Lending could be further curbed in anticipation of a housing correction
Joanne Lee-Young
The Vancouver Sun
As federal regulators tighten mortgage rules, there are signs the big banks are moving away from the behind-the-scenes lending practices that helped their earnings in a rising real estate market but are now starting to look more risky.
Banks had not only been growing their ranks of unlicensed mortgage specialists in recent years, but also dipping into more perilous mortgage lending by making deals for higher-risk borrowers through subsidiary companies or an internal, but separate department.
“Some of them have been saying, whoa, maybe we shouldn’t be in this as much anymore,” said David Madani, a former Bank of Canada senior economist who now works for the research firm Capital Economics.
CIBC confirmed to Postmedia it is shuttering the Vancouver office of its HLC Home Loans Canada subsidiary, a process the bank says isn’t related to recent changes in mortgage rules, but that has been in the works for some time.
The wholly-owned subsidiary of CIBC employs mortgage option specialists who take on the mortgage clients that CIBC rejects because they don’t meet credit guidelines, according to a job posting with HLC’s Vancouver office. HLC specialists also refer clients to alternate lenders when they “no longer meet bank risk standards and/or are current risks for CIBC,” according to the posting.
A CIBC spokesperson told Postmedia: “We made the decision to wind down the HLC business two years ago as part of our broader strategy to deepen our client relationships, and the majority of the employees are now CIBC mortgage advisers.”
At Royal Bank, when a potential borrower’s application for a mortgage doesn’t pass muster, a bank representative passes the file along to what is known, uniquely at RBC, as the “alternate mortgage solutions” or AMS team. This group then farms out the deal to other alternate lenders, much like a licensed mortgage broker might, and when the mortgage closes the bank representative is paid. The bank did not respond to a Postmedia request asking for details such as the current size of the AMS team and if there have been any recent reductions, as some industry sources suggest.
A retreat from these lending practices comes as there are questions about the health of the big six national banks’ mortgage books, which swelled five per cent to $1.14 trillion in 2016, according to James Shanahan, a senior analyst who focuses on Canadian banks at Edward Jones. More than two-thirds of the $52.8 billion in new mortgages are uninsured, triggering fears of a crash.
“It’s true, you can say that Canadian banks are very conservative, but they have been, I would say, aggressive in extending mortgages to homebuyers,” said Madani. “It’s a concern because if we get into a nasty housing correction and prices of homes drop, some people will be defaulting on their obligations and this will then present a problem to the banks.”
Bank mortgage specialists differ from mortgage brokers. Rather than representing the borrower and shopping around for the best mortgage rate, specialists work to bring in new business to the banks. They work solely on commission and sometimes without a desk at the bank. They also aren’t subject to the regulations of B.C.’s Financial Institutions Commission, which oversees the province’s 3,400 registered mortgage brokers.
Although consumers are increasingly turning to mortgage brokers, 47 per cent of homebuyers still went to a mortgage representative at a Canadian bank to make a purchase in 2016. Also, 67 per cent of homeowners go to banks to renew or refinance a mortgage, according to a recent Mortgage Professionals Canada study. When you look at all mortgage holders, 56 per cent worked with a bank representative. For the banks, the use of mortgage specialists and alternate lending teams is a way not only to make a fee, but also to “hold onto that client,” said Geoff Lee, a Vancouver-based mortgage broker.
The concern for consumers, according to Samantha Gale, CEO of the Mortgage Brokers Association of B.C., is that borrowers might not realize their file has been shifted from the bank to an outside lender without first being shopped around for the best rate. The details would be in the very fine print.
Not everyone agrees that such a borrower would necessarily be in the dark. “We actually call and talk to them so they know who they are working with,” said Jonathon Cowan, president of Peat & Cowan Financial, a Vancouver-based broking firm that has a contract to work with borrowers turned away from Toronto-Dominion Bank.
Gale counters with an example of what could happen to an unsuspecting consumer: “You could have someone requesting financing who gets turned down by the bank itself and then referred (by the bank) to their alternative lending (subsidiary or department), but who could have actually qualified for the loan elsewhere on different terms.”
HLC is not the first CIBC mortgage business to be shuttered. In 2012 the bank closed FirstLine whose loans, often granted to the self-employed and recent immigrants, were described as having “some similarities to non-prime loans in the U.S. retail lending market,” according to a Bloomberg News story citing a report from the Office of the Superintendent of Financial Institutions, which governs Canadian banks.
The report added that the banks and other lenders are becoming “increasingly liberal” with mortgages and home equity lines that don’t mandate borrowers to prove income.
CIBC executives said in a recent earnings call that most of the bank’s uninsured residential mortgage loans have high credit scores and less risky, low loan-to-value ratios.
Of all the big banks, CIBC’s portfolio of uninsured mortgages grew the most, by 32 per cent or $25.4 billion, in 2016, according to Shanahan.
In a recent quarterly outlook note, Madani spelled out what a housing correction might mean for consumers: “We doubt any large banks would ever become insolvent, but the fallout would likely force them to curb lending.”
© 2016 Postmedia Network Inc.
