Soaring mortgage costs have become such a problem for Canadian homeowners that Prime Minister Justin Trudeau’s government is urging banks to ease the burden on mortgages.
Nick Kyprianou, CEO of RiverRock Mortgage Investment Corporation, takes a more tough-love approach.
Mortgage investment companies (MICs) like Kyprianou’s company are navigating difficult times. Rising borrowing costs are weighing on many homeowners, but the problem is even more acute among MIC borrowers, given that interest rates on loans are often 10% or more. But because the companies don’t have the resources of Canada’s giant banks, the Ministry of Internal Affairs and Communications says it can’t let stuck customers skip payments for that long and needs to act faster to stem the losses. often claimed.
So if someone misses a payment, Kyprianou’s company will contact them right away to see if they can get back on track. If the answer is no, they give you an ultimatum. “If you don’t sell it now, we will sell it for you.”
“Last year we started off extremely aggressively,” he said. “When people ran into a problem, we said, ‘Look, you can’t afford it. Let’s look at your budget. Okay, let’s sell the house. What does it come down to? We can’t get that, so let’s work together.”
Housing expense
It’s this kind of pressure that Prime Minister Trudeau is asking banks to ease. His Canada Mortgage Charter, released last month, lays out guidelines banks should use to keep borrowers in their homes after a historic spike in interest rates. Rising home prices have emerged as one of the government’s biggest challenges as it seeks to avoid mass foreclosures.
But ministries such as Cyprianou’s River Rock are overseen by provincial governments, not the federal government, giving Trudeau no leverage to heed the new guidelines. And Kyprianou argues that private lenders that are too lenient with defaulters risk going out of business.
“I don’t think all ministries will survive,” he said. “I don’t think they’re going to be proactive with people who run into problems. They’re going to be passive, hoping that things will get better and the market will fix their mistakes.” I think there is.”
There are signs that forced sales by the Ministry of Internal Affairs and Communications are a contributing factor to the rapid increase in the number of new listings nationwide since the beginning of the year. And their status outside of federal regulation could push even more borrowers into their hands.
Despite claiming only about 1.7% of the national mortgage market, these alternative lenders have experienced double-digit growth in recent years. One reason for this is the federally mandated mortgage stress test, which requires banks to prove that they have enough income to service their loans if interest rates rise. Because there isn’t.
With interest rates currently at their highest levels in more than 20 years, many borrowers are unable to meet the criteria, and more are turning to the Ministry of Internal Affairs and Communications instead. According to a recent report from Canada Mortgage & Housing Corp., assets at Canada’s 25 largest mortgage investment companies grew 7.1% in the first quarter compared to the same period last year. In contrast, the industry as a whole increased by 6%. In the coming years, more Canadians will find themselves competing with this far more ruthless type of lender.
“Canadians across the board are feeling the financial crisis, so they’re turning to alternative financial institutions,” said Matthew Gibson, a real estate lawyer based in Hamilton, Ont.
He says the number of mortgage applications coming to his desk from these companies has tripled compared to last year.
“Big banks need to understand that they may be slower to act because of their assets, size and other safety reasons,” he said. “Private financial institutions are vulnerable in that big banks lack the resources, so asking them to be as lenient with non-payers as TD Bank and RBC is is a tall order.” within 6 months. ”
fall behind
However, that action is often painful for those who have lost their homes. Since 2018, Jared Gage has had a second mortgage with a private lender on his home in Kitchener, a small city about an hour and a half outside of Toronto.
He and his wife needed money after other investments failed. The interest rate was 19% per year (paid in monthly installments), but he was able to cope because he worked at a local Toyota factory and his wife was a nurse.
But over the past two years, inflation has skyrocketed. The family’s other expenses suddenly increased, causing them to be behind on their second mortgage by November 2022. In January, lender New Haven Mortgage Corp. announced it would begin the sale process. The family of four has now downgraded from the four-bedroom house they had lived in since 2008 to a three-bedroom condo.
“It’s scary not knowing if you have a roof over your head,” Gage said.
Why didn’t his lender, his real estate attorney, or his mortgage broker warn him about keeping such a high-interest loan for so long, or what could happen if he defaulted? I was wondering why he didn’t make it clear.
“We agreed to it, but we didn’t investigate. Ultimately it was our responsibility,” he said. “But no one really cares about you.”
Many alternative financial institutions offer shorter maturity loans, often one or two year debt. This means that its borrowers are the first to face the effects of the historic interest rate increases of the past two years.
This means a larger portion of Mortgage Investment Corporation’s loans are behind on payments. At the end of the first quarter, MIC had nearly 0.9% of its mortgages in delinquency, according to CMHC data. For chartered banks, home loan delinquency was only 0.15%.
A number of recent guidelines from Prime Minister Trudeau essentially encourage banks to keep these delinquencies low. For some lenders, this means customers can reduce their monthly principal payments or stop them altogether, and it means borrowers have more time to repay their loans.
Some companies also allow holders of adjustable-rate mortgages to reduce their interest payments, adding that amount to the principal amount, effectively increasing the size of the mortgage. In all of these cases, it technically means that the borrower has not defaulted on payments.
But while these strategies may mean keeping people in their homes, they have also drawn criticism from critics who say they risk putting homeowners into permanent debt. Some borrowers currently face amortization periods in excess of 35 years. That means there may be no realistic way to pay down the debt unless interest rates fall or values rise.
And with prices down 12% from their 2022 peak, the urgency is growing. If the home’s value falls below the mortgage amount, the lender may not be able to recover the full amount and the borrower will be left with nothing in the sale. The hole gets deeper every time interest payments are delayed.
In this situation, a recovery in prices could help both lenders and borrowers, and that may be what Canadian banks are counting on. But for alternative lenders who are unable or unwilling to retain it, the options are to seek a foreclosure, which effectively takes over the property, or to force the borrower to sell in a power-of-sale proceeding. At least you get to keep the extra sales proceeds after the loan is paid off.
forced sale
It is difficult to obtain accurate figures on how many buy-sell mandates are taking place. But there are signs that pressure from alternative lenders is at least partly why more homes have been put up for sale in the housing market in recent months. The three-month moving average of new listings in November was up 21% from March, with the jump concentrated in Ontario, where alternative lenders are most active.
In Canada’s largest city, Toronto, the number of listings that mention the terms “sales force” or “mortgage” has increased to about 1% of listings from less than 0.3% a year ago, according to data compiled by local authorities. did. real estate agent Daniel Foch;
Foch said the measure likely underestimated the total number of ongoing right-to-sale procedures, as not all listed companies cited them as the cause. And this data does not include homeowners who are threatened with a right to sell and take action themselves before their lenders begin legal proceedings.
“There’s a lot of soft power of sales going on,” Foch said. “Forced sale is a realistic option.”
