The Canadian Mortgage and Housing Corporation released its inaugural Residential Mortgage Industry Report for Q3 2019.
The report is a comprehensive look at the state of the residential mortgage industry across the country.
In the report, the CMHC highlights several changes to mortgage growth and conditions. All of these changes favour the ongoing growth of investment opportunities for Mortgage Investment Corporations (MIC).
According to the report, FY 2018 represented the lowest mortgage originations in 25 years. In spite of this, demand outside of the legacy banking system remained strong.
The report highlights the impact of several changes in the mortgage market driven by governance and policy changes. These changes in part have been adding market share to MICs.
These changes include:
- Changes in the insurability of mortgages based on revised maximum housing value
- Higher stress tests for mortgage origination
- An increase in interest rates
The report dedicated a page to MICs.
Here, the report shows the rate of growth from $8-10B in 2016 to $13-14B in 2019, or about 40%+ in the last three years. That trend is unlikely to change in the near term.
At $13-14B, MICs hold a very modest 1% of the overall Canadian mortgage market in spite of the current trend.
The CMHC report tells us that 49% of mortgages have an LTV of 65% or less, followed by 19% in the 65%-75% category. Indicating that ⅔ of all mortgages fall at or below 75% LTV.
The report also says that the LTV range across the MIC industry is 43-73% as of 2018. The average mortgage amount for all MICs is at $194,760, just below the legacy financial system.
The report also highlighted a default rate of 1.93%, which exceeds that reported by the other lenders in the document. However, the source of this data appears unavailable for further examination.
The CMHC Housing Research Report: Mortgage Investment Corporations Update of 2017 indicated a low default rate across the country (Page 6) for this reporting period. At the end of this report (pages 18, 20, 22), one can see that loan loss reserves across the industry were low with a couple of notable exceptions of MICs located in western Canada.
The update of this report in December of 2018 made no mention of any change in the default rate from historical norms. So the details about this number are unclear and certainly don’t match with our experience in this market.
The Financial Post presented the report as a cautionary tale about the rise in people who could not access the legacy financial system.
A variety of factors can limit access to the system, including the previously mentioned policy changes related to insurance, stress tests, and B-20 guidelines cover several.
MICs can and do provide financing across all mortgage classes. First mortgages constitute 65% of the mortgages for MICs in the review. However, MICs also invest heavily in second mortgages, and on occasion, third mortgages.
MICs provide the ability for people excluded from the legacy system to fix their credit or develop a credit history. Both of which will eventually provide them access to the system in the future.
For example, skilled immigrants with resources and lacking a credit history in Canada are excluded from the legacy system. These people can use lending from a MIC to develop a credit profile here while owning a home. Eventually, they will be able to access the legacy financial system with the help of MIC investors.
In other instances, people can consolidate their consumer debt and use their home as collateral as they repair their credit rating. As a result, these people will eventually be able to access the legacy system and better rates again in the future.
Although the CMHC focused on the low-risk first mortgages in the report; second mortgages typically provide a superior risk-reward profile.
While the Financial Post piece on the report focuses on risk, they didn’t emphasize the important role that MICs play as a safety net in a diversified and fluid financial system.
The CMHC report does mention that MICs tend to favour shorter duration commitments. This duration allows the lender to identify problems early and reduce risks. While the overall mortgage average is just below that of Federally regulated banks, it does not mention the range of mortgage averages across the industry.
For example, at Nest Capital Mortgage Investment Corporation, our average $95,100, less than half of the industry average. We also target a conservative fund LTV at 70%.
The item that always gets left out of the discussion is the fact that MIC founders are more likely to have skin in the game. Meaning they are investing alongside their outside investors with every decision.
By investing alongside our investors, we have a vested interest in carefully managing the risks of mortgages we choose to invest in.
Overall the CMHC report confirms the growing trend in Mortgage Investment Corp financing. Our experience confirms that a wide variety of borrowers use the service for a variety of reasons. As a result, we anticipate that the demand for the space will continue to remain healthy.
This trend provides a unique opportunity for private investors to invest in real estate as a creditor. Meaning, you can participate in real estate investing without the responsibilities of ownership. Therefore, no toilets and tenants required.