 90 days or more in the fourth quarter of 2021, compared to 0.26% in third quarter 2020. Mortgage Investment Entities had an average arrears rate of 1.38%, compared to 1.79%.

Fisgard’s Noble said that of the more than 600 mortgages in Fisgard Capital Corporation’s portfolio, only one is in default and one is in foreclosure.

“We manage our products and our risks appropriately,” she said. “Are we expecting to see a few more flaws? Maybe. But Canadians inherently want to protect their homes and pay their mortgages, and we will continue to diligently monitor the economy and real estate markets.

Koeller agrees that the industry as a whole will likely see a return to a more normalized arrears rate in the coming year from today’s record high rates.

“We’re going to see increases over the next year and probably more in a normal category as opposed to what we saw in 2008 where the losses were quite significant,” he said. “There’s just going to be normalization, so I don’t expect to see a lot of industry failures as a result of what we’re seeing today.”

For any Mortgage Broker who may have questions or concerns regarding the alternative lender they are dealing with, Noble recommends speaking directly to the Business Development Managers representing those lenders.

“Ask them questions,” she says. “We’d be more than happy to dispel any rumors or let you know what’s going on with our businesses and why, and that’s really important. Go straight to the source and educate yourself.

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