If you are a subprime lender or MIC, you may have started looking at bundled loans as a way to get around some of the new mortgage rules that initially would have made it more difficult to organize mortgages on property purchases of $500,000 or more. Is this a viable option – do they offer more risk than reward?Global News recently published an article diving into the practice, outlining some of the risks and rewards. It’s fairly straightforward; the MIC in first position and private lender in second position bundle the loans together. You can find the article in full here: http://globalnews.ca/news/3174179/canadians-skirting-new-mortgage-rules-with-risky-bundled-loans/.
The reward: now the mortgage can be funded with a down payment as low as 10%, as opposed to the new regulated mortgages that involve a down payment of 20-30%.
The risk: well, new mortgage rules were introduced as part of the government’s effort to protect the economy if the real estate markets experiences a cool-down. For example, should interest rates go up, this could make it more difficult for Canadians carrying larger mortgages to carry their debt (the new regulations aim to avoid this situation). The risk is that, with bundled mortgages, those who hold these will be in a higher risk position should their mortgages go into default because those mortgages will involve security with less equity.
Bundled loans are not new – this is a practice that has existed for some time – the new mortgage rules have simply resulted in an increase in the practice according to the article. Furthermore, as the article notes, the Ministry of Finance is closely monitoring the increased proactive of mortgage bundling but at the moment no one seems to be sounding alarm bells.
If you are a MIC considering partnering with private secondary lenders to bundle mortgages, utilizing the correct technology will be one way that you can mitigate your risk. The risk does exist. Considering the fact that the government recognized enough concern regarding these higher value mortgages that it changed the rules to protect the economy against it, it makes good sense to proceed with caution when entering this arena.
Being positioned to investigate different areas to better understand which present greater risk is one way to focus on lending in areas that are safer and less prone to dips if the real estate market cools. Sure, there are routine releases from different companies that tell you, city by city, how real estate markets are performing, but there are also tools you can leverage to assess cities neighbourhood by neighbourhood. Trends in different neighbourhoods will help you to be more aggressive where the market is showing stronger trends and less aggressive where this is not the case.
For more information about the tools that you can use to help mitigate risk and assess property values at different levels please visit Purview at https://www.purview.ca/.