MORTGAGE LENDERS

The term ‘lender’ means someone who rent his or her own money to another (a borrower) temporarily in return for income (interest).  But none of the traditional brick and mortar mortgage lenders in Canada, including banks and credit unions, really lend out their own money.  In that strict sense, they are not lenders at all.  More like mortgage brokers.  They act like the middlemen for their direct depositors or investors from the ‘secondary market’.  So I would suggest there is no reason to choose a lender simply based on brick and mortar (meaning they have offices or branches you can visit). To understand this, we need to appreciate how the mortgage market works.

What is the ‘secondary market’?  The Canadian mortgage industry has experienced profound change in recent years. Although the industry is still dominated by those brick and mortar financial institutions, recent addition to the market are dedicated mortgage lenders – both start-ups and foreign banks – who use the Canada Mortgage Bond (CMB) securitization program to fund their mortgage lending activities.  That is part of the ‘secondary market’, which also includes Mortgage-Backed Securities (MBS) and Asset-Backed Commercial Paper (ABCP).  These are all pooled money from all kinds of investors.  All institutional lenders source their mortgage funds from this ‘secondary market’.  Banks are no exception.

Then, what about service?  You may want to consider the fact that most of the brick and mortar financial institutional are only interested in capturing all your business, so that they can sell you all other types of financial products of their own.  It is not to their self-interest to give you unbiased information.  Their representatives are rewarded by selling as much of their own financial products to you as possible.  They are under pressure all the time to meet quota.

On the other hand, dedicated mortgage lenders only do one thing.  They must do that and service their customers well.  Why?  Simply, they have to compete against those brick and mortar financial institutions that dominate the mortgage market.

Here are examples of some dedicated mortgage lenders:

• AGF Trust
• Bridgewater Bank
• Canadiana Financial
• Concentra Financial
• First National
• FirstLine Mortgage
• Home Trust
• MCAP
• Merix Financial
• Street Capital

Think of your mortgage as someone else’s investment!  To allay any concern you may have about lenders, you may wish to read on.

Canada’s mortgage market has attracted an understandable surge of interest in recent years, motivated by the housing sector’s relatively successful navigation of the global credit crisis.

Eric Lascelles, Chief Canada Macro Strategist at TD Securities wrote a marvelous report called “Canadian Mortgage Market Primer” in June 2010.  This report addresses that interest by providing a detailed overview of the key building blocks of Canada’s housing market, the mortgage market, the mortgage insurance system, mortgage-backed securities (MBS), the Canada Mortgage Bond program (CMB), and the Canada Mortgage and Housing Corporation (CMHC).  Here’s a brief overview:

“According to a CAAMP (Canadian Association of Accredited Mortgage Professionals – my association) survey of homeowners, Canadian homeowners collectively have home equity worth about 70% of the housing stock, with the remaining 30% in the form of mortgages1.

Home equity withdrawal remains relatively contained, and Canadians have generally been disinclined to use their homes to finance discretionary spending to the extent that was once common in the U.S. That said, one in five mortgage borrowers extracted equity from their home over the past year, with the most common use to consolidate and/or repay other debt.

Naturally, fixed rate mortgages enjoy a constant, predictable monthly payment.

However, Canada’s floating rate mortgage market (variable rate mortgages or VRMs) has a twist.

From an economic standpoint, while the growth in the popularity of floating rate mortgages has generally increased Canadians’ exposure to the risk of rising interest rates, the existence of VRMs tempers the immediate impact on Canadian household finances.

To establish the credit-worthiness of mortgage applicants, Canadian lenders and mortgage insurers traditionally employ two key income tests.

A criticism of the credit score mechanism is that Canadian lenders tend to be more protective of their borrower data than in the U.S., meaning that a borrower’s mortgage payment history is often not available to be factored into the calculation.

For borrowers with very high credit scores — 680 or higher — the GDS and TDS tests are eased.

A small portion of securitized mortgages that are not backed by CMHC are spread across “private label” securitization vehicles, including non-insured MBS, Nonbank ABCP (asset-backed commercial paper), and Bank ABCP.

The NHA MBS program represents the set of mortgage-backed securities in Canada that are fully insured under the National Housing Act (NHA).

The level of insurance is actually twofold.

First, all eligible mortgages must be insured against default, either with CMHC or one of the private insurers.

It costs between 0.2-0.4% of the notional value of the mortgage portfolio, and ensures that if the banks were to fail, payments would continue to the MBS holder.

In this way, the government ensured that the CMB program would not be cannibalized, and that the IMPP program would wind down naturally in the event of a market normalization.

CMHC’s securitization guarantee program is anticipated to cover $397Bn in securities by 2010, and is expected to earn $177Mn in fees for that year, versus no anticipated losses.

First, so long as borrowers continue to make their monthly payments, the only implication of a failed lender is the administrative headache of CMHC stepping in to service the loans directly.

Second, each of Canada’s major financial institutions present a sufficiently large systemic risk to the overall economy that the government would likely already have its fingerprints all over the dossier, helping both to reduce the risk of a failure and to blunt the implications for other financial sector participants.

As previously discussed, the CMB program is not directly profitable, and Canada Housing Trust is obliged to operate on a break even basis.

A regular criticism of CMHC over the years is that the insurance program has been designed in such a manner that it effectively provides insurance on the lowest quality mortgages in Canada, with far less exposure to higher quality mortgages.

This is undeniable, despite the fact that a U.S.-sized correction is much less likely in Canada due to the predominance of recourse mortgages, stricter mortgage laws, and a variety of other beneficial traits detailed in this report.”

You can read the full report below: