Home Capital Group Inc. (HCG) and Equitable Group Inc. (ETC), two of Canada’s biggest non-bank mortgage lenders, stand to benefit from new lending restrictions that may drive clients away from commercial banks.
Canada will shorten the maximum amortization period of mortgages the government insures to 25 years from 30 years and lower the maximum amount homeowners can borrow against the value of their homes to 80 percent from 85 percent, Finance Minister Jim Flaherty said yesterday.
The rules, along with new guidelines announced yesterday by Canada’s banking regulator, will increase due diligence and documentation requirements for lenders, making it harder for some homeowners to qualify for mortgages at the big banks.
“As more and more business at the margin shifts away from the banks, the alternative lenders stand to benefit from increased product and higher quality customers,” said Stephen Boland, an analyst at GMP Securities in Toronto.
Adam Seanor, a research analyst at M Partners in Toronto, said the new measures play to the advantage of Toronto-based Home Capital and Equitable, which are already doing such client reviews.
“The announcement should be great news for the alternative lenders,” Seanor said in an interview. “They’ll get better quality clients and more volume.”
Home Capital fell 26 cents to C$44.90 at 4 p.m. trading in Toronto. Equitable rose 2 cents to C$25.57.
Banks including Toronto-Dominion and Canadian Imperial Bank of Commerce (CM) have already scaled back on certain areas of home lending. Toronto-Dominion, the No. 2 bank, stopped originating non-prime residential mortgages at the end of March, while CIBC, the fifth-biggest, said June 20 it’s shuttering its FirstLine mortgage brand after failing to find a buyer.
“To the extent that it makes it more difficult for people to qualify, it’s obviously additive to the pressure that they’re going to experience,” said Brad Smith, an analyst at Stonecap Securities Inc. in Toronto. “There’s a broad consensus that consumer leverage levels are high and should be brought down, and that’s certainly going to impact growth in the consumer lending area for the banks.”
Home Capital, which targets the C$200 billion ($194 billion) mortgage market of home buyers who don’t qualify at chartered banks, operates in “a space that the banks did not quite infringe on,” because of a niche group of employees, Chief Executive Officer Gerald Soloway said.
“We do a lot of training with the underwriters that will look and ask questions and try to get the documentation to get people qualified who may get turned down at the bank,” Soloway said in an interview.
He said the new rules, including shorter amortizations, are “small potatoes,” and the government is simply returning to the 25-year mortgages that were the norm for many years.
“In my opinion, they had gone bonkers” with the 40-year mortgages and looser criteria, he said.
Equitable, which sold the majority of its mortgages in Ontario at the end of the first quarter, also said the new guidelines could be a benefit.
“Our view of these changes is that they will have the impact of making a greater share of the market addressable to lenders like Equitable,” CEO Andrew Moor told investors yesterday during a presentation in Toronto.