The current market continues to present challenges for highly-leveraged homeowners
Amid a turbulent and challenging current mortgage market, the private space is seeing a growing trend of so-called “unrefinanceable” mortgages – cases in which mortgages cannot be refinanced because of home price depreciation, according to a prominent broker in the sector.
Daniel Vyner (pictured top) of DV Capital in Toronto, told Canadian Mortgage Professional that the protracted downturn of property values across many markets over the past year, coupled with an increasingly cautious approach by most lenders, was seeing plenty of borrowers on private mortgages run into problems at the end of their term.
“Private mortgages by design are typically short-term, [with] one-year terms,” he explained. “Last year, compared to now, some locations’ property values have decreased. So what that means is some of the loan-to-values [LTVs] from last year to this year are much higher as a result of the value decreases.
“In other words, a 70% LTV last year may very well be an 80% LTV this year based on an updated appraisal. Depending on the current LTV, based on a current appraisal, some of these private mortgages have been for a few months, and still are, unrefinanceable.”
With many lenders tightening their purse strings in recent times, the LTVs required to replace the existing mortgages are higher than what those institutions are willing to provide, Vyner said.
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What solutions are available to highly-leveraged borrowers in the private market space?
The options facing borrowers in those cases are far from ideal. Private mortgage lenders who realize that a mortgage cannot be refinanced can provide an extension to the homeowner and hope that they’re eventually able to make payments on that extension – but they may also double down, insist that they can’t replace or lengthen the one-year mortgage, and opt to enter mortgage enforcement and power-of-sale territory.
Depending on the lender, some could also permit the homeowner to list and sell the property under close supervision. Whatever the case, the challenges facing struggling borrowers are considerable, according to Vyner.
“You have high-leveraged homeowners that are optionless because private mortgage lenders have reduced their LTV or their lending aggression given the current real estate and mortgage market environment,” he said.
“So as lenders scaled back their lending aggression, there are fewer ‘bailouts’ or high-LTV private mortgage options. Naturally, this is eliminating the high-leveraged segment of the market. They can no longer, like previous years, order a new appraisal. That’s not happening right now, for the most part.”
Borrowers facing challenges transitioning to conventional lending options at present
While private mortgages are usually a short-term option that allows borrowers to transition smoothly into the banking space, that’s proving increasingly difficult in the current high-rate environment.
“Depending on the LTV, even if they were bankable through the debt service test or through the stress test, they may not still be able to go to a bank because the LTV is too high to refinance,” Vyner said, “so you might have an income- and credit-qualified borrower that took a one-year private mortgage with the gameplan to refinance to a bank mortgage and on paper, they can stress test – but the LTV is too high.”
It’s also noteworthy that some private mortgage lenders such as mortgage investment entities (MIEs) and mortgage investment corporations (MICs) deploy a line of credit into mortgages, with a cost base to those products that’s likely growing as interest rates rise.
That means that those entities need to make a spread on that money, and has in many ways tempered their lending appetite in the current environment, Vyner said.
“Private mortgage lenders rightfully have a duty to protect their investors’ money. They’re doing everything they should be – but they’re not as aggressive as they were in a rising market,” he said.
“So you’ve got a combination of market unknowns and home value unknowns – and if the majority of private mortgage lenders are more conservative than they previously were and ordinarily are, it’s simple to see why there are fewer options for the private mortgage borrowing segments.”
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