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Alternative lenders gain ground as mortgage originations slow: CMHC

Alternative mortgage lenders saw more business in 2018 even though overall mortgage originations declined, leading to the slowest year-over-year growth rate of outstanding mortgages in 25 years, according to the Canada Mortgage and Housing Corporation’s (CMHC) inaugural Residential Mortgage Industry Report.

The report, released Tuesday, found that mortgage investment companies (MICs) have a market share of one per cent, with their share of originations more than doubling their share of the mortgage stock.

Overall, MICs and private lenders held an estimated $13 billion to 14 billion of mortgages outstanding, up from the $12 billion estimated for 2017 and the $10 billion in 2016.

”It’s hard to put a positive spin on that one I think,” said Stephen Brown, Capital Economics’ senior Canada economist. “When you look at the stats, some of them are up to nine per cent or 15 per cent, and the conclusion of this report is that a lot of this is lending to people who couldn’t get (a mortgage) from more traditional sources, so a lot of this is indication of rising stress in some parts of the market.”

The rate of uninsured mortgages has been increasing, the report found, with insured mortgages accounting for only one in three new mortgage loans in 2018.

Tania Bourassa-Ochoa, a CMHC housing research specialist, said a number of factors explained this change.

“Notably, the 2016 stress testing for high-ratio mortgages is one of them, modest economic conditions, definitely changes to portfolio insurance and rising house prices,” said Bourassa-Ochoa.

Specifically because of rising house prices, uninsured mortgage loan originations with values of $500,000 or more accounted for 35 per cent of the total, up from 29 per cent in 2016.

She also cites the culture shift from buying to renting in recent years as a reason for the decline in outstanding mortgage originations. This is backed up by the report, showing that new mortgages for the purchase of property decreased by 19 per cent.

“The total mortgage debt is still increasing,” said Bourassa-Ochoa. “High household debt still remains one of the top threats to the Canadian economy and financial stability for sure.”

This report is the first of its kind from the CMHC, as it continues to attempt to fill in the gaps in Canada’s housing market data. All the information contained in the report came from the Canadian Bankers Association, Non-Bank Mortgage Lender Survey, a MIC survey, CMHC’s residential mortgage data-reporting framework of National Housing Act Mortgage-based Securities issuers. Fundamentals Research and CMHC calculations based on a custom Statistics Canada request.

… we support evidence-based policy and informed decision making within the housing finance sector

Michael Tremblay, senior vice-president, CMHC

“By making this type of information available to the public, we support evidence-based policy and informed decision making within the housing finance sector,” said CMHC senior vice-president Michael Tremblay in a press release.

CMHC’s analysis of the mortgage market unsurprisingly revealed the banks hold a majority of market share, at 75 per cent. The average mortgage is $220,650 and a delinquency rate of 0.24 per cent.

Credit unions hold 14 per cent of the market, with an average mortgage of $150,995 and a delinquency rate of 0.17 per cent.

Mortgage finance companies have a market share of six per cent, an average mortgage of $258,140 and a delinquency rate of 0.25 per cent, while MICs and private lenders have a market share of one per cent, an average mortgage of $194,760 and a delinquency rate of 1.93 per cent.

Another focus of the report is the increase in popularity of variable-rate mortgages. While most Canadians still prefer a five-year fixed rate, the first quarter of 2019 saw the average share of new mortgages with a variable rate at 29 per cent, a 12 per cent increase from the same period in 2017.

Covered bonds have gained close to one percentage point of the funding market, reaching a record 9.5 per cent in the same period.

“It’s another thing to watch out for because it certainly played a role in the global financial crisis,” said Brown. “The idea is they increase funding opportunities for the banks but when you add another layer of opacity it increases the risk of problems somewhere.”

CMHC’s funding accounted for 30 per cent of all outstanding mortgage credit in Canada by the end of 2018.

While this is the first edition of the report, it will be released annually, while highlights will be updated on a quarterly basis.

• Email: nsokic@postmedia.com

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