MICs should be regulated by B-20: CIBC economist

MICs should be regulated by B-20: CIBC economist

MICs should be regulated by B-20: CIBC economist

One of the most respected economists in Canada not only came out in favour of B-20 this week at the National Mortgage Conference in Montreal, he says it should encompass mortgage investment corporations.

Benjamin Tal, deputy chief economist of CIBC World Markets, called B-20 “a game changer,” but says the regulation doesn’t go far enough.

“I supported B-20 because I believe we need to save from Canadians from themselves,” Tal said during a keynote speech. “However, I do believe that, at this point, alternative lenders are the fastest growing segment of the mortgage market. They’re transferring risk from the regulated part of the market to the unregulated market. They’re transferring risk from where there’s light to where it’s dark.”

Tal says alternative lenders, and specifically MICs, comprise the fastest growing segment of the mortgage market. Before B-20, they were serving fewer borrowers, but since January 1 they have attracted borrowers who cannot sustain the 200 basis point stress test, and that worries Tal.

“Today household credit is rising at the slowest rate than in any recessionary period of the past 50 years,” he said. “You have to be in a recession to see credit rise this slowly, and with the exception of the MIC market, this is all good.”

Dimitri Kosturos, chief operating officer of VWR Capital Corp., was in attendance at Tal’s speech in Montreal, and he isn’t convinced that Tal understands MIC brass tacks. For starters, he says VWR lends at 75% loan-to-value or less.

“If you look at default rates on our book of business, it’s pretty low and has historically been low,” said Kosturos. “Most Canadians who borrow from us are responsible borrowers who come through our product and stay as long as they need to, then leave without issue. He’s also talking about the size of the market, but I’m not sure he has a strong grasp on that. Being in the industry, I think some open dialogue needs to happen.”

Kosturos does not dispute the fact that MICs are enjoying greater share of the mortgage market because of B-20, but risk mitigation remains as, if not more, important than ever. VWR’s overall book is 56% LTV.

“Everything we do is based on the equity and marketability of the property,” he said. “We look at that first and have a list of approved appraisers we use for third-party validation of the estimated market value of the property. And as long as it fits our criteria, as outlined in our offering memorandum, we try to get the deal done. We’re not driven by the covenant—that’s one of the primary differences between us and the banks—we’re driven by the property.”

7 Comments
  • Harry 2018-10-31 10:08:49 AM
    Interesting thought but rather biased and bank serving. An average MIC loan is north of 10% while a bank mortgage rate ranged from 2.20 to 2.49 when B-20 was implemented. An average borrower, despite what we may think of him/her, is smart enough to curtail frivolous borrowing when the cost of borrowing more than quadruples. MICs also raise their capital through Exempt Market Dealers (regulated via OSC) with full disclosure to the investors regarding how the funds are going to be used while providing returns anywhere from 6 to 10% depending on the type of lending etc.
    I would rather see the regulators focus on unsecured lending (credit cards). A b-20 variant on unsecured lending will benefit consumers/borrowers tremendously, as it is far too easy to obtain unsecured credit at 20+ percent. In fact, if unsecured lending were to be tighter, I would predict the demand for mortgage refinances to simply consolidate high interest debt would also diminish.

    Imagine a world where I didn't have to deposit my hard earned savings at a bank for meager returns, while the banks, using the same funds to extend credit to borrowers, turn a handsome profits, while charging administrative fees for access to my own money. We have unprecedented access to fast and timely information as consumers and therefore need more efficient markets.

    It is time to break the long standing oligopolies in banking, and telecom industries while we are at it. We are a world class country, an envy of the world, and as such deserve regulations and regulators that are progressive and encourage competition. As for significant increase in private lending that Mr. Tall has been tracking, lets keep in mind that the same private lending segment was insignificant (as he has documented previously) both in originations volume and AUM in relation to the overall size of the mortgage markets. Thus any shift in business will from Prime lenders to Alternative institutional lenders to Private lenders will be significant on percentage basis.
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  • sam 2018-10-31 10:52:00 AM
    With all due respect, Mr. Tal is totally off base. First of all the main reason that MIC's were created in around 1976 via legislation, allowing MIC entities to be designated as "flow through" corporations as per tax act (130.0), was mainly motivated to give INVESTORS an opportunity to directly invest in mortgages. The additional motivation (secondary) was also to give borrowers an alternative to regulated entities. The fact is that MICs are a minor player in the alternative lending space. There are 1. Private lenders, 2. Syndicated lenders, 3. Trusts and 4. and Other corporate structures that lend money. By regulating MICs you not only fail to eliminate or minimize the ability for people to borrow, but you also eliminate or limit the opportunity for investors to participate via a MIC structure. The reason is that MIC's would need to charge less and therefore will not be an attractive investment vehicle for investors. Exactly contrary to what was intended in 1976 legislation. I welcome regulation, if at the same time, MICs were allowed the same access to capital as the BANKS!
    The notion "to protect people from themselves", is dangerous and fraught with many negative consequences (too many to get into here). I suggest that Mr. Tal should make an effort to protect us from his uninformed and biased opinions.
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  • AV 2018-10-31 11:43:36 AM
    Totally agree with the replies above. Too many people no longer qualify under the B-20 guidelines and are forced into higher rates through MIC's or private lending. But if the MIC's and private lenders were no longer available to consolidate the high credit card interest rates then there would likely be more defaults as well. I agree that the focus should be more on unsecured credit card interest rates and also car loans which are oftentimes too easy to obtain without income qualifying.
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