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Risky Lending Practices

Jan 17, 2017

Canada’s subprime mortgage providers are increasingly teaming up with unregulated rivals to sidestep rules designed to sidestep rules designed to clamp down on risky lending.
These partnerships are so-called “bundled “ loans pairing a primary mortgage with a second loan from unregulated groups called Mortgage Investment Corporations (MICs).
This allows a borrower to make a 10% down payment whereas federal rules require either 20 or 35% down on mortgages not backed by government insurance.
David Madani, an economist with Capital Economics states such high loan-to-value mortgages are common when housing markets are about to implode. He further states that “this is what happens at the late stage of a housing bubble – the quality of lending goes down”.

Bundled loans do not violate any laws. Primary lenders are expected to take the extra debt from a second loan into consideration when assessing the borrower’s ability to pay.
Canada’s Finance Ministry said it is monitoring co-lending activity but declines to comment on whether the practice has increased.

The Bank of Canada estimated unregulated lenders have about $125 billion in assets from auto loans and other products as well as mortgages. The vast majority is held by companies not listed on public exchanges which affects available hard data.Regulated lenders are not allowed to lend more than 65 per cent of the value of a home to borrowers with bad or nonexistent credit records. The MICs are financed mainly by wealthy individuals seeking higher yields. Borrowers with good credit are granted comparable rates to mainstream banks. For less creditworthy borrowers rates of 7-10 per cent are common.

Canada’s biggest 6 banks which provide about 7 out of 10 mortgages do not offer bundled loans but Home Trust , a unit of Home Capital Group and Equitable Group – two of Canada’s biggest subprime lenders – do participate in bundled lending. Home trust, with assets of $20.5 billion at the end of last year, confirmed it provided bundled mortgages worth up to 90 per cent of a property’s value, with no mortgage insurance requirement.

One of the unregulated lenders that Home Trust worked with is an entity called Brookstreet. It’s President Diana Soloway, said that growth in bundled mortgages started a few years ago when regulated lenders were looking for ways to share risk with unregulated entities
“Not every institution either acknowledges it or wants to advertise it,” Soloway told Reuters, later adding that Brookstreet “did it quietly, under the radar.”
If a borrower with bundled loans falls behind in their payments , the unregulated lender loses money first. The regulated lender has first claim on any future payments or sale proceeds in a foreclosure.

Nick Kyprianou, chief executive of the RiverRock MIC and former president of Home Trust, said RiverRock has avoided bundling because of the risk. Three years ago , when he was CEO of Equity Financial Trust, OSFI (Office of the Superintendent of Financial Institutions) was scrutinizing the practice across the industry. He said they were showing discomfort with those partnerships and it could come up again.

The Credit Counselling Society’s Scott Hannah, President and CEO urged regulators to ban the products.
“ This is not a product that’s going to help the vast majority of people using it to get ahead financially,” he said. “ That’s the bottom line.”

Adapted from Reuters Financial Post