Despite the sustained high demand from borrowers, worries about a property market that is quickly cooling and a potential recession have depleted enthusiasm.
“We’re going through a period now where investors are more cautious as to how alternative (investments) and really the overall real estate market, is adjusting to higher interest rates,” Dean Koeller, president of Calvert Home MIC and chairman of the Canadian Alternative Mortgage Lenders Association, told Reuters.
MICs pool loans made to small real estate developers and borrowers who are ineligible for residential mortgages from banks, which they then sell to investors. Most of these loans have floating rates, which means that payments rise in tandem with interest rates.
Even though the direct effects of the sector’s problems are minimal due to its small scale, the Bank of Canada warned in a staff note that MICs and other private lenders’ problems could indirectly increase the financial system’s vulnerabilities. However, any tremors experienced by MICs may have an impact on larger lenders, from which MICs borrow money.
Rob Colangelo, senior credit officer at Moody’s Investors Service, noted that while rising interest rates benefit lenders since they increase margins, that’s being offset by investors’ demands for larger returns.
