Potentially significant developments could be on the way, says leading broker
As interest rates rise and mortgage qualification criteria tightens at bank lenders, it might be assumed that private lending solutions stand to benefit from changing circumstances in the market.
However, significant developments could also be underway in the private space, according to a prominent mortgage professional who’s urging brokers to exercise caution and care when choosing a private lender.
Daniel Vyner (pictured top), principal broker at the Toronto-based DV Capital Corporation, told Canadian Mortgage Professional that the cost of private capital was increasing for the most part, regardless of whether it was being advertised or announced.
“Mainly a result of the eroding spread between increasing bank rates and private mortgage rates, private lenders are demanding an adjusted risk-based return,” he said, “in other words, a greater financial incentive to continue investing in private mortgages in the current climate.”
If the lender leverages a line of credit, the cost base of that borrowing facility often fluctuates with prime – meaning the cost will be passed along to the borrower by way of an increased interest rate, he said.
The increase in private mortgage sources in recent years saw a segment of private lenders “race to the bottom” to provide historically low interest rates in order to remain competitive, with some simultaneously providing high leverage loans, according to Vyner.
A consequence of the recent housing cooldown has been property values plummeting across many markets, notably in the Greater Toronto Area (GTA). That makes it increasingly difficult, he noted, for private lenders to assess the risk of what they’re underwriting in Ontario.
Recent Canadian Real Estate Association (CREA) data showed that the average price of a home across Canada had declined by over $100,000 in May compared with three months prior, while the volume of homes sold posted a 20% year-over-year fall.
“In a previously uprising market, where on paper the loan to value at funding becomes lower at maturity based on an updated higher value appraisal, times were relatively simple for appraisal-focused mortgage lenders,” Vyner said. “However, currently in a transitioning market as we are seeing, it’s much more difficult to appropriately price and assess risk.”
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With those factors in mind, the executive emphasized that rising rates and stricter qualification criteria among bank lenders may not necessarily translate into a growth surge in the private space.
“Private lenders, who have a fiduciary duty to investor capital, are beginning to analyze funding requests under a different lens – rightfully so,” he said. “As illustrated by online real estate trade data, there are examples of single-family dwellings in certain pockets of Ontario that were purchased at the top of the market now trading three to four months later for as much as 15% to 20% below the recent acquisition price.”
In those cases, assuming a mortgage lender provided a first mortgage to 80% of the purchase price, there’s a chance that the lender may have effectively taken a loss after real estate commission and HST are considered, he said.
As the “loan” component of loan to value typically remains constant during the term, the value might differ at maturity from loan inception – something that may not be realized until the property is sold or the inability of other lenders to refinance becomes clear. That could pose as a liquidity issue in the private mortgage market, according to Vyner.
“Hence, a segment of private lenders is temporarily reducing their lending exposure and reassessing their underwriting guidelines,” he added, “and in some cases, halting new fundings altogether and taking this time to better understand the health of their existing loan portfolio and the real estate marketplace.”
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This year has seen a number of noteworthy developments for Canada’s private lending space, not least with potentially sizeable regulatory changes having been recommended for private lenders in the westernmost province.
The Cullen Commission of Inquiry, established as part of the British Columbia provincial government’s inquiry into money laundering, said a new regulatory authority located within the BC Financial Services Authority (BCFSA) should be created.
In Ontario, meanwhile, the Financial Services Regulatory Authority (FSRA) is pushing ahead with plans for a new qualification tier that brokers and agents who wish to transact in private mortgages will have to meet – a result of the regulator’s stronger focus on mortgage broker conduct within private lending in in recent times.
