Canada’s alternative mortgage lenders are not getting the anticipated boost to business from the introduction of tougher mortgage qualification rules that took effect three months ago.
Credit unions and other non-bank lenders were expected to see a bump in business after Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), imposed new rules on Jan. 1 requiring banks and other regulated institutions to ensure borrowers can afford their mortgages even if interest rates were significantly higher than the negotiated rate.
The stress-test rule does not apply to lenders that are not OSFI regulated, including provincially regulated institutions such as credit unions, which were expected to lure customers who were turned away from the banks by the tougher new standards.
But home buyers have so far not moved in droves to alternative lenders, in part because real estate sales remain slow in major markets such as Vancouver and Toronto, cooling mortgage demand in the first quarter of 2018.
Banks are also working hard to keep clients, while many credit unions say they are taking a conservative approach to wooing customers who do not qualify for loans elsewhere.
Rob Paterson, chief executive officer of Ottawa-based Alterna Savings & Credit Union Ltd., said business has been slower because of weak buyer demand for house purchases in Ontario.
“We’re really seeing a softening in the market,” he said. “The volumes would be slightly lower on a year-over-year basis than we’ve experienced before, so we’re actually having to spend more time out there in the market.”
He said he is hearing that major banks are also working more with clients to counsel them on how to qualify for mortgages, rather than seeing clients move on to other lenders.
“What the Big Five are trying to do is talk to them about ways that they can meet the higher hurdle,” he said.
Bank of Canada data show that mortgage balances grew three times faster at banks than at credit unions between the end of December and the end of February, which suggests credit unions are not taking mortgage business away from the big banks, according to Ben Rabidoux, president of North Cove Advisors, a market research firm focusing on Canadian credit trends.
The data show outstanding residential mortgage credit climbed by 1 per cent at credit unions and by 3.2 per cent at banks during the two-month period, based on seasonally adjusted numbers on an annualized basis.
Martha Durdin, CEO of the Canadian Credit Union Association, said many of Canada’s credit unions are not rushing to take all the new business that comes through the door.
“Brokers may be pushing applicants our way, but that doesn’t mean we are writing more business,” she said.
She said many credit unions are “inherently conservative” and do not want to take on higher risks. And many also don’t have the capacity to write a lot more mortgages, because they are limited by their ability to raise capital to backstop new mortgages.
“Many are up against their caps and can’t fund huge increases,” she said.
Vancouver City Savings Credit Union, Canada's largest credit union commonly referred to as Vancity, decided to be careful about taking on new risk in the wake of the rule change, said Rick Sielski, senior vice-president of enterprise risk.
Vancity has been applying a new stress test of its own on mortgage applications, although one that is less strict than the OSFI standard, he said.
Mr. Sielski said a raft of policy changes in B.C., including a higher foreign-buyer’s tax and a new speculation tax, have also cooled the market, especially for detached houses, which has slowed the growth of applications.
“For sure we’re not seeing any heyday, and our strategy also wasn’t to build market share with a lower stress test or by being more lenient,” he said.
While many credit unions have not seen soaring demand from the OSFI changes, Mr. Sielski said there is no information available on how much business is going to private lenders and “shadow” lenders who are unregulated and do not provide data on their business.
Robert Goodall, CEO of Atrium Mortgage Investment Corp., said he thought he’d see more mortgage business from the rule change than has emerged, although he hadn’t anticipated a huge leap in demand.
Mr. Goodall said Atrium charges higher rates than mainstream banks because of the riskier profile of its borrowers, who are largely entrepreneurs and new immigrants, which deters many other buyers seeking a mortgage.
“Our borrowers tend to be entrepreneurs who can actually afford our rates, probably not forever but for one, two, three years until a bank agrees to do their mortgage,” he said.
The stress-testing rules are having some impact at some smaller banks that are subject to the new rules.
Andrew Moor, CEO of Equitable Bank, told an industry conference last week that he forecasts new mortgage originations will fall by 10 per cent to 20 per cent this year as real estate markets remain weak. But he said Equitable’s total mortgage balance will be up by about 4 per cent over all because the company’s commercial lending business is strong.
“I’d say in the past few weeks we’ve seen signs the market is already starting to deal with the challenges of B20,” Mr. Moor said. “Application levels have been sound in the context of the time of year. Certainly January and February were relatively quieter.”