Canadian alternative lenders face funding challenge as investors flee to safer assets
17/08/2022 17:28
By Nichola Saminather
TORONTO, Aug 17 (Reuters) - Canadian mortgage investment
corporations (MICs), alternative lenders that offer riskier home
loans and small construction financing, are struggling to
attract investors, firms and analysts said, which could increase
pressure on them and spur consolidation in the sector.
These alternative lenders, which make up about 1.5% of
Canada's mortgage market, drew investors looking for high
returns as interest rates hit rock bottom in recent years. But
with rates rising rapidly under a Bank of Canada tightening
cycle this year, investors have sought higher-yielding, safer
assets.
Concerns about a rapidly cooling housing market and a
possible recession given the pace of rate increases have also
sapped appetite despite continued high demand from borrowers.
"We're going through a period now where investors are more
cautious as to how alternative (investments) and, really the
overall real estate market, is adjusting to higher interest
rates," said Dean Koeller, president of Calvert Home MIC and
chairman of the Canadian Alternative Mortgage Lenders
Association.
MICs pool loans to small property developers and to
borrowers who do not qualify for residential mortgages from
banks, and sell them to investors. Most of these are
floating-rate loans whose payments increase alongside interest
rates.
The struggles of MICs and other private lenders could
indirectly contribute to vulnerabilities in the financial
system, the Bank of Canada said in a staff note https://www.bankofcanada.ca/2021/03/staff-analytical-note-2021-2/#22-Reassessing-the-size-of-mortgage-investment-corporations
last year, although the sector's small size means the direct
impact from its troubles is small. Still, any tremors felt by
MICs could affect bigger lenders, from whom MICs borrow funds.
While higher interest rates are good for lenders because
they lift margins, investors' demand for better returns is
eating in to the higher rates MICs are charging on loans, said
Moody's Investors Service Senior Credit Officer Rob Colangelo.
If MICs were to make loans even more expensive to attract
investors, any potential rise in unemployment could push
borrowers into default, leaving all the parties worse off, he
said.
Current conditions could also lead to an increase in
bankruptcies or consolidation in the industry, as smaller MICs -
which typically have a harder time accessing bank debt - fail to
raise enough capital to survive, Colangelo said.
The pullback comes as demand for loans from MICs remains
strong, with larger banks tightening lending standards and
pushing more borrowers to alternative lenders.
Atrium MIC AI.TO said on Aug. 10 it had record mortgage
advances during the second quarter, ending the period with the
biggest mortgage portfolio in its history.
In an ideal world, a MIC would be able to raise enough
equity from investors to fund all its mortgage commitments. But
MICs like Calvert are funding more mortgages with debt, holding
them on their own books longer.
Using credit to fund loans is an "expensive proposition,"
Moody's Colangelo said, which adds to company risk in a falling
housing market.
Another MIC, MCAN Mortgage Corp MKP.TO , is relying
primarily on capital it raised last year to fund its lending,
even though it does have a wealth business that enables it to
tap deposits, Chief Executive Karen Weaver said.
"We did have growth last year from two rights offerings ...
and until the markets settle down, I expect we'll just be
functioning off of our existing capital," she said, adding that
MCAN's focus now is on preserving its bottom line rather than
expanding its loan book.
(Reporting by Nichola Saminather in Toronto
Editing by Matthew Lewis)
((Nichola.Saminather@thomsonreuters.com; +1 647 480 7519;))