It's been a wildly busy week for Canada's mortgage industry.
The trade group that represents mortgage brokers, in an effort to enhance the image of brokers and gain more market share, is changing its name to the Canadian Association of Accredited Mortgage Professionals. The name reflects the fact that anyone who wants to be a member of the organization must earn the Accredited Mortgage Professional designation, which sets a national proficiency standard for brokers. The name change, from the current Canadian Institute of Mortgage Brokers and Lenders , officially takes place in May 2007.
Mortgage brokers currently have about a quarter of the market share for residential mortgages in Canada, but in the past the industry has been plagued by poor business practices and sleazy operators. By making the AMP accreditation mandatory and enforcing its code of ethics, the new CAAMP is hoping to drum poor performers out of the industry and give consumers confidence in dealing with professional mortgage brokers.
In another major development, a new mortgage insurance company is about to enter the Canadian marketplace. AIG United Guaranty Canada is launching a new line of insurance products that it says will provide consumers with a wider range of mortgage insurance than currently available. Mortgage insurance is required to protect lenders when a home is purchased with less than 25 per cent down payment. Until recently, there were only two mortgage insurance providers in the marketplace -- Canada Mortgage and Housing Corp. and Genworth Financial Canada.
"We have seen significant activity in the Canadian mortgage insurance industry over the past six months in anticipation of increased competition. New product introductions, along with the elimination of certain application fees, have greatly benefited Canadian consumers," says AIC United Guaranty Canada President and CEO Andy Charles.
Changes in the mortgage industry mean that a lot of people who previously would not have qualified to get a mortgage are now able to do so. The "sub-prime" or non-conforming mortgage market -- people who don't meet traditional bank guidelines mostly because of a lack of proof of income, or people with a poor credit history -- is growing in Canada at a record pace. A report by CIBC World Markets' Benjamin Tal says the market is "by far the fastest growing segment of the mortgage market," rising at an annual pace of more than 50 per cent.
The report says that during the last year, "growth in the non-conforming market has enabled no less that 85,000 Canadian households, who otherwise would have been shut out of the market, to become homeowners. Note that as early as 1994, the non-conforming/sub-prime market in the U.S. stood at five per cent of total market originations. Today, it stands at 22 per cent."
Tal says the Canadian mortgage market is in transition. "Over the next five to 10 years, innovation in the mortgage market will accelerate at a pace not seen before in Canada," he says. "Lenders will face more flexibility, alongside steeper competition and increased risk. Consumers will enjoy increased options and better access to home ownership."
Mortgage brokers will play an important role in those changes, he says. Only 10 years ago, mortgage brokers accounted for just three per cent of mortgage originations. Tal says that mortgage brokers are more popular among young Canadians, with one-third of homeowners under 35 using them instead of traditional financial institutions. Those homeowners are expected to continue their relationship with their mortgage brokers in the coming years.
"A widely held misconception regarding mortgage brokers is that this segment of the market services primarily high-risk credit," says Tal. "The data simply does not support this claim. More than 50 per cent of brokers' funding is through commercial banks while another one-third is via mortgage banks. Brokers' funding though special sub-prime credit providers accounts for roughly nine per cent of total broker-originated credit."
Tal says that while the current "fantastic pace of growth" in the non-conforming market is not sustainable, "it appears that in the foreseeable future these non-conforming mortgages will remain by far the fastest growing segment of the mortgage market -- propelled by increased numbers of sub-prime players and the growing role of mortgage brokers in the Canadian market."
He notes that with the economy expected to slow during the next 12 months, and a likely increase in the unemployment rate and consumer bankruptcies, demand for sub-prime mortgages will probably increase.
Tal predicts that an additional 270,000 households will take out non-conforming mortgages during the next five years.
"The future growth of the non-conforming mortgage market will not be smooth," he says. "Macroeconomic factors and regulatory considerations will add an element of volatility to this young market."
