Newer entrants may find it harder to break through against established entities, executive suggests
A steady stream of new lenders has arrived in Canada’s private and MIC (mortgage investment corporation) spaces in recent years – but another flood of fresh entrants looks unlikely in an increasingly crowded field, according to one mortgage market watcher.
Benjamin Sammut (pictured top), founder and principal at Dabble Capital Advisory, told Canadian Mortgage Professional that with existing entities establishing a foothold in the MIC sector, new companies would find it more difficult to break into the space – at least, from an origination standpoint.
“I think we’re probably saturated from a lending perspective, so I don’t know that we’ll see too many more entrants in the space – especially none that are significantly at scale,” he said. “And that’s because a lot of the MICs and other private or B lenders have such a strong hold on broker relationships.
“For any new person coming in trying to challenge the incumbent, they’re going to be so much better off partnering with a strong originator rather than trying to drum up origination themselves because that’s such an uphill battle.”
Mortgage investment entities (MIEs) have steadily grown their market share across Canada in recent years. A year-over-year jump in assets under management held by the country’s top 25 MIEs in Q4 marked their fastest growth for the past 18 months, according to Canada Mortgage and Housing Corporation (CMHC).
Sammut isn’t predicting that share to diminish but says it will be held in the same amount, or a smaller number, of hands. “What we’ll most likely see over the next, let’s say five years, is either roughly the same amount of private names and lenders that we know today, or it’ll start to shrink,” he said. “We’ll see some M&A [mergers and acquisitions], we’ll see some partnerships with third-party funding.”
Tighter bank rules mean even Canadians with 700+ credit scores are turning to private lenders and MICs, says Alta West Capital’s Armando Diseri.
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How lenders’ approach could evolve
Another big shift that could be on the way in the MIC space, according to Sammut: a potential move away from lenders taking a fee approach based on fund management and toward one that focuses more on origination.
That’s because of what he sees as the likelihood that global capital markets will become increasingly active in the private and MIC markets as the spaces’ popularity grows.
“I think that you’re going to see private lenders go in one of two directions. I think the first ones are going to want to maintain assets under management. They want to have dollars in their funds. They want to maintain all the mortgages themselves. And they’re going to continue to grow at a typical pace for a private fund,” he said.
“Some of these other lenders, if they’re open to the fact that we’re going to open global capital markets to them, are going to look toward changing their strategy from being [based on] fees for management of the funds to an origination fee, and a broader originate-to-sell model.”
‘We’re going to start to see a divergence in the MICs’
Plenty of leading monoline lenders carry very little on their book, choosing instead to originate mortgages before offloading them into the Canada Mortgage Bond program administered by CMHC and collecting origination and servicing fees.
Sammut foresees contrasting strategies emerging in the MIC space, partly based around a similar model. “Where I think a lot of the MICs are going to be moving to over the next 18 months is: some of them are going to recognize that their revenue will be a smaller piece of a much larger pie and we’re going to start to see a divergence in the MICs,” he said.
“We’ll see those that are going more to the originate-to-sell model and then those that are just doubling down and maintaining a private fund. They’re niching down, potentially shrinking their AUM [assets under management], but getting more into whatever their unique product was. We’ll see who rises, who sinks, who survives, who thrives.”
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