Subprime mortgages are a very small part of the overall mortgage industry in Canada. However, they are quickly growing from their small base. This in itself is not a sign of imminent danger, but it is a sign that the traditional mortgage business is tightening its lending standards and rejecting loans it previously accepted. The tighter government lending requirements on traditional mortgage lenders could have a similar effect to higher interest rates in bringing about a top in the Canadian housing market. In that sense, the 25% increase in subprime mortgage lending could be a small sign of big things to come.
According to the Financial Post:
Industry watchers say Canada’s major mortgage lenders are turning away loans they previously accepted.
“When you talk to the management teams of the [non-bank firms], they definitely believe that the banks continue to tighten their underwriting, and mortgages that could have been done by a bank one, two, or three years ago are being rejected,” said Stephen Boland, an analyst at GMP Securities Inc.
Mortgage brokers are bringing these loans to the non-bank lending firms such as Home Capital Group Inc. and Equitable Trust, he said.
“It’s good-quality stuff,” Mr. Boland said. “Anything that just misses a bank is considerably stronger than some of the traditional business that those firms have done.”
Ottawa’s tougher lending regime has created an opening in the mortgage market for other lenders. Credit unions, for example, aren’t bound by federal rules because they are provincially regulated. And though they are not considered alternative or subprime lenders, credit unions have been expanding their share of the residential mortgage market, which now sits at 6.8%, according to Credit Union Central of Canada.
“There’s no question that B-20 and then B-21, plus other rules, are creating demand for alternative lending sources,” said Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute, referring to the recent regulations put in place by the Office of the Superintendent of Financial Institutions, which supervises banks as well as mortgage default insurance companies.
He said the demand is especially strong from “among higher risk borrowers.”
Another factor is a recent cap placed on NHA mortgage-backed securities, which has led to more lending by less-regulated firms. That market has grown “leaps and bounds” since 2013, Mr. Poschmann said.
