The next economic downturn will result in higher credit card losses at Canadian banks than the last recession due to the “unprecedented” levels of consumer debt fuelled by the housing boom, says Moody’s Investors Service.
With many Canadians already pushed to the limit by high housing costs, job losses or other “cash flow shocks” will put higher credit card balances at risk of default, the ratings agency concludes.
“When the economy turns, many consumers will struggle to meet their credit card payments because they’ll be too concerned about making their mortgage payment,” said Jason Mercer, lead author of the report published Wednesday.
Credit card portfolios tend to take the hit in times of stress because homeowners prioritize repayment of mortgages, explained Mercer, and the banks hold no collateral against credit card loans.
“Consumers are more likely to default on credit cards before their mortgage because they won’t lose an asset such as their house or their car,” he told the Financial Post. “The banks have limited recourse to a defaulted credit card borrower other than giving them a black mark on their credit history.”
During the next downturn, the ratings agency expects the losses from credit card portfolios to climb between 50 and 100 basis points above the past peak charge-offs of 5.8 per cent in 2009.
“In the event of job loss, consumers will not only prioritize mortgage and other loan payments, but may also increase their credit card borrowing to pay the bills until they find another job, resulting in higher balances at default,” the report warns. “Credit cards are also sensitive to increases in interest rates, albeit indirectly.”
If rising interest rates result in higher servicing costs when a mortgage is refinanced, this can drive credit card repayments further down the list of a homeowner’s priorities, the report explains.
The big five
Canada’s five largest banks are dominant players in the domestic credit card business, with a combined estimated market share of between 70 and 85 per cent, Mercer said. But despite their exposure to the overall segment, the Moody’s analysts note that credit cards account for only five per cent of the lenders’ total consumer loan portfolios. Mortgages, roughly half of which are secured, make up the bulk of those portfolios.
The small relative exposure to credit card debt should dull the impact of the expected fallout from a downturn, the report notes, as should the higher fixed interest rates Canadian banks tend to charge their credit card customers compared to peers in the United States and United Kingdom.
“The research suggests Canadians repay their credit cards at a higher rate than in the U.S. and the U.K. because it’s more expensive to carry a balance,” Mercer said. “The flip side is that these rates lead to higher profitability for the (Canadian) banks.”
In the last recessions in the U.S. and U.K, credit card loss rates rose to 11.5 per cent and 12 per cent respectively, according to Moody’s. That’s well above the ratings agency’s prediction of 6.3 per cent to 6.8 per cent for Canada in the next downturn.
The expectation of additional losses is not surprising when considering Canadians’ growing debt burden. As Moody’s points out, as of March 31 of this year, just a penny shy of $1.70 was owed for each dollar earned.
That’s “nearly twice the level of 30 years ago,” the ratings agency points out, adding that the trend has been driven by a combination of low interest rates, minimal economic stress, and increasing housing prices.
Canada’s record high household debt has attracted attention and warnings from international organizations such as the Bank for International Settlements. A key ratio of credit to gross domestic product tracked by the BIS suggests Canada is among a group of developed countries most vulnerable to a financial crisis.
This week’s Moody’s report suggests high household leverage will play out differently in regions across the country. Consumers in Toronto and Vancouver, for example, are flagged as particularly vulnerable to “cash-flow” shocks such as job losses or rapidly increasing interest rates, due to more dramatic house price increases in those pockets. In the oil-producing provinces of Alberta and Saskatchewan, meanwhile, there have already been indications of an uptick in delinquencies in consumer debt portfolios in the aftermath of a slump in crude prices, the report says.
Initial unemployment insurance claims in those oil-dependent provinces nearly doubled in the latter half of 2016 from the start of that year.
“Although we expect losses to be moderate and manageable for large, geographically diversified banks, card loan performance in these Prairie provinces in coming quarters will be an illustrative first test of the ongoing strength of Canadian credit card portfolios,” the ratings agency report said.
TORONTO — Royal Bank of Canada on Wednesday reported a 5 per cent increase in underlying third-quarter net income, helped by double-digit growth at its wealth management business which offset a weaker showing in capital markets.
Net income at Canada’s biggest lender, excluding one-off items such as costs of integrating U.S.-based City National, bought in November 2015, rose to $2.8 billion for the quarter to June 30.
Earnings per share also excluding one-off items reached $1.89 compared with an average analyst forecast of $1.87, according to Thomson Reuters I/B/E/S data.
Net income at RBC’s retail banking division grew by 6 per cent to $1.4 billion, while net income in wealth management increased by 25 per cent to $486 million, including a first-time contribution from City National.
RBC said net income from its capital markets business fell 4 per cent to $611 million. The bank reported a decline in fixed income activity, reflecting less volatility in the market.
The bank announced a 5 per cent increase in its quarterly dividend to $0.91 per share.
Its core Tier 1 ratio, a key measure of a bank’s financial strength, increased by 30 basis points to 10.9 per cent.
RBC is the first of Canada’s biggest banks to report quarterly results. Canadian Imperial Bank of Commerce is due to report on Thursday, followed by Bank of Montreal , Toronto-Dominion Bank and Bank of Nova Scotia next week.
Rick Durst is a veteran investor and a strong believer in shareholders’ rights, and who has, at times, turned activist. He has also been a shareholder of Home Capital Group Inc. for more than two decades.
For most of that time his investment paid off handsomely as Home Capital, the alternative mortgage lender, generated stellar returns. The ride up – the shares hit an all time high of $55.75 about three years back – was more enjoyable than the slide. In May the shares hit $5.85 – or a drop of almost 90 per cent from the peak, just before the Warren Buffett-led Berkshire Hathaway Inc. stepped in to purchase a potential 38.39 per cent of the company in a two-tranche process. Buffett picked up a 19.99 per cent stake in the company for $153.2 million in the first tranche.
Home Capital’s shares closed flat Tuesday at $13.02 on the Toronto Stock Exchange.
But Durst, whose total cost on the shares is below the current trading price, won’t be supporting Berkshire’s second tranche, which requires a shareholder vote. The company plan to issue 23.955 million common shares to Berkshire, which would hand over more than a third of the company to the Oracle of Omaha.
“It’s highly dilutive, will significantly reduce return on equity and will significantly extend the time for existing shareholders to recover their lost hard-earned equity,” he said. Home Capital plans to issue shares at $10.30 a share – which is not only below net asset value at the current share price, but also considerably below the trading price of the shares the day the first placement to Berkshire was announced on June 21, when it was trading at $14.94. Berkshire paid $9.55 a share for its initial 19.99 per cent investment, a stake acquired under the TSX financial hardship rules and did not require shareholder approval.
If approved at a special meeting on Sept. 12 (a simple majority is required, with Berkshire ineligible to vote) the Omaha-based company will become Home Capital’s largest shareholder, acquired for about $400 million.
Berkshire also provided a $2 billion line of credit on less onerous terms than what Home Capital paid for a similar facility from The Healthcare of Ontario Pension Plan, or HOOPP. About one month after accepting the Berkshire facility, Home Capital repaid the full amount.
“They don’t need the capital in the second tranche,” said Durst, given that it just paid $2 billion back to Berkshire. “Why are they issuing more shares to dilute the much beaten-up shareholders?” asks Durst, noting that Home Capital’s directors and executive own 90,221 common shares, a collective stake worth less than $1.2 million.
In what may be a precedent-setting number of advisers, Home Capital retained three firms — Blair Franklin, BMO Capital Markets and RBC Capital Markets — for a fairness opinion. By incorporating a number of assumptions, the three essentially compared Home Capital’s implied share price with and without the Berkshire investment.
Home Capital said the board, “after consultation with its legal and financial advisors, unanimously determined that the transaction with Berkshire (including the Berkshire Second Tranche) is in the best interests of the corporation,” and urged shareholders to support the plan.
So what happens if shareholders do not approve Berkshire Hathaway’s second tranche? Durst argues Home Capital’s stock price “will recover more than it otherwise would,” noting that when Berkshire Hathaway rode to the rescue and beat out competing offers from two Canadian private equity firms, “Home Capital got a lot of credibility. It may get a little more credibility, but they are facing huge dilution,” he stated.
As with many other shareholders, Durst wonders why Home Capital’s share price has been on a steady slide since the Berkshire announcement was made.
Calls to two institutional shareholders – Turtle Creek Asset Management (listed in the circular as owning 14.249 million shares, with a 17.76 per cent stake) and Taylor Asset Management – seeking comment on their voting intentions were not returned.
TORONTO — Canada’s biggest banks could deliver another profitable season for investors as third-quarter results starting to roll in this week are expected to get a boost from the strengthening economy.
Analysts expect modest improvements from the Big Six banks, which launch their quarterly earnings reports beginning with Royal Bank on Wednesday, but some suggest the industry could outdo the conservative predictions.
“There always seems to be this hesitancy that somehow the numbers won’t be as good,” suggested Gareth Watson, vice president of investment management and research at RichardsonGMP.
“But we’ve always come out of the results saying ‘Things weren’t as bad as people thought they were going to be.”‘
It’s an issue analysts continue to grapple with in this period of intensified questions about the direction of Canada’s housing market and expectations the Bank of Canada could make another move on interest rates later this year. The central bank raised interest rates for the first time in seven years in July, moving from 0.5 per cent to 0.75 per cent, citing “bolstered” confidence about economic growth prospects.
A slight cooling in the real estate sector and the recent interest rate hike could leave a mark on the third quarter, though analysts suggest it would be minimal.
Banks raised their prime rates after the central bank’s 25-basis-point increase, but it happened during the final weeks of the third quarter, meaning it’ll likely have little impact on the results.
Signs of a slowing real estate market could eventually hit the banks’ mortgage portfolios, though Watson suggests it won’t happen this year.
“The housing market becomes more problematic when you start getting interest rate increases and mortgage renewals at higher rates — maybe in 2019 or 2020,” Watson said.
“Eventually it will be a big deal, it’s just not necessarily an immediate concern, especially for the banks who are pretty darn good at mitigating and controlling risk.”
Royal Bank (TSX:RY) starts off reporting results on Wednesday, followed by CIBC (TSX:CM) on Thursday. Scotiabank (TSX:BNS) and the Bank of Montreal issue results next Tuesday, followed by National Bank (TSX:NA) on Aug. 30 and TD Bank (TSX:TD) on Aug. 31.
“We think there are plusses and minuses that add up to a decent third-quarter reporting season for the banks,” Robert Sedran, an analyst at CIBC World Markets Inc. wrote in a note to investors.
“The plusses include an overall solid operating environment that is supportive of ongoing revenue growth and stable loan losses that should help overcome slowing capital markets revenues and the currency headwinds that have developed.”
A stronger Canadian dollar has some observers weighing how currency conversions will impact the financial results of some of the banks with larger U.S. operations. The consensus suggests it won’t leave much of a dent for now.
Canadian bank valuations have mostly strengthened coming out of the most recent quarter, Barclays analyst John Aiken wrote in a note.
“We anticipate the trend will continue over the back half of the year, buoyed by the steady domestic economy and the strongest employment landscape since the financial crisis,” he said.
Aiken added that “sustainability of earnings growth remains key” as other questions persist, such as the likelihood of another central bank rate hike ahead of slower economic growth expected next year.
Toronto-Dominion Bank has picked Dublin for its expanded trading hub inside the European Union in preparation for Britain’s departure from the economic bloc.
The bank’s TD Securities unit plans to establish a bond-trading business there, subject to regulatory approval, according to a statement on the Irish development agency’s website Tuesday. The unit of Canada’s largest lender by assets already has a fully licensed operation in the Irish capital, where it has been operating for more than 20 years, and has an office in London.
Dublin is the second most popular destination — after Frankfurt — for financial-services companies seeking uninterrupted EU access post Brexit. The city provides a low-tax English-speaking location and has similar laws and regulations to its U.K. neighbour. Barclays Plc and Bank of America Corp. have also settled on the city for their new EU hub.
“This is a great win for Ireland as we seek to deepen and expand the range of financial-services companies who are investing in Ireland,” said Irish Prime Minister Leo Varadkar in Toronto, where he is concluding a trade mission. “As we face into the challenges of Brexit, we are determined to pursue and seize new opportunities and investment projects from key companies worldwide.”
Early next month, the shareholders of Sandvine Corp. will consider a $4.40-a-share offer from PNI Canada Acquireco Corp., an affiliate of U.S. based Procera Networks, Inc. and Francisco Partners.
The purchasers emerged after Sandvine agreed to an earlier deal from U.S.-based Vector Capital, who consented to purchase the company for $3.80 a share. During a six-week “shop period,” PNI Canada and Vector traded competing offers with the process ending when Vector chose not to match PNI’s $4.40 a share offer.
Based on information contained in the meeting circular, Sandvine has been a takeover target for more than four years. All of its would-be suitors were, like Vector and PNI Canada, private equity firms.
If there is any consolation to Sandvine’s shareholders, it’s the price they’re being offered is the highest that other potential acquirers had talked about offering.
But for day one shareholders – Sandvine went public in the fall of 2006 at $1.90 a share – the journey has not been particularly rewarding. The shares peaked at $7.10 about one year after it went public, but hit a low of $0.61 at the end of 2008. In its time as a public company, the shares have averaged $2.50. It started paying a dividend in 2016 at the rate of $0.175 a share a quarter that was hiked this year to $0.02 a share.
The circular indicates that in May 2013, Sandvine received an unsolicited expression of interest at $2.30 a share – a 15 per cent premium to the then share price.
The retained an advisor, who contacted 12 potential buyers – though none proceeded past the first stage of the auction process. In the end, only the original bidder pursued a transaction but backed away when Sandvine’s share price rose to $2.65 a share.
In late 2015, another private equity firm made an inquiry but after some initial meetings, “the parties determined that there was not enough strategic merit to proceed.”
Six months later a third private equity firm arrived, had a series of initial meetings, undertook a limited due diligence process, which produced a “non-binding expression of interest,” in the $3.80 – $4.05 a share range. Later the range was moved to $4.00 – $4.15 a share.
After much work by Sandvine – a special committee (which retained financial and legal advisors) was set up and five meetings were held – the private equity firm couldn’t arrange the necessary financing “and discussions were terminated.”
Around this time, Vector Capital turned up with an unsolicited expression of interest in the $3.25 – $3.50 a share range. Not high enough, said Sandvine.
Buyers were still interested, and so a fourth private equity firm entered the fray. Those negotiations came unstuck when the potential buyer set $3.75 a share as its maximum price. But the situation at Sandvine changed in late 2016 when it announced sharply lower revenue expectations for the fourth quarter.
Last March Vector reemerged with a firm $3.75 a share – that became a firm $3.80 a share two days later.
The special committee did its work and determined the offer was fair. After accepting the $3.80 offer, the board decided that it not go through a “further market check process,” but insisted that a go-shop provision be attached to the Vector transaction.
That inclusion drew four prospective purchasers, with PNI’s $4.40 a share winning the day. On Sept. 7 the shareholders will gather in Waterloo, Ont., to decide.
Global private equity firm Warburg Pincus is making a major investment in Cambridge, Ont.-based cyber security firm eSentire Inc.
Financial terms were not disclosed, but the investment is “well north” of the US$34.5 million raised to date by the cyber detection and response services firm, said J.Paul Haynes, chief executive of eSentire.
The financial injection from funds affiliated with Warburg Pincus will be used to bolster eSentire’s expansion, and to provide liquidity for some earlier investors, Haynes said in an interview, noting that the overall size of the investment is “multiples of the aggregate of what we’ve raised to date.”
Early investor Edison Partners, a New Jersey-based venture firm, is remaining with eSentire, as are Toronto-based Georgian Partners, and Northleaf Ventures Catalyst Fund. Cisco Investments, which took part in a funding round that raised US$19.5 million from investors in February 2016, is among those cashing out.
Haynes said the company’s leadership team felt it was time to find a large, well-resourced investment partner that could help eSentire capitalize on its combination of cyber security technology, analysts, and services, and its 26 quarters of growth. In February, the firm reported year-over-year revenue growth of 60 per cent.
Warburg Pincus has more than US$44 billion in private equity assets under management. The firm has an active portfolio of more than 140 diversified companies at various stages of development across a number of sectors.
“We could not have found a better partner than Warburg Pincus, whose global reach, access to industry experts and extensive network will serve as a great catalyst for our future growth,” Haynes said.
The New York-based private equity firm was attracted to eSentire because it has the most complete suite of technologies and services among cybersecurity providers in the area of managed detection and response, according to Cary J. Davis, managing director of Warburg Pincus. In a statement, he noted that the Canadian firm also has “industry-leading growth and impressive customer satisfaction.”
Most of the focus at eSentire has been in the mid-market, where its specially built technology and security analysts detect, investigate, and rapidly resolve cyber threats for businesses that don’t have the capacity for full internal teams and systems to protect sensitive data and the security of business transactions.
However, Haynes said some of the latest investment funds would be earmarked to pursue an emerging avenue for growth: the development of “co-existing technology” that can integrate specialized cyber security skills into the existing systems of larger firms.
The model is already being deployed at a large insurance company in the United States, he said.
The funding arrangement with Warburg Pincus is expected to close in September, and Haynes said he expects the partnership will last somewhere between three to six years, a typical horizon for private equity players. He said eSentire could go public at some point, but added that the focus at the moment is on developing the business and venturing into new industries and geographies.
The firm has already expanded beyond financial services to sectors including insurance, legal, healthcare, biopharma, engineering, technology, manufacturing and government agencies. It has beachheads in North America and Western Europe.
A recent spate of high-profile ransomware attacks, where hackers freeze a target’s online operations and then demand money in exchange for allowing business to resume, suggest there won’t be a slowdown in the cybersecurity business anytime soon.
Last week, Connecticut-based research and advisory company Gartner Inc. said worldwide spending on information security products and services is expected to reach US$86.4 billion this year, and grow to US$93 billion by 2018.
Their ads trumpet the ease of using the equity in your home to get cash.
Alpine Credits helps customers get loans approved “regardless of your credit, age, or income,” the company’s commercials say. In a Capital Direct radio spot, veteran B.C. broadcaster Bill Good encourages listeners to call one of the company’s “friendly” advisers “if you could use any amount up to $300,000 or more,” telling them “it’s your money.”
While federally regulated banks dominate Canada’s residential mortgage lending market, accounting for more than 80 per cent, business appears to be growing for many “alternative” lenders, including two of the most visible B.C. companies, Capital Direct and Alpine Credits, who say they have provided more than $1 billion of loans each.
Representatives of home equity lending companies say they provide a valuable service, filling a need for Canadians unable to get loans from conventional, regulated financial institutions. Both defenders and critics of alternative mortgage lenders say more Canadians are turning to these less-regulated lenders as Ottawa has tightened lending requirements at federally regulated financial institutions. A Bank of Canada report from late last year said: “Tightening bank regulation … can lead to migration of activity from the traditional banking sector” to alternatives.
The breezy tone of their ads doesn’t sit well with a number of credit counsellors and foreclosure lawyers. They say that while these alternative lenders aren’t breaking any rules, the public needs to better understand what’s behind the catchy jingles: high costs and potential risk.
Typically, a home-equity loan is short-term (two years or less) and is secured against a borrower’s home as a second or third mortgage. Regulatory filings for Capital Direct and Ryan Mortgage Income Fund (a company affiliated with Alpine Credits, which purchases its mortgages) show a range of interest rates, often between 10 and 15 per cent. A small number of Capital Direct’s loans have interest rates as high as 25 per cent. Canada’s major banks have offered five-year fixed mortgage rates between 2.59 and 2.99 per cent in recent months.
The upfront fees charged by some alternative lenders can be significant, with five-figure sums charged before a loan is issued.
Most home equity borrowers use the money for renovations or to consolidate debt, according to a 2016 survey by Canadian Mortgage Professionals. But borrowed funds can be used for any purpose, which concerns credit counsellors at a time when Canadians are increasingly willing to use debt to fund their lifestyles.
Some ads for alternative mortgage lenders highlight that loans can be used to fund any frivolous purpose a homeowner chooses. In one Alpine Credits commercial, a cartoon “approval specialist” says an applicant “wants a loan to add a four-storey waterslide to his home.” After establishing the applicant is a homeowner, the narrator announces “He’s approved!” as the room erupts in cheers. Confetti rains down. Champagne sprays around.
Abdul Rahimi said he learned about Alpine Credits “through all these advertisements on TV 24/7.”
He wanted to start his own business, he said, and because he’d owned his Port Coquitlam home for more than a decade, he applied for a home-equity loan. But after his business hit a rough patch, he said, he had trouble making the payments. He defaulted on the loan last year and Ryan Mortgage (the Alpine Credits-affiliated company) started a foreclosure action against his home.
Rahimi said Alpine and Ryan Mortgage did not mislead him. Shaken by the experience, he blamed himself for not fully understanding what he signed up for.
“It’s not their fault. They’re in business, they’re trying to make money,” he said. “I never blamed any of these creditors. I blame myself.”
But when asked what he would tell a friend considering taking out a home-equity loan, Rahimi said: “I would tell them, ‘Never touch it.’ I don’t advise anyone to go with this kind of high interest rate.”
Some chartered banks also offer home equity loans, but at “very reasonable” interest rates and “little to no fees,” said Kin Lo, an accounting professor at UBC’s Sauder School of Business. Banks’ home equity loans are very different products, Lo said, than those offered by alternative lenders.
After reviewing details of home equity loans offered by alternative mortgage lenders, Lo said: “These products are being targeted toward unsophisticated and uninformed homeowners. No one who is even a little bit familiar with loans and mortgages would pay interest rates this high, and pay so much in upfront fees.”
Examples of the fees can be seen in documents filed with B.C. courts in connection with foreclosure actions. One case includes a loan agreement obtained by a 79-year-old pensioner from a Ryan Mortgage-affiliated company. The fixed credit disclosure statement for the loan details the fees, which include: a brokerage fee, lender fee, application fee, appraisal/other fee, and estimated legal fee and disbursements totalling $15,088 — about nine per cent of the principal amount of the mortgage ($168,100).
B.C. lawyers who work in foreclosures said the fees in that example are on the higher side, but not uncommon for mortgages from alternative lenders.
When you see alternative mortgage lenders charging high interest rates, Lo said, it suggests they “are not vetting the borrowers like the banks are. … The high interest rates anticipate high rates of default.
“If the homeowners are able to borrow from a bank (or credit union), they would be much better off doing so,” Lo said. “If they aren’t able to borrow from a bank, then they shouldn’t resort to borrowing from these ‘alternative mortgage lenders’ because doing so will just get them into debt that will be very difficult to pay off.”
Firm numbers are hard to come by in this sector. A Bank of Canada report last year said “significant gaps remain in data and knowledge” in the country’s alternative financial sector, and “are likely to remain.”
Samantha Gale, CEO of the Mortgage Brokers Association of B.C., said it’s hard to say how much alternative mortgage lending has grown in the past decade. “There are no records to draw upon — we know that it has grown and continues to grow,” she said, adding it’s estimated that as much as $7 billion is under administration by alternative mortgage lenders, including home equity lenders, in B.C.
When a borrower defaults on a mortgage, whether a first mortgage from a big bank or a second or third mortgage from an alternative lender, it can lead to foreclosure, which sometimes result in a court-supervised, forced sale of the property so lenders can recover the outstanding value of the loan.
Foreclosures are rare in B.C. because, in a hot housing market, borrowers who get into trouble can usually sell their home quickly to “bail themselves out,” said Scott Hannah, president of the Credit Counselling Society. But, Hannah said, if there’s a correction in property prices, the number of foreclosures could rise.
Hannah has seen the impact foreclosures can have on families, forcing them to uproot and move, he said. “It takes a real toll on people. It goes beyond finances.”
Canadians’ willingness to take on debt has grown dramatically in the past decade. Last year, Statistics Canada reported, the level of debt held by Canadians exceeded the country’s gross domestic product for the first time.
“People are using debt to finance their expenses,” Hannah said. “We’ve really kind of changed as a culture: Canadians used to be known as a nation of savers. And now we’re a nation of debtors.”
As for Bill Good, Capital Direct’s main pitchman, Hannah had this to say: “Just because somebody is a spokesperson with a very good reputation and past, it doesn’t mean the product is right for you. … When you see someone like Bill Good, who is a spokesperson and, let’s face it, Bill Good has a very good reputation, has been trusted by consumers for decades, I think that builds a lot of credibility. I worry that people think, ‘Well, OK, he wouldn’t be doing that if he didn’t think the service was upfront and was really there to help people.’”
Good is one of the province’s best-known journalists with a 50-year career in radio and TV, lifetime achievement awards, and an honorary doctorate from BCIT. Good’s radio editorials run eight times every weekday on News 1130and this year he began writing a column for the Glacier chain of newspapers.
In an interview, Good said: “I checked out Capital Direct pretty carefully before I went to work with them. They have an outstanding rating with the Better Business Bureau. I’ve interviewed a number of people who’ve borrowed from them, all of whom expressed considerable satisfaction.”
Capital Direct and Alpine Credits both have A+ ratings from the Better Business Bureau of B.C., evaluations the bureau says are based on a wide range of factors.
“From my point of view, I’m quite comfortable with it, because I’ve had no backlash,” said Good.
“Capital Direct has been around for quite a while, but there’s a bit of a proliferation of companies coming into the market to fill the void that’s being left behind by the banks and the Finance (Department) making it tougher to get loans. And I don’t pretend to be an expert, but my understanding is that a large percentage of the people borrowing money from companies like Capital Direct would have been borrowing from the banks three or four years ago, and it’s just become more and more difficult to get money from the banks,” Good said. “I think it’s filling a need.”
“It’s not a situation where we’re trying to rope people in who aren’t suited,” David Rally, Capital Direct’s vice-president of legal affairs, said in an interview. “That’s bad for business. We want people who can manage the loan. … But given the rules the federal government has passed, it has become increasingly difficult for people to access bank loans, which sends them looking for other alternatives, and that’s sort of what we do.
“I can’t speak for the rest of the industry. … But we spend a lot of money on advertising and we try and put our presence out there. It’s a good time for this type of business, but our goal, obviously, is to make sure we have borrowers who are properly positioned so we’re providing a service that’s going to help them, and we’re not going to obviously impair our own business,” Rally said.
Second and third mortgages from alternative lenders tend to default at higher rates than first mortgages, said Sid Rajeev, head of research for Fundamental Research Corp. The rate of mortgages in arrears 90 days or more for home equity loans from mortgage investment corporations is still low, Rajeev said, estimating around two per cent, but that could be eight times higher than the rate of residential mortgages in arrears from federally regulated banks, which the Canadian Bankers Association reports is 0.25 per cent.
Rajeev specializes in researching alternative mortgage lenders and mortgage investment corporations (or MICs), including secondary lenders like Capital Direct and Alpine (and Ryan Mortgage). The CMHC commissioned Rajeev to provide an overview of this sector in 2015 with a report called “Growth and Risk Profile of the Unregulated Mortgage Lending Sector.”
There’s a fundamental difference, Rajeev said, in how banks and alternative lenders assess whether to lend to a borrower: “The banks, when they lend, they focus more on the borrower’s credit and income to see if they can repay on a regular basis. While these kinds of (alternative) lenders, they do more asset-based lending, so they’re more worried about the fundamentals of the collateral, the underlying asset, and not much on the borrower.”
Rajeev said alternative lenders can be the best option for recent immigrants or self-employed people who want to borrow funds but don’t have the credit rating to obtain a loan from a bank.
Representatives of Alpine Credits and Ryan Mortgage declined to be interviewed or answer questions by email.
A director of Alpine’s parent company, Amur Financial Group, declined to talk about the business but said customers must obtain independent legal advice before entering into a loan agreement.
Capital Direct requires borrowers to obtain independent legal advice before taking out a loan, Rally said, but not independent financial advice.
The value of borrowers obtaining not only legal advice but also independent financial advice was stressed in interviews with foreclosure lawyers and credit counsellors.
Chris Carter, B.C.’s acting registrar of mortgage brokers, did not discuss specific companies, but in an emailed statement, said, generally speaking: “There is a risk of predatory lending practices in equity lending and the registrar is vigilant in monitoring for that activity. That is why we advise not only independent legal advice, but also independent financial advice. … Independent financial advice provides an enhanced level of scrutiny and protection.”
Capital Direct and Alpine Credits declined to provide their default rates.
Priyan Samarakoone, a lawyer with Access Pro Bono who has tried to help dozens of borrowers facing foreclosures in the past four years, said many cases involve a borrower who’s saddled with a high-interest home equity loan and stretched thin so that when an unexpected challenge comes up — like job loss, illness, an accident or divorce — it leads quickly to financial trouble.
“Your world can go down very quickly if one bad thing happens to you. You need to be aware of that,” he said.
There’s another reason for caution, Samarakoone said. In a time, when good pensions are increasingly rare and the rising cost of living makes it harder to save, there’s a concern that drawing down the built-up equity in your home can shortchange your future.
“A good way of looking at what your home really is, is as an investment for you and your kids and the future,” he said. “And if you think your home is an ATM or a bank machine and you can just use money against it, you end up with nothing for the future.”
Still, Samarakoone said, alternative lenders sometimes fill a need. He’s helped clients in the past who have found themselves needing cash and unable to borrow from banks. Depending on the details of their situation and the terms offered by the lender, he’s helped people through situations where a home-equity loan was their best available option. However, he said, borrowers always need to get careful legal and financial advice and enter the agreement with a clear understanding.
“It’s not to demonize these things,” he said. “It’s just that you have to get the proper advice before you do it and you have to consider everything.”