(Non-traditionally) Regulated Lenders Grow

THINK OUTSIDE THE BOX:  We have access to non-traditional Bank Lenders, who are actually largely funded by the big banks, and who are likely more scrutinized than the big banks.  The benefit of having a non-traditional Bank Lender can include better pre-payment privileges, lower interest rates, and the largest benefit is the much lower payout penalty, of which payout penalties become an issue more times than people realize.

The Globe and Mail reports that “unregulated lenders” now own a 15% share of Canada’s mortgage market, according to a Finance Department memo it obtained. That sounds somewhat concerning as a layperson, doesn’t it?

It sounds like Canada has some drunken, unrestrained Wild West lending going on. You can hear Joe Public thinking, “These yahoos must be selling those insidious teaser rates and doling out those NINJA (no income, no job, no assets) mortgages that sunk the U.S. market in 2008.”

That’s unfortunate…because it’s not true.

Right off the bat, let’s dispense with the term “unregulated” as it applies to prime mortgage lending. It’s complete baloney (I’d rather use another term but kids might be reading).

Virtually all prime non-bank lenders are regulated. They must conform to:

  • Federal regulations that apply to the banks providing their funding
  • Federal regulations that apply to insurers providing their default insurance and securitization
  • Provincial regulations applying to mortgage brokerages, administrators, etc.

On top of this, non-deposit-taking lenders must withstand the regular audits and scrutiny of their OSFI-regulated bank funders and investors.

All told, this puts them under a microscope that’s just as intense as the major banks, if not more so. Anyone who thinks banks would risk their capital and reputation by funding them otherwise is woefully misinformed.

Note, of course, that the aforementioned regulations do not generally apply to private subprime lenders. Those lenders account for roughly 1 in 16 mortgage originations, according to CIBC (see its chart below). Yet, they present arguably no material systemic risk because they’re predominately investor- and self-funded, require higher borrower equity, and price and underwrite commensurate with their risk appetite. (Incidentally, the rise in private lending is directly attributable to policy-maker’s own actions — i.e., stricter federal lending guidelines.)

Source: CIBC, Teranet

Source: CIBC, Teranet

The Globe further reports, “The government memo estimated that about 90 per cent of the business of unregulated lenders is subject to federal mortgage rules, which include meeting the strict underwriting standards set by CMHC and the Office of the Superintendent of Financial Institutions, Canada’s banking regulator.”

The message here is that non-deposit-taking lenders have countless checks and balances and ample supervision to assure their stability. That’s vital because, as the Department of Finance is quick to point out, they’re “enhancing competition in the mortgage market.” Moreover, they account for roughly half of broker originations.

So let’s not allow news stories without context to send the wrong idea about non-traditionally regulated lenders. They and their mortgage broker partners are overwhelmingly responsible for keeping rates and prepayment penalties down, and that keeps more money in Canadians’ pockets.

Robert McLister      Canadian Mortgage Trends      August 17, 2016

 

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