With the continuing low yield environment, Mortgage Investment Corporations have seen dramatic growth over the last couple years as investors search for return and capital preservation; capital sourcing by many established MICs has appeared to be steadily reliable and available in the current environment. The BOC rate is anticipated by many to remain at or near all-time lows. In addition to the low yield environment, a general slowing of the economy appears to be persistent as we move forward into 2016.
On the lending side of the coin, due to increased regulation and tightening by CMHC resulting in dramatic changes to underwriting procedures for the banks, the alternative mortgage lending market has also picked up comparable steam.
The balancing act of matching deals with a steady flow of capital seems to be continuing for what appears to be a positive situation for established MIC managers.
Mortgage brokers have also seen their portfolio of business begin swinging to the alternative (or ‘B’ ) side, mostly due to the first –time home buyer market drying up, refinancing through banks becoming more and more difficult along with restrictions on the self-employed. According to CAAMP’s 2014 Fall Research report, brokers had originated 30% of all outstanding mortgage debt in the country.
Recently mortgage brokers, the Fund’s main referral source for funding opportunities, have seen a decline in what is called “Prime” business; also known as “A” clients with good paying, salaried jobs, clean credit with properties in marketable, urban areas – the typical cookie cutter mortgage any Schedule 1 bank can fund with little due diligence or story. As mentioned, this decline in “Prime” business was exacerbated by continued tightening of bank underwriting policies, a trickle down of federal rules recently implemented on government backed mortgage insurance products. This has led both broker and borrower to search for alterative means as the borrower often no longer reflects the ‘ideal’ profile of someone deserving of the record low rates, and brokers being filtered out of the large institutions as some banks exit the broker channel to focus on ‘in house’ originations. A weakening economy, mixed with these points has created an opportunity for alternative sources of capital to benefit from the perceived added risk of the borrower, by commanding higher interest rates, even in the record low environment, when lending to these individuals.
Capital and Competition
Over the last few years, with the influx of yield hungry, risk adverse capital, also came an influx of new competition which we have seen through the growth of trust companies, credit unions, existing MICs, newly created MICs, along with larger individual private sources that deal with or are a part of the mortgage broker network. Those that have benefitted the most are those that have a long track record of doing good business and that have consistent access to capital, as they have been regularly relied upon by brokers who require solutions for their clients that don’t fit the ‘bank box’.
It is estimated from a recent report by the Bank of Canada (Residential Mortgage Market in Canada – A Primer- Financial System Review) that alternative sources of capital including trust companies and MICs take up approximately 2.6 % of residential mortgage debt outstanding in the country.
The low rate environment could be seen to have had an impact on returns for investors for those in this space as downward pressure on interest rates mixed with increased competition (potentially more money searching amongst a lessoned number of opportunities) created price competition, or the perceived need to offer lower rates to borrowers than normally offered to ensure capital is not sitting idly by. The well-managed MICs have been able to strike the balance between cash-in and cash-out while maintaining competitive pricing that attracts enough funding business while providing the desired yield to its shareholders through sound treasury management practices. In some cases the use of leverage is used to smooth cash-flow, which can sometimes lead to mixed results as the market shifts.
Expansion to New Areas and Growth Opportunities
Many established MICs are reaching into new markets to seek out funding opportunities as their funds continue to grow. Frontenac continues to be open to markets outside of its niche of Eastern Ontario but remains focused within the province while avoiding potentially volatile areas. The small-town niche that Frontenac and Pillar are known to service continues to be increasing in opportunity as banks avoid these areas, and as the fund grows, this will continue to be a focus for lending.
Recent jobs numbers suggest that self-employment is on the rise, while borrowing for the self-employed continues to be more and more difficult, creating another growth sector for alternative capital.