Broker on what's in store for the space in 2024
The spectrum of financing from the A to private spaces in Canada could be returning to equilibrium after a tumultuous few years, having witnessed a profound shift since the onset of the 2007-08 financial crisis.
Prior to that economic shock, an even market saw lenders in the banking and A spaces sitting around 5%, with the credit spectrum moving downward from there. But the years following the crash tilted into a scenario that resulted in some mortgage investment corporations (MICs) beginning to deploy money at rates of around 3.99% – an unusually low yield for private funds to be chasing.
That landscape has now evolved once again, according to consultant and former mortgage broker Benjamin Sammut (pictured top). “What I think this entire experience has been over the last few years is that we’ve kind of gone back to that equilibrium where the banks are now sitting at 5% and the private funds are yielding just below 10%, which is where they should always have been,” he told Canadian Mortgage Professional.
“The B space is somewhere in the middle there. And now that we’ve reached that equilibrium, I don’t think we’re going to go much further from a macro scale. I think we’ll end up staying about where we are.”
Rates might tick marginally higher or lower over the next five years, Sammut said – “but I think this is sort of naturally where it was supposed to be all along, and we’re getting out of the response that Canada had to have to the housing crash.”
What’s top of mind for MICs in the 2024 market?
Raising capital has emerged as a prominent focus for MICs in the current climate, although Sammut argues that prioritizing liquidity may be a more prudent consideration for those organization.
That’s based on his view that as long as MICs have the ability to continuously deploy, it shouldn’t matter whether they’re soliciting new investors or freeing up existing capital.
“The buying and selling of tranches within your book is going to be a major trend this year: ‘We’ve got $10 million sitting in the fund, let’s go and buy $10 million worth of mortgages rather than trying to originate,’ or ‘We’re coming up to the limit of our fund. Let’s sell off a good $5 million to $10 million and figure it out from there,’” he said.
Michael Durand, President and CEO at MCommercial brokerage expects growth, particularly in construction, with a focus on purpose-built housing and industrial properties in major cities.
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 22, 2024
Read more: https://t.co/smIouJ2Ohi#mortgageindistry #commercialmarket #mortgage
Still, MICs can struggle when trying to sell their mortgages – principally because they’re registering a mortgage in their own name, meaning the cost of re-registering it in the buyer’s name when another MIC or private equity fund is interested may become so cost prohibitive that it’s not worth it.
That’s among the reasons the use of custodians could grow in popularity in the coming years, seeing an individual act as a neutral third party for when the mortgage is bought or sold, or if there are any further land registry requirements.
Usage of custodians increasingly prevalent in current climate
“Rather than me having to discharge my mortgage, issue a discharge statement and a full statement of account, all I do is call my custodian and say, ‘This other person is actually now the beneficiary of this mortgage. He paid me, we’re square,’” Sammut explained. “When this mortgage has any new payments or any default or anything that happens, it’s not my mortgage anymore.”
The initial startup cost is sometimes viewed by MICs as prohibitive when it comes to using custodians – but the strategy has gone from a “nice-to-have” in recent years to a “need-to-have,” according to Sammut, especially for growth beyond MICs’ current capacity.
“If you’re just a private mortgage broker with $8 million to $10 million and that’s all you want to do, okay – don’t worry about it,” he said.
“But if you’re a purpose-built MIC and you’re solely a lender with the intention of being in the lender space, I think having a more liquid book and being able to have just one more arrow in your quiver is going to be crucial over the next year.”
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