Onus is on lenders to attract investment through shared best practices and common approach, president argues
Canada’s alternative and private lending spaces are continuing to see a surge in popularity – and with that growth likely to continue in the coming years, it’s incumbent on lenders to come together and find ways of attracting as much investment to the sector as possible.
That’s according to Glasslake Funding president Mike Forshee (pictured), who told an audience at the recent Mortgage Professionals Canada (MPC) conference in Toronto that the space would be well served by a common approach to best practices and data sharing that can ultimately make it as appealing as possible to investors.
“Our view is that we want to work within the Canadian market with partners, both brokers and other lenders, to really find creative ways to bring more funding into the alternative and private space,” Forshee said during a presentation on Glasslake and the alternative space.
“So how do we really work together as an industry to provide more funding? How do we get more funding into the space as it’s going to continue to grow?”
Those questions are especially relevant in the current market, according to Forshee, with the number of borrowers that no longer qualify with regulated entities on the rise – even those that would traditionally be viewed as highly creditworthy clients.
Borrowers are grappling with substantial affordability issues, leading many to seek solutions in the private lending sector to fulfill their financial requirements.— Canadian Mortgage Professional Magazine (@CMPmagazine) November 4, 2023
Read more: https://t.co/Qa5QRiZ5gn#MortgageIndustry #MortgageBroker #Suitability #AlternativeLending
Executive emphasizes need for a common approach
Against that backdrop, the unregulated alternative market could be “on the cusp of breaking out,” said Forshee – but he added that options are limited for borrowers at present, especially given the preference for highest possible loan to value (LTV) and lowest rates.
“When you have an investor coming into the market and your ask is of them to take the highest risk and the lowest return, it doesn’t really whet the investor’s appetite to stay in the long term,” he said.
“So our view in the market is there’s going to be a big funding gap. And to fill that funding void, we need that [lending] group to come together and really create vehicles that will [bring about] sustainable funding long term for the clients that are not in the regulated space.”
Another significant hurdle for borrowers in the current environment is that even after their term with a private or alternative lender has ended, it’s becoming increasingly difficult to return to the conventional lending space – a trend that Canada Mortgage and Housing Corporation (CMHC) has recently flagged.
That’s a departure from previous years, when borrowers have typically turned to solutions in the private and alternative space for short-term needs before finding an exit with a more mainstream lender.
With that in mind, Forshee said an extremely limited term – for instance, around a year – may not always be in borrowers’ best interests.
“It’s getting harder for clients in the private, unregulated space to graduate back up the credit curve. Rates are higher, OSFI [the Office of the Superintendent of Financial Institutions] continues to tighten, a number of other factors,” he said.
“So we’ve got to be able to provide longer stability for these clients, and putting clients into solely one-year terms when they don’t have an opportunity to graduate up the credit curve in a year is probably not the most secure position that the clients are going to be in.”
Longer terms, data-sharing can prove beneficial to industry
Lenders should steer clear of a “rent-a-money” approach, Forshee added, providing funding to create origination fees in an approach that doesn’t necessarily create a secure product for the client.
A longer-term approach is also often appealing for the investors who are seeking yield, duration, and credit quality. “I think it’s a match from an investment perspective where investors want longer-term duration – but the client also wants longer-term security, because they don’t want to be in that renewal cycle six, nine months from now,” he said.
Ultimately, it’s not a question of the sector needing to be “fixed” – but rather, ensuring greater sophistication to make sure the needs of both borrowers and investors are fully addressed, Forshee said.
Data sharing will be a huge part of that, with Forshee highlighting the difference between the United States – where lenders can easily access any form of data for modelling and predictive purposes – and Canada, where that data is more closely guarded in many cases.
“We don’t all have to be egotistical and just stay in our own shops,” he explained. “I think there’s a way we can share data, share best practices where in turn, that shows the alternative segment in Canada is much more sophisticated to the end investor – we know what we’re talking about.”