When it rains, it pours. Alternative lenders are reporting a record number of originations largely due to a tide of borrowers shut out by the big banks. But will a stream of ill-prepared apps clog the pipe?
The Canada’s new mortgage rules continue to shut out more and more borrowers from the chartered banks sending consumers spilling over to alternative lender. Yet, despite the mounting originations, some point to a troubling puddle of ill-prepared documents that could gum up the works. Those applications, in case you were wondering, come courtesy of brokers.
“The mortgage rule revamp, B20 and other changes have been a big opportunity for brokers and alternative lenders,” says Nick Kyprianou, CEO of Equity Financial Trust. “Generally business has been in the upswing, but we are also seeing an increase in applications that have not been prepared properly.”
The submissions, he says, could be attributed to mortgage professionals who are either new to dealing with alternative lenders or unfamiliar with the document requirements under the new mortgage rules and OSFI’s B20 lending guidelines.
Earlier this year, OSFI compelled federally regulated lenders to implement a series of lending changes by their fiscal year-end (October 31 for most banks). Among those changes were the reduction of HELOC loan-to-value from 80 per cent to 65 per cent and the elimination of 100 per cent financing. The B20 guidelines are even seen by the Credit Union Central of Canada as a barrier to accessing mortgages for so-called “non-conforming borrowers” such the self-employed, freelancers, low-income individuals and even immigrants, Aboriginal people and rural Canadians.
Three months ago in an effort to avert a debt crisis, the government also reduced the maximum amortization for government-insured mortgages from 30 years to 25. The feds also reduced the amount of equity that can be borrowed against a home from 85 per cent to 80 per cent.
“I get a sense that as many as 20 per cent to 25 per cent of brokers who submit to us are not familiar with the stricter document requirements under the new lending regime,” says Kyprianou. “There’s some degree of hand-holding on our part now to help brokers out.”
Among documents now under greater scrutiny but often found missing in borrowers’ files, he says are:
• Business licenses
• Notice of Income Assessment
• Tax Returns
• Bank statements
• Financial statements
“Now more than ever, records that go back up to two years or more are needed,” Kyprianou explains. “The goal is to establish the borrower’s cash flow.”
When brokers submit incomplete documents for their clients, the time required to sort things out increases the workload on the lender’s staff, lengthen the processing cycle and running the risk of creating a backlog.
The pressure is likely to increase in the near future before it abates as more borrowers turn to alternative lenders, says Lester Shore, VP of Optimum Mortgage.
All of Optimum’s more than $12 billion in originations this year came exclusive from business brought in by mortgage brokers. Shore estimates that 95 per cent of that number represents deals rejected by the banks.
“Our typical client falls into two main categories: a borrower rejected by the banks because he or she does not have a credit history or has poor credit; and borrowers rejected by the banks because they do not have a traditional form of income determination,” Shore says. “In other words, they work freelance or are BFS clients.”
He estimates that half the time, these customers are dealing with “newbie” brokers.
“No, they are not necessarily new entrants to the industry,” Shore points out. “Rather, they are most likely brokers, used to handling A deals and not well-versed in the documentation needed to support a BFS application or B mortgage.”
He believes the difficulty is an issue of perception.
“I think our main challenge is convincing these brokers that their client no longer lives in the A world,” says Shore. “The new rules have knocked a lot of people down a few rungs and now they have to meet new requirements and big banks won’t touch them.”
For example, he said, because of the B-20 guidelines many of the big banks no longer do alternative lending. The B-20 guidelines also require lenders like Optimum to scrutinize and verify income sources of all borrowers.
Brokers, according to Shore, can help the approval process along by making sure that they are submitting deals that have a high possibility of being approved. An initial determination of three key points would be helpful. For instance, mortgage professionals need to determine the following:
• Does their client have a job or means of income that will enable him to afford the mortgage?
• How can these sources of income be backed up by records and documentation?
• How much flexibility does the lender have in providing a mortgage to the borrower?
Barring evidence that the borrower is a “perpetual credit abuser,” said Shore, most applications are denied because of affordability issues or because the lender does not see the house as an “acceptable home for the borrower” or in other words may need costly repairs.
“The home is our security,” says Shore. “We have its condition and value appraised. We approve the loan when the appraisal meets our criteria.”
