TORONTO – Government documents suggest the federal Department of Finance is keeping close tabs on shadow mortgage lenders, a fast-growing segment of the market that could threaten the country’s financial stability if left unregulated.
Documents obtained through an Access to Information request indicate the unregulated mortgage market was among the topics discussed at a November meeting between the Finance officials, the Bank of Canada, the Canada Mortgage and Housing Corporation and other key players.
The heavily redacted documents provide scant information about the contents of the meeting, but suggest the topic was also addressed in an earlier presentation by CMHC a year ago.
The central bank warned about potential risks posed by less regulated lenders in its financial stability review late last year.
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Alternative lenders, also called shadow lenders, operate in the margins outside the scope of federal bank regulations, offering short-term, uninsured mortgages that carry interest rates higher than those provided by the banks.
In many cases, the loans are financed by wealthy investors and high net-worth individuals seeking higher returns than those provided by the stock markets.
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Unregulated lenders have seen huge growth in recent years as Ottawa’s efforts to cool Canada’s piping-hot housing market have left certain borrowers, including the self-employed, unable to secure financing from the big banks. Those borrowers have turned to private lenders such as mortgage investment corporations for help.
“There’s a transfer of risk from the regulated part to the unregulated part,” said CIBC economist Benjamin Tal.
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The exact size of the unregulated mortgage market is difficult to gauge, as it includes both individuals and a slew of private firms.
Tal’s research, which includes figures compiled from three different sources, suggests that shadow lenders comprise only a small portion of the mortgage market — less than five per cent. At its current size, the shadow mortgage sector is unlikely to pose serious risks to financial stability.
However, non-bank lenders have doubled their market share since 2012, according to a report penned by Tal earlier this year. If that rapid pace of growth continues, the economist says regulators will need to increase their level of oversight, either over the lenders themselves or over the products.
“It’s a baby, but this baby is growing fast,” says Tal. “I don’t think it’s an issue now, but it might be an issue five years from now if we continue this way.”
CMHC says it’s monitoring growth in unregulated mortgage lending alongside its government partners.
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“Unregulated lenders are an important part of the overall mortgage market, providing healthy competition to the banks and credit unions,” the federal housing agency said in an email.
“CMHC diligently underwrites every mortgage application applying the same standards to all lenders. We have not seen any evidence to indicate that unregulated lenders are contributing to additional risk to our portfolio.”
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