In 2007, when CMP launched its first guide, it was called the Guide to Subprime Mortgages and was a huge success. In 2009 most of the lenders mentioned in that guide had either dropped the product or left the market entirely, but there is definitely a still a good chunk of them in the alternative lending game, the term "alternative" being key.
To use the word subprime in today's context to describe a client that simply doesn't fit into the parameters of a prime mortgage would be devastating, and according to Nick Kyprianou, president, Home Trust, "words like subprime aren't relative to what we're doing. I don't think they are subprime. Just because you're not the mainstream it doesn't mean you're not good."Even the word B is a "hard thing to market," he says.
"For the broker, they don't want to tell their client, 'Oh, you're a B client.' It's like telling somebody their baby is ugly - they don't want to hear that. They would much rather hear, 'I can't get you with the bank, but we do have an alternative program that we can fit you into.' Alternative, from a marketing perspective, from a lender perspective, and from the broker who is with the client's perspective, is a much more user-friendly term."
Under the alternative banner, the lenders that made it through the difficult markets of the past two years have come out stronger not only because they had an opportunity to capture more market from the exiting lenders, but most importantly, because they were balance sheet lenders.
"There are less lenders in play to support the alt-A world but the ones that remain are committed to it," says Lester Shore, manager, Optimum Mortgages. "It's probably survival of the fittest amongst the lender group, and the ones who were approaching the alt-A opportunities from a common sense, reasonable standpoint are the ones that remain, continue to be successful in mortgage lending and have very satisfactory lending portfolios as a result."
As for seeing new lenders in the near future, the prospects probably aren't as good. "Maybe at the margin, one or two," says Andrew Moor, president, CEO, Equitable Trust. "I just don't think people have the balance sheet for the capital required, as it's basically a balance sheet business and will be that way for a while."
Looking up
Moor says he noticed the market for alternative lending really started picking back up again in May, and "has been getting better ever since," he says.
Kyprianou is quick to point out that, as a national lender, it's important to look at it regionally.
"Every market in the country has been hit differently," he says. "Ontario has been relatively stable, but Western Canada, especially Alberta, has been hit significantly. They have suffered some pretty big decreases in values and Eastern Canada has remained relatively stable. The positive to all this, of course, is that rates are really low."
In fact, out of everyone CMP spoke with for this guide, lenders and brokers, everyone shared at least a few similar sentiments that things are looking positive.
"Everything just seems to be more of a settled nature and there is probably a higher degree of approval levels than there would have been a year ago," says Shore. "Everybody's got a better understanding to where the goal posts are with respect to the lenders and the borrowers."
Shore adds that things are so good for Optimum that they "have the green light in terms of bank liquidity to try to double the size of business," he says. "It's a key priority."
The pricing gap
The biggest issue that alternative lenders faced though was on housing prices. While statistically the numbers seemed to be going up, the appraisers operated on a different level.
"Appraisers have been appraising lighter than expected, which has been the greatest challenge when closing transactions," says Moor, before adding that the market was "through the bottom of that around the April or May time period, just when things started to take off. At the time just working with our partners to see what kind of a deal could be done was a bit of a challenge."
While this obviously applies to all sectors of the market, it's especially true for alternative lenders because of their heavy reliance on quality real estate to base their loans.
"When you're an alternative lender you're overlooking some other things, but the real estate rules the day," says Kyprianou. "Marketability, location and exit strategy. For Home Trust it has always been that way, which is why I think we have survived for so many years."
One unfortunate side-effect of this, at least according to the forum on mortgagebrokernews.ca, is the access to alternative funds in remote areas.
"Residents of small cities, towns and rural areas have no options given to them by the B lenders," wrote one reader. "Expensive, private money is their only choice. B Lenders need to realize that these properties are marketable and sometimes nicer than those in the bigger centres. [They] need to step up to the plate and expand their lending areas. Well and septic are not bad words."
"There is a need, and not at a minimal LTV either. We need it up to 90 or 95 per cent like in the major urban centres," wrote another.
And while there may be a need, lenders still view rural areas as higher risk.
"If a house becomes abandoned, for instance, you have to deal with the snow removal, make
sure the pipes don't freeze and vandalism," says Kyprianou. "It becomes more costly to manage, and because of that you can't lend at the same LTV."
While the alternative market may be back, it's nowhere near 2006 levels, so things have obviously softened a bit. But for clients who don't fit in the big bank's box, it's nice to know there is still a place for them. This is particularly true for the growing amount of business-for-self clients, especially as unemployment numbers grow.
"You may have to piece together the track record of earnings, for instance," says Moor. "That's what we're seeing more and more of. You have people out of unemployment but into a part-time job, perhaps with some consulting on the side. That's where this is really strong. Certainly any well-rounded, qualified broker is going to use alternative products as any part of their overall solutions for what they're doing."
Next page: A list of alternative lenders and their guidelines
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