Canadian non-bank lender Magenta’s ‘pause’ on mortgages may signal a slowing down in private lending

Was it the first drop of a downpour, or just a random splash?How to interpret news that one of the country’s most prominent non-bank lenders is “pausing” mortgage applications until September depends on who you ask.According to Claire Celerier, an assistant professor of finance at U of T’s Rotman School of Management, the news from Magenta Mortgage Investments — reported by the Globe and Mail — is likely the first of many similar announcements to come from other mortgage investment companies (MICs.)The main reason, according to Celerier? Investors who fund MICs are likely getting skittish about growing risk as interest rates rise and house prices start to drop.“Investors have less appetite for risk in an environment like this, so it doesn’t surprise me that this happened. And it wouldn’t surprise me if it happens with other institutions like this, particularly smaller ones,” said Celerier. “I think these types of institutions will struggle more to raise funds.”The Bank of Canada has raised its main overnight lending rate from 0.25 per cent to 1.50 per cent this year, and analysts expect more increases to come as the Bank attempts to slow down runaway inflation.Celerier says MICs typically charge a higher rate than so-called Tier 1 financial institutions like banks because their clients are people unable or unwilling to meet stricter borrowing standards set by banks.“The borrowers are riskier, and these institutions get less information than banks. With rates increasing, they potentially become even riskier,” said Celerier.A drop in home prices means more pressure on MICs’ existing mortgage portfolios, says veteran mortgage strategist Robert McLister.“Plunging values always put private and MIC lenders on edge. The equity in the home is often the only security they have,” said McLister, adding that some MICs he’s spoken with recently have been getting requests from investors trying to pull their money out.“I’ve heard from two in the last few weeks that are seeing increased redemptions and slowing subscriptions (new investments). While that’s not a representative sample it’s par for the course after an overinflated real estate market keels over,” said McLister.But MICs, including Magenta, say they’re not seeing any pullback from their investors, who range from mom and pop investors throwing in a few hundred thousand dollars to institutional investors putting in millions.In a written statement, Magenta says they’ve “fully utilized” their existing pool of money, but says they’re already attracting more.“Magenta underwrites residential mortgages falling just outside of institutional underwriting criteria. The benefit to borrowers and our investors is optimized when our finite lending capacity is fully utilized as is currently the case,” the company said. “Our lending capacity grows daily from an influx of new investment capital, attracted by our unbroken 28-year track record of strong investor returns.”At Vancouver-based AP Capital MIC, there’s no sign of slowing demand from investors, said CEO Ches Hagen.“We’re seeing an impact on house prices. But I think time will show what that looks like. And there seems to be a steady demand from investors,” said Hagen.Hagen estimates that MICs have roughly 5 per cent of the Canadian mortgage market and says AP is continuing to see strong demand, both from investors and borrowers. The company isn’t pausing anything.“We’re lending in all market conditions,” said Hagen, adding that MICs’ collective share of the mortgage market hasn’t changed all that much either during the global COVID-19 pandemic, or now that interest rates are rising. “I couldn’t say that we’ve seen that change even through COVID. And I don’t think that changes even under the rate-changing environment.” At MCAN Mortgage Corp., which unlike traditional MICs also draws financing by issuing insured term deposits, there’s no sign of falling demand from investors, according to CEO Karen Weaver.Still, Weaver says, some lenders — from Tier 1 banks all the way down to private lenders — are likely tightening things up right now, even if they’re not sending out memos.“The entire lending market is managing their volumes and their business through rates. So if you want to be in the market, you’re going to have the best rate in the market. And if you don’t want to be in the market, you’re just going to have the highest rate in the market,” said Weaver, who was nonetheless surprised to learn of Magenta’s pause.“There’s no question for somebody to stand up and say ‘I’m shutting down my business until September,’ yes, that feels a little extreme,” said Weaver.