IMBA Professional Development Syposium Panel
From left to right : Rick Glauser – Optimum, Brian Leland – Equitable Bank, Pino Decina – Home Trust, Angelo Froudakis – IC Savings, Hassan Shaikh – MCAN Mortgage Corporation
I recently had the privilege of participating in a discussion panel as part of the Independent Mortgage Brokers Association of Ontario (IMBA) Professional Development Symposium. One of the topics that generated considerable discussion was around the potential for growth in what is referred to in the industry as the “Alt A” or alternative lending space. Alt A borrowers are those that have difficulty qualifying for a mortgage loan with the major banks and are forced to look to so-called “alternative” lenders for financing.
Those that have had previous credit issues, new Canadians with little Canadian credit history, and the self-employed often find themselves in this group. The major banks remain hesitant to lend to these borrowers as they consider them to be higher risk. The thing is, though, that individual borrowers from this group do not automatically represent any greater risk than the rest of the population.
This is something that Gerald Soloway, Home Trust’s recently retired CEO, first understood thirty years ago when he founded Home Trust. At the core of Mr. Soloway’s vison was the realization that many of those rejected by the established banks were being turned down not because they necessarily represented higher risk, but simply because their circumstance were different from the borrowers the banks were used to serving.
By taking the time to understand each client’s unique situation, Mr. Soloway felt it was possible to responsibly underwrite these applications thereby providing financing for those qualified borrowers to realize their home ownership goals. Clearly, Mr. Soloway was on to something; here we are thirty years later, a recognized leader in our industry and with a non-performing loan rate on par with any of the big banks.
What Does the Future Hold for Alt A Lending?
It is my view that demand for alternative lending will continue to grow and I base this position on an examination of several factors. Looking first to Canada’s immigration policies, it is clear that the government intends to maintain an aggressive recruitment strategy.
Canada, like many Western countries, is experiencing an aging of its population as the baby boomer generation – essentially those born between 1945 and 1965 – are all at, or nearing, retirement age. The result of this is that last year for the first time, the number of Canadians over the age of 65 exceeded the number of young Canadians aged 15 and under.
At the same time, Canada’s fertility rate has declined from 3.81 children per adult female in 1960, to just 1.6 today. This is actually below the fertility replacement rate of 2.1 which is the rate required for the population to replace itself within the span of a single generation. To put it simply, as a country we need to increase the number of working Canadians to ensure we can continue to afford the programs we have come to rely on and new Canadians are an important part of building and maintaining our workforce.
In addition, about 16% of the workforce is currently defined as being self-employed, and we expect this number to increase in the coming years. This move to more self-employment will be driven partly by younger workers embracing entrepreneurship and we are seeing this today with some very innovative tech start-ups. In other cases, self-employment will be forced upon more workers as businesses, in a bid to reduce their costs, will continue to convert more fulltime, salaried positions to contract and consulting roles.
Because these individuals don’t fit neatly within the banking industry’s rather narrow definition of the ideal borrower, we see this as an opportunity for mortgage brokers and lenders to expand their alternative business. We also expect the major banks to continue a tightening of their risk appetite in response to current price volatility in many parts of the country including the key housing markets in Vancouver and the Greater Toronto Area. This will result in more borrowers being rejected by the major banks providing further opportunities for alternative channel participants.
Having said this, I want to make it clear that I am in no way suggesting that Home Trust is any less risk averse than the prime institutions. The Home Trust advantage is based on the lessons learned specializing in serving the alternative market over the past thirty years and it all starts with taking the time to thoroughly review each application on a case-by-case basis. While this is a time consuming process and requires input from various in-house experts, it is necessary to ensure that Home Trust remains shielded from excessive risk. This approach has served Home Trust well and, as I noted earlier, Home Trust’s non-performing loan rate is very much in line with Canada’s major banks.
EVP Residential Mortgage Lending
Home Trust Company
This post is intended for informational purposes only and is not to be considered financial advice.