Crackdown to batter alternative lenders: analysts

Investors don’t seem to like the latest proposed changes in home financing being ushered in by Canada’s top financial services regulator.

On Thursday, the Office of the Superintendent of Financial Institutions proposed a required stress test to qualify for all uninsured mortgages. OSFI also proposed to prohibit co-lending or mortgage “bundling ” arrangements that appear designed to circumvent regulatory requirements.

A bundled mortgage is when two lenders partner to secure a loan against the same property. If only one lender is regulated by OSFI, the loan-to-value ratio on the property — a key measure of risk — may appear lower than it is when both lenders are taken into account.

Shares of Home Capital Group Inc., Equitable Group Inc. and Equity Financial Holdings Inc. all lost ground Friday.

Analysts said OSFI’s proposed prohibition on such arrangements, if adopted, would affect a small segment, estimated at around one per cent, of the mortgage market. But they said the biggest impact would be felt by alternative mortgage lenders, firms that provide loans to people who don’t qualify for funding from the big banks.

“With respect to the alternative mortgage market, we believe the draft changes … will shrink both the pool of qualified mortgage borrowers and the mortgage size that borrowers can obtain,” National Bank analyst Jaeme Gloyn said in a note to clients.

He said some relief could be obtained through a “trickle down” of clients from the big banks as they tighten their underwriting practices and push certain borrowers down the credit risk spectrum. But the overall impact on alternative mortgage loan growth is expected to be negative, the analyst said.

The potential changes, which were proposed as part of a broader effort by policy-makers and regulators to rein in risks from Canada’s red-hot housing market, are “net net-negative for alternative lenders, thus validating our ongoing cautious stance on the mortgage industry overall,” Gloyn said.

The share prices of alternative lenders may already be reflecting the impact of ongoing efforts to cool the frothy housing market, but the analyst suggested investors wait for “better visibility” on risks such as the weakening housing market in the Greater Toronto Area and rising interest rates.

Home Capital and Equity Financial Holdings issued news releases Thursday saying they are evaluating OSFI’s proposals, which are to be finalized in the fall following a comment period.

Shares of Home Capital slipped 74 cents on Friday, closing at $15.13, while Equity Financial Holdings stock was down 75 cents to a 52-week low of $7.40. Equitable Group shares closed at $56.98, down $1.75.