Where have all the B lenders gone?

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Wells Fargo, the fourth largest bank in the U.S., made an announcement on July 30 that came to many people as a surprise: it was pulling out of mortgage lending in Canada, leaving yet another void in the non-prime mortgage space.

While similar pullouts from American-based lenders in Canada - think GE Money and Accredited Home Lenders - took place during the credit crunch last year, Wells Fargo's Canadian operation stayed in the mortgage game for several months before calling it quits.

Rick Valade, Wells Fargo Canada's president, didn't go into detail with the closing announcement, simply stating, "In response to recent analysis of our operations and the current market environment, at this time, we have made the decision to stop originating consumer real estate loan products in Canada." (The bank will, however, continue to grant personal loans and honour existing mortgages).

The latest exit of a lender serving 'B' clients (and brokers with these clients) has left only a handful of lenders in the non-prime arena in Canada - not to mention that most of these companies don't lend in all provinces.

And nonprime lenders that didn't fold during the economic downturn are also changing to a prime lending business due to the unstable securitization market (which means the unavailability of funding for high-ratio loans). Examples of switchovers include Street Capital, Home Trust (which still offers B products, but currently only in Ontario) and Xceed Mortgage Corporation, which has plans to become a Schedule One bank next year.

"To me, it was not good news to see Wells Fargo leave the market," said Xceed's president and CEO, Ivan Wahl. "A lot of people who are in a position to renew can't go to their existing lender because there is no funding available in the marketplace. It shows that there are still quite a lot of deserving people who should have mortgage renewals, but they're not going to be provided for."

Who's left?
One example of a Canadian lender still in the non-prime space is Equitable Trust, which lends in Ontario, Manitoba and Alberta. Andrew Moor, the company's president and CEO, said the company is continuing to service alternative borrowers, such as new immigrants who don't have established credit, self-employed individuals (particularly those who have been in business for three years or less) and people that have bruised or damaged credit.

"Our credit criteria has, in fact, expanded since last September - we have an 85 per cent loan-to-value product that we didn't have last year," Moor said. He did add, however, that there was a short period of pulling back. "We did tighten our criteria in the late fall and spring because we were concerned about where the real estate market was going. But now that it appears the worst of the recession is behind us, we're essentially back to where we were on lending this time last year."

Moor added that Wells Fargo's July 30 announcement didn't come as a big surprise to him, pointing out it was the last American company to leave the mortgage lending space in Canada - in other words, the back end of a longer-term trend that was just as much about being an American subsidiary as being a non-prime lender.

"I think it shows that the domestic institutions that continue to be here really understand the Canadian market and we're comfortable about building our business in this kind of environment," he said.

The more tenuous credit environment that resulted from the downturn didn't stop VFC Home, a subsidiary of TD Canada Trust, from launching earlier this year. The alternative lender - which currently serves Ontario, B.C. and Atlantic Canada - can provide mortgages to clients who fall outside of bank or insurer guidelines to a maximum LTV of 90 per cent.

"Brokers love the fact that we're not beacon score driven and we're more based on reading into the clients' credit, their personal situation and what may have happened to the beacon score not being where it should be as far as the insurers are concerned," said Anne-Albani-Dolson, national sales director of mortgages at VFC Home, which gets mortgage originations solely through the broker channel.

Albani-Dolson added that since insurer's guidelines have tightened in the past few months, VFC Home has seen a shift in the types of clients coming to them since these guidelines have excluded some that normally would have been
insured.

Risks and challenges
Because lenders who serve alt-A clients are at a higher risk of defaults than their prime counterparts, they must go through different processes to approve loan applications. Albani- Dolson explained that clients go through a "robust" evaluation at VFC Home that looks at their overall credit profile and the marketability of the property being mortgaged.

"Applications do take longer to process simply because we're not using little ticks that say beacon is this, job is this - we look more in-depth and we ask for clarity a lot of times from the broker on different instances so we can make the right decision," she says.

For example, alternative lenders will want to know the reasons why someone's credit is damaged or non-existent. Wahl pointed out that a beacon score doesn't give credit for the quality of a person's income, for example, and said a low score is often mitigated by doing an in-depth analysis of a person's credit worthiness.

The appraisal is also a key step in the alt-A lending process because there is a focus on lending toward a property in a marketable area with potential for growth.

"We're very concerned about the quality of real estate as an alt-A lender, so appraisals are done more thoroughly than you'd expect with a typical prime lender because one of the ways we mitigate risk of lending to someone without the lengthy track record of credit is making sure that we're lending against good real estate," said Moor. "That's a key tool in our toolbox."

Of course, higher interest rates are another risk mitigation tool of alt-A lenders, which means brokers have to tell these types of clients to expect different interest rates than they see at the larger financial institutions. Albani-Dolson said the question of rate is occasionally a challenge with brokers who don't feel comfortable selling a mortgage to a client at a higher rate, even if it's a small increase.

While it appears the worst of the economic crisis has passed, there are still questions on whether the real estate market has fully stabilized, and job loss remains a key issue for lenders. But companies like Equitable Trust (which posted a 15.5 per cent net income increase in the second quarter of 2009) and VFC Home appear confident in the business they're doing.

"I don't see [lending to alt-A clients] expanding dramatically from here - I think it will stay where it is which, quite frankly, is pretty good," said Moor. "I think in Canada we've been pretty stable all the way through [the credit crunch] and I think that's going to continue. People like myself and my competitors still have concerns about where the real estate market is going, so I don't really see that we'd be relaxing credit criteria at this point. But I don't see it tightening from here, either."