Alternative mortgage companies are increasingly providing riskier loans, a new report from the national housing agency says.
Among large mortgage investment corporations and mortgage investment entities, the percentage of first mortgages in their portfolios fell from 88 per cent in 2017 to 77 per cent in 2018, said Canada Mortgage and Housing Corp. (CMHC).
That means a greater share of their portfolios are second or third mortgages, which are riskier than the original mortgage on the property, CMHC said. If a borrower defaults on their debt, the original or first mortgage will get paid before the second and third.
“We are seeing they are taking a bit more risk,” said Tania Bourassa-Ochoa, a senior housing researcher with CMHC.
The portfolio composition of alternative lenders has changed as it has become more difficult for borrowers to get a loan from a bank. The federal government’s mortgage stress test on uninsured mortgages went into effect in 2018. It requires banks to ensure that borrowers can make their loan payments at higher mortgage rates.
That made it harder for home buyers to get a mortgage from a bank or to refinance their loans through the top lenders.
Subsequently, some borrowers had to turn to lenders such as credit unions, mortgage investment corporations and private lenders, which are not required to comply with the stress test.
The CMHC report shows that among the large mortgage investment corporations, the share of debt to capital rose slightly from 19 per cent in 2017 to 22 per cent the following year. CMHC defines large as a lender with a portfolio of more than $100-million. Among the small alternative lenders, or those with a portfolio of less than $100-million, the share of debt to capital increased from 8 per cent to 9 per cent.
However, the delinquency rate at alternative lenders has eased from 1.93 per cent in 2018 to 1.65 per cent last year.
Although the alternative lenders are a tiny part of the overall mortgage market, they have been quickly growing. The CMHC estimated that their total market size in 2016 was between $8-billion and $10-billion. In 2018, it was between $13-billion and $14-billion.
“My bigger concern is risk to borrowers,” said Robert McLister, mortgage broker and founder of mortgage comparison web site RateSpy.com. “The stress test essentially shifted risk from banks to non-banks by shutting people out from low-cost prime first mortgages,” he said.
This is CMHC’s third report on the residential mortgage market. The agency and Statistics Canada have recently started collecting data on alternative mortgage providers in an attempt to provide more information on the housing market.
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Rachelle Younglai