Bundles of debt: how lenders sidestep Canada’s mortgage rules

Wed Jan 11, 2017 7:46am EST
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By Matt Scuffham and Allison Martell

TORONTO (Reuters) - Canada's subprime mortgage providers are increasingly teaming up with unregulated rivals to sidestep rules designed to clamp down on risky lending.

The result of these partnerships are so-called "bundled" loans, which pair a primary mortgage with a second loan from unregulated groups called Mortgage Investment Corporations (MICs).

The arrangements have proliferated, mortgage brokers told Reuters, as Canadian regulators have tightened lending standards to shield borrowers in case a decade-long housing boom goes bust.

The practice has grown fast because it allows borrowers to make down payments of just 10 percent, dodging federal rules that require either 20 or 35 percent down on mortgages not backed by government insurance, according to industry experts. Packaging two loans together allows the regulated lender to skirt those rules.

The rise of bundling reflects declining affordability after a long run-up in home prices, and it could present a danger of defaults if prices fall. Such high loan-to-value mortgages are common when housing markets are about to implode, said David Madani, an economist with Capital Economics who has long forecast a housing crash in Canada.

"This is what happens at the late stage of a housing bubble - the quality of lending goes down," he said.

Bundled loans, however, do not violate any laws, a spokeswoman for the Office of the Superintendent of Financial Institutions said in a statement. Primary lenders are expected to take the extra debt from a second loan into consideration when evaluating the borrower's ability to afford the primary mortgage.

In a statement, Canada's Finance Ministry said it was monitoring co-lending activity, which it said represented a small portion of the mortgage market. It declined to comment on whether the practice had increased as an unintended consequence of tighter lending rules introduced last year.   Continued...

File Photo: Rooftops of houses in the Kitsilano neighbourhood and the downtown core are seen in the hot real estate market of Vancouver, British Columbia, Canada January 6, 2017.  REUTERS/Chris Helgren/File Photo