How are lenders assessing the current private market?

A less aggressive approach is prevailing, suggests broker

How are lenders assessing the current private market?

A conservative and cautious approach is likely to remain a key priority for Canada’s leading private lenders when it comes to the 2024 market amid an unpredictable economic climate, according to a top broker in the space.  

Daniel Vyner (pictured), principal broker at the Toronto-based DV Capital, told Canadian Mortgage Professional that recent months had seen little change in the outlook for the private lending sector, with high borrowing costs and fluctuating property values contributing heavily to the current uncertainty.

“I’d expect there to be similarities [this year] pertaining to private mortgage lenders continuing to underwrite loans and lend using a conservative lens,” he said.

“There remain economic unknowns. The cost-of-living for consumers is through the roof. The cost of private capital remains the same. And there are still unknowns with respect to real estate valuation, which adds question marks into lenders’ underwriting.”

Real estate valuations continuing to pose a challenge in 2024

In the current bumpy market, it may be difficult to ascertain the value of loans funded a year or more ago – particularly as appraisals speak to comparable sales data, rather than forecasting precisely where home values are heading in the months ahead.

During unpredictable times, Vyner described it as “prudent” to question home values, even if the nature of a private mortgage is generally short-term – especially since an agreed exit to the mortgage term is no easy feat for many borrowers at present.

“As we’ve seen, quite a bit can happen in one year’s time, especially when qualifying for traditional lending,” he said. “The stress test is no less difficult than it was a yar ago and especially if other private mortgage lenders are also aggressive with lending practices, the exit strategy is no simpler.

“Regarding property types, property locations and loan to values (LTVs), I say that in the absence of a rising market, an increase in underwriting scrutiny will naturally provide fewer bailout options for homeowners in financial distress, including situations that would’ve been fairly easily approved and funded in prior times.”

Despite that continuing caution, there remains an “abundance” of private mortgage capital in a competitive market, Vyner said, provided by mortgage investment entities and a segment of private mortgage investors and facilitated through licensed brokers.

“This speaks to the evident and ongoing demand for private mortgage capital,” he said. “With, for the most part, a marginal spread between the interest rates and fees provided by most private lenders, there’s a greater emphasis placed on product simplicity and relationship fostering.”

Could delinquencies and power of sale situations increase this year?

Delinquencies of 60 days or more among leading mortgage investment entities ticked upwards in four consecutive quarters between Q2 2022 and 2023’s first quarter, according to Canada Mortgage and Housing Corporation (CMHC), although at 1.95% they peaked during that period lower than in the third quarter of 2021, when they were nearly a full percent higher.

So-called power of sale situations, in which a lender compels a borrower who’s behind on payments to sell their home, are also on the rise in Toronto in recent months.

“Because lenders are being less aggressive – rightfully so – with their underwriting practices, there’s a homeowner segment that simply cannot graduate to traditional lending,” Vyner said. “Depending on the loan-to-value or the leverage on their home or other properties, they [have no other options].

“They can’t replace mortgages largely because of two things: the absence of a rising market and a decrease in private mortgage lenders’ aggression. They may very well be out of options other than selling the property.”

Regulatory focus on private space continues

On the brokering side, regulatory attention on the private space has been strengthening in recent times, with the Financial Services Regulatory Authority of Ontario (FSRA) doubling down on its focus on suitability – mortgage agents and brokers ensuring their recommendations are made with the client’s best interest in mind – in 2024.

That’s to be welcomed, Vyner said. “Compliance isn’t a one-person role in a mortgage brokerage. An increase in regulatory awareness and scrutiny should be welcomed by industry stakeholders,” he said. “It’ll promote confidence in the industry and it will provide protection.

“It’ll provide consumers with additional resources, especially during this present real estate market and economy. Compliance is good, and having an active regulator is helpful for all parties.”

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