Formerly a haven for would-be borrowers who were unable to fulfill the stricter lending criteria drawn up by banks, Home Capital and its current troubles are now forcing borrowers towards more loosely regulated private mortgage providers.
Experts estimated that these lenders now account for around 15 per cent of new mortgages in Canada. Many of these private lenders group their funds together into collectives called Mortgage Investment Corporations (MICs), which are only overseen by their provincial watchdogs and do not fall under the purview of the Office of the Superintendent of Financial Institutions.
“If you want to look at the unintended consequences of policies and what’s happened now with Home Capital, I think you will see the MIC market mushrooming,” CIBC deputy chief economist Benjamin Tal told Reuters. “You will see more and more activity going through to MICs.”
However, the trend is not without its dangers, as it means that Canadians are essentially relying on a segment with a lack of regulation and an unstable source of funding in a time of unprecedented levels of household debt.
“We’re transferring the risk from the regulated segment of the market to the unregulated segment,” Tal stated. “I really don't think it's a good thing.”
The OSFI assured that it will keep a close eye on further developments. “Whenever there are conditions or events that impact that environment and potentially increase risks, our level of activity and vigilance increases.”
Prior to its woes, Home Capital actively served the alternative market that flourished post-2008 as rising home prices and record-low interest rates compelled more and more Canadians to take on debt. The lender previously estimated that the alternative funding segment comprised as much as 25 to 30 per cent of all Canadian borrowers, representing $350 billion to $420 billion out of the $1.4 trillion national residential mortgage market.
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