Housing bubble fears as buyers beat loan cap rule
IN Canada increasing numbers of homebuyers are skirting mortgage caps similar to the rules that now apply here, by using a mix of regulated and unregulated lenders to increase their borrowings.
Subprime mortgage providers in the country are increasingly teaming up with unregulated rivals to sidestep the rules designed to clamp down on risky lending.
The result of these partnerships are so-called "bundled" loans, which pair a primary mortgage with a second loan from unregulated groups called Mortgage Investment Corporations (MICs).
There's no evidence to date that this is happening in Ireland.
The arrangements have proliferated in Canada, mortgage brokers told Reuters, as regulators tightened lending standards to shield borrowers in case a decade-long housing boom goes bust.
The practice has grown fast because it allows borrowers to make down payments of just 10pc, dodging federal rules that require either a 20pc or 35pc deposit for mortgages not backed by government insurance, according to industry experts. Packaging two loans together allows the regulated lender to skirt the rules.
The rise of bundling reflects declining affordability after a long run-up in home prices, and it could present a danger of defaults if prices fall. Such high loan-to-value mortgages are common when housing markets are about to implode, said David Madani, an economist with Capital Economics who has long forecast a housing crash in Canada.
"This is what happens at the late stage of a housing bubble - the quality of lending goes down," he said.
Bundled loans, however, do not violate any laws, a spokeswoman for the Office of the Superintendent of Financial Institutions said in a statement. Primary lenders are expected to take the extra debt from a second loan into consideration when evaluating the borrower's ability to afford the primary mortgage.
Canada's Finance Ministry said it was monitoring co-lending activity. It said such loans are a small portion of the mortgage market but declined to say whether the practice had increased as an unintended consequence of tighter lending rules introduced last year.
OSFI said that bundled mortgages have existed for years and that it will revise its guidance as the market evolves.
The government does not track bundling, and the practice is sometimes carried out in a discreet fashion, with lenders working directly with the unregulated funds or referring mortgage brokers to them to work out a loan with a borrower. But Finance Ministry data shows that the share of unregulated lenders has shot to 12.5pc of Canada's C$1.6 trillion mortgage market in 2015, up from 6.6pc in 2007.
"It's becoming prevalent with everybody. This is how they sidestep the loan-to-value issue," Guy Lew, a mortgage broker at CENTUM Metrocap Wealth Solutions said in an interview, adding that he arranged such loans for his clients.
Property prices in Toronto rose 12pc in 2016, according to the Toronto Real Estate Board. Prices in Vancouver, after many years of increases, fell in the second half of 2016, in part because of a tax on foreign buyers. The Canada Mortgage and Housing Corporation has warned that both the Toronto and Vancouver markets will cool in the next two years, leaving the most highly-indebted borrowers exposed to losses.
Bundling has provided a way around two federal rules meant to control such risks. Regulated lenders in Canada are not allowed to lend more than 65pc of the value of a home to borrowers with bad or non-existent credit records.
They also cannot lend more than 80pc of a property's value - even to borrowers with solid credit - without obtaining government-backed insurance, which requires the banks to run income stress tests on borrowers.
The MICs are financed mainly by wealthy individuals seeking higher yields. For borrowers with good credit, mortgage brokers say MICs typically offer rates that are comparable with what mainstream banks charge: five-year rates fixed at 3pc. For less credit-worthy borrowers, rates of 7pc to 10pc are common, brokers said.
Most borrowers would then look to refinance with a mainstream lender within the five-year period or revert to a variable rate thereafter.
Canada's biggest six banks, which make up 70pc of the market, said that they do not offer bundled loans. But Home Trust, a unit of Home Capital Group and Equitable Group - two of Canada's biggest subprime lenders - said they participate in bundled lending.
Consumer advocates have urged regulators to ban the products. (Reuters)