Was it the first drop of a downpour, or just a random splash?
How to interpret news that one of the country’s most prominent non-bank lenders is “pausing” mortgage applications until September depends on who you ask.
According to Claire Celerier, an assistant professor of finance at U of T’s Rotman School of Management, the news from Magenta Mortgage Investments — reported by the Globe and Mail — is likely the first of many similar announcements from other mortgage investment firms (MICs). †
The main reason, according to Celerier? Investors who fund MICs are likely to become wary of the increasing risk as interest rates rise and house prices begin to fall.
“In an environment like this, investors have less risk appetite, so I’m not surprised this has happened. And I wouldn’t be surprised if it happens at other institutions like this, especially smaller ones,” Celerier says. “I think these kinds of institutions will have more trouble raising funds.”
The Bank of Canada has raised its key overnight interest rate from 0.25 percent to 1.50 percent this year, and analysts expect more to come as the Bank tries to slow runaway inflation.
Celerier says MICs typically charge a higher rate than so-called Tier 1 financial institutions like banks, because their customers are people who can’t or won’t meet stricter lending standards set by banks.
“The borrowers are riskier and these institutions get less information than banks. With interest rates rising, they may become even more risky,” Celerier said.
A fall in house prices puts more pressure on MIC’s existing mortgage portfolios, says veteran mortgage strategist Robert McLister.
“Price values always put private and MIC lenders on edge. The equity in the house is often the only security they have,” said McLister, adding that some MICs he spoke with recently are getting requests from investors trying to get their money out of it.
“I have heard from two in the past few weeks that the number of redemptions is increasing and the registrations (new investments) are slowing down. While that’s not a representative sample, it’s just part of when an over-inflated real estate market takes a turn for the worse,” says McLister.
But MICs, including Magenta, say they’re seeing no downturn in their investors, who range from large and small investors who put in a few hundred thousand dollars to institutional investors who invest millions.
In a written statement, Magenta says they have “fully utilized” their existing money pool, but says they are already attracting more.
“Magenta underwrites residential mortgages that fall just outside the institutional underwriting criteria. The benefit to borrowers and our investors is optimized when our finite borrowing capacity is fully utilized, as is currently the case,” the company said. investor returns.”
There is no sign of declining investor demand at Vancouver-based AP Capital MIC, CEO Ches Hagen said.
“We see an impact on house prices. But I think time will tell what that looks like. And there seems to be a constant demand from investors,” Hagen said.
Hagen estimates MICs control about 5 percent of the Canadian mortgage market and says AP continues to see strong demand from both investors and borrowers. The company does not pause anything.
“We borrow under all market conditions,” Hagen said, adding that the collective share of MICs in the mortgage market has not changed that much, neither during the global COVID-19 pandemic nor now that interest rates are rising. “I couldn’t say we’ve seen that change even through COVID. And I don’t think that’s changing, even under the changing environment.”
At MCAN Mortgage Corp., which unlike traditional MICs also attracts funding by issuing secured term deposits, CEO Karen Weaver said there is no sign of declining investor demand.
Still, Weaver says some lenders — from Tier 1 banks to private lenders — are probably tightening things up right now, even if they don’t send memos.
“The entire credit market manages their volumes and their business through rates. So if you want to be in the market, you will get the best price in the market. And if you don’t want to be in the market, you just get the highest rate in the market,” Weaver said, nevertheless surprised to hear of Magenta’s hiatus.
“There’s no doubt that someone will stand up and say, ‘I’m closing my business until September,’ yes, that feels a little extreme,” Weaver said.
JOIN THE CALL