With home values on the decline and economic conditions changing, there has been heightened interest in how Canada’s alternative lenders are adapting.
Last month, Magenta Capital Corp. announced it would temporarily stop taking new loan applications until September. And last week, the Globe and Mail reported that Fisgard Asset Management Corp. was no longer offering new construction financing in select provinces.
Both are Mortgage Investment Corporations (MICs), which fall in the alternative lender space and thus have different underwriting and funding processes compared to chartered banks and other “A” lenders.
The current situation at Fisgard
Hali Noble, Fisgard’s senior vice-president of residential mortgage investments and broker relations, spoke with CMT to explain the reasoning behind its construction loan changes and the market dynamics at play.
“Construction financing takes an enormous amount of due diligence and underwriting time. It’s much more complicated than your typical residential first or second mortgage, which is our core business,” she said, adding that residential construction financing comprises only about 5% of Fisgard’s total portfolio.
“We and other Mortgage Investment Corporations have had a huge increase in volumes over the past few years,” she added. “As a result, at Fisgard we decided we were going to focus on our core business and put construction financing aside for now.”
Noble said the change was made over six weeks ago, and that some construction deals are still being approved and funded on a case-by-case basis.
Of course, changing market conditions also played a role in that decision, especially when construction costs have increased and values are declining, Noble said.
“Part of the underwriting process is obtaining a current market value of the ‘as complete’ home. Our appraisers provide us with a value based on what they think it’s going to be worth in today’s market,” she explained. “But of course, 9 to 12 months from now when construction is complete, the value could be quite different, possibly lower than expected.”
So, a mortgage that was initially funded at a 75% loan-to-value (LTV) based on the completed valuation could become 85% LTV if prices drop by the time the project is complete. “That’s a liability,” Noble added. “It’s all about risk management.”
Noble noted this isn’t the first time the company has adjusted its product offerings in the face of changing market conditions.
“We’ve adjusted our construction program a number of times over the 28 years that Fisgard’s been in business,” she said. “We’ve been through numerous cycles in the market, some up and some down, and our job as a MIC manager is to make sure that we are protecting our investors’ capital and making appropriate decisions related to risk and market conditions.”
Lenders being more selective about how to deploy their cash
Fisgard isn’t the only lender adapting to the changing market. Magenta Capital Corp., as noted above, is just one other example, but many others will also be having discussions over how to best deploy their limited capital.
At the start of the pandemic, many lenders stopped raising capital and went into a “defensive state,” given initial concerns about a housing market downturn, explained Dean Koeller, chair of the Canadian Alternative Mortgage Lenders Association (CAMLA) and President of Calvert Home Mortgage Investment Corporation.
But when demand for real estate subsequently surged, Koeller said the industry responded quickly to fill that funding gap.
“But there’s a natural cycle to how much cash you put out in mortgages one month and then when those mortgages are going to pay out,” he told CMT. “What is likely happening for most funds today is that their monthly payouts haven’t caught up with the amount of funding demand that we’re currently seeing in the marketplace.”
“It’s creating a tightening in the availability of cash, so funds need to make careful decisions as to how they’re going to invest their investors’ capital, and that certainly tightens the product category,” he added.
Not only do some lenders restrict their product offering, but some will tighten up the loan-to-value as well.
At Fisgard, the average LTV of its residential mortgage portfolio is just under 54%, Noble said, giving the company a bit of a buffer against a drop in valuations. However, she added that there may be some MICs and individual private lenders that have been lending to 85% or 90% LTV, or in small or rural communities, who “will be looking very closely at their mortgage offerings and portfolios right now.”
Arrears rate remains low for now
Another factor that lenders are currently taking comfort in is a historically low arrears rate.
Data released recently by the Canada Mortgage and Housing Corporation showed non-bank lenders had just 0.23% of their portfolio in arrears by 90 days or more as of Q4 2021, down from 0.26% in the third quarter of 2020. Mortgage investment entities had an average arrears rate of 1.38%, down from 1.79%.
Fisgard’s Noble said that of the 600-plus mortgage loans in Fisgard Capital Corporation’s portfolio, just one is in default and one is in foreclosure.
“We are managing our products and risk appropriately,” she said. “Do we expect that we’ll see a few more defaults? Possibly. But, Canadians intrinsically want to protect their home and pay their mortgage, and we will continue to diligently monitor the economy and real estate markets.”
Koeller agrees that the wider industry is likely to see a return to a more normalized arrears rate over the coming year from today’s record-low rates.
“We are going to see some increases over the next year and likely more into a normal category as opposed to what we saw in 2008, where losses were quite significant,” he said. “There’s just going to be a normalization, so I’m not expecting that we’ll 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 about the alternative lender they’re dealing with, Noble recommends they go directly to the Business Development Managers representing those lenders.
“Ask them questions,” she said. “We would be more than happy to dispel any rumours or let you know what’s going on with our companies and why, and that’s really important. Go right to the source and get educated.”