Connect with us

Real eState

Private lenders rein in real estate borrowers

Published

 on

Mark Morris, a Barrister and Solicitor in the Province of Ontario, at his office in Toronto on Jan. 23.Tijana Martin/The Globe and Mail

As financial pressures intensify, real estate industry professionals are keeping a wary eye on debt-burdened homeowners – particularly those who rely on cash from private lenders.

The credit that flowed so easily from private and alternative lenders when the Canadian real estate market was climbing is scarce, expensive and sometimes unobtainable when property values fall.

Mark Morris, Toronto-based real estate lawyer with LegalClosing.ca has a growing sense of foreboding as more problem files land on his desk. The steep climb in interest rates combined with a slide in house prices may be a major source of instability in the real estate market in the Greater Toronto Area and beyond, Mr. Morris says.

“The stars are aligned for a bloodletting,” he says.

Warnings from within the industry follow seven interest rate hikes by the Bank of Canada last year that took the benchmark rate to 4.25 per cent from 0.25 per cent. Low interest rates during the pandemic spurred many potential buyers to jump into bidding wars that sent prices soaring, but the central bank’s increases extinguished the market euphoria in 2022.

Mr. Morris says most homeowners have so far been able to cope with higher monthly expenses, but the duration of the increased rates is taking a toll. Some of those who borrowed heavily against the equity in their homes are struggling to make ongoing payments.

More inventory will hit the market, he believes, and he’s already seeing more homes listed under power of sale as lenders foreclose.

“People are hurting,” he says. “The truth is, it’s going to get worse.”

Mr. Morris sees the darkest storm clouds brewing in outlying communities where real estate prices spiked during the pandemic. Many of those areas are now facing the steepest declines in average price, and debt-laden homeowners are running into trouble.

“They just grabbed on to whatever they could get. They are in a world of hurt,” Mr. Morris says of those who bought near the peak.

Benjamin Tal, deputy chief economist at CIBC World Markets, believes homeowners in Canada have been handling the burden of rising interest rates well so far. But the number of distressed sellers is likely to increase in 2023, he cautions.

“I think you will see situations in which people are tested.”

So far, the 30-day delinquency rate on sub-prime mortgages – a good leading indicator of trouble ahead – has remained well-behaved, he says, but the data points to early signs of stress.

That stress will intensify, Mr. Tal predicts.

Homeowners who borrowed from alternative lenders are more likely to come under pressure, he adds. Alternative lenders account for about 8 to 10 per cent of the mortgage market in Canada, according to Mr. Tal. That figure includes mortgage investment corporations, private consortiums and so-called mom and pop investors.

Typically borrowers resort to alternative sources when they aren’t able to qualify for a mortgage with one of the traditional “A” lenders. The “B” lenders charge higher rates and fees to offset the risk.

While Mr. Tal expects an upward trend in delinquencies, he stresses that the magnitude will be nothing like the meltdown in the U.S. sub-prime segment that led to the 2008 global financial crisis.

“I suggest it’s not significant enough to derail the market,” he says.

Mr. Tal says some borrowers on the fringes will face significant hardship at the micro level, but housing in Canada remains stable at the macro level.

“This is not freefall. This is not a meltdown.”

Amongst the homeowners seeking advice from Mr. Morris, those who purchased in 2021 or early 2022 in areas of Ontario such as Barrie, Brampton, Caledon and Stouffville are feeling the greatest pressure.

Many who bought with a typical 20-per-cent down payment and a mortgage for the other 80 per cent have seen the value of their property slide more than 30 per cent, which puts the mortgage underwater Mr. Morris points out.

He has especially deep concern for people who took out a second mortgage from a private lender at a high rate of interest and are now finding that they are not able to renew.

Homeowners sometimes take out a second mortgage in order to consolidate debts with higher interest rates, to finance a renovation, or to invest in a second property. Typically such loans have relatively short terms of six months or one year.

Today, borrowers must meet tougher standards set by lenders who are aiming to limit their own exposure, Mr. Morris says.

“Now, if they want to renew, they can’t. Even if they can, the rates are atrocious,” he says, citing a recent example of 13 per cent interest plus another 2 per cent in fees.

Lenders are calling loans in tertiary markets because house prices have fallen more than 30 per cent in some cases and they are unwilling to renew for another term.

“There is no replacement for that money – that was already money of last resort,” Mr. Morris says.

There’s also less credit to go around after “mom and pop” lenders disappeared from the market all together, he says.

Mr. Morris points to the example of a client in a location he calls “Boonieville”. The homeowner owes $300,000 on a second mortgage with private lenders. Now, at the end of the one-year term, the lender is calling the money, and the house has fallen in value from about $900,000 in April to $700,000 today.

Mr. Morris acknowledged the lenders can force a sale if the homeowner doesn’t pay, but they would not be able to recoup the amount they are owed after the first mortgage is paid.

“Your only hope is that values go up,” Mr. Morris argued in successfully negotiating on behalf of the owner for more time.

The lawyer is taking several calls a day from homeowners facing similar scenarios.

Another snag at the moment is that so many sellers decided to lease their house or condo unit when it failed to sell, the rental market is becoming saturated.

“That out is collapsing too,” he says.

Andre Kutyan, broker with Harvey Kalles Real Estate Ltd., says prices in the Toronto market have held up better than those in rural and small-town areas, but some homeowners are crippled by the large amounts they owe to private lenders.

Lenders prefer not to foreclose, but they will after too many missed payments.

“There comes a point where a lender says ‘enough is enough.’”

Meanwhile, if borrowers stop making payments, the interest continues to accumulate and penalties tend to be steep.

“Sometimes they don’t see the money coming out of their bank account and they don’t grasp that the interest meter is still running,” Mr. Kutyan says.

In Toronto, the mezzanine financing segment is often providing loans to small builders and flippers, but those investors who pool their capital and lend to them are becoming far tighter with their money.

“In the past they would ask very little in the way of questions – they would lend the money.”

Those builders often need a short-term loan while they wait for the house to sell after pouring money into construction.

If the newly completed house doesn’t sell quickly, the builder may have to cut the price drastically.

“I’ve seen guys get burned like this,” Mr. Kutyan says. “Nine times out of 10 they have to reduce. It kills their profit margins.”

Mr. Kutyan says the potential for real estate prices to plummet has sent some private lenders fleeing to other asset classes.

“They have no idea where this is going – that’s the fear.”

Samantha Brookes, chief executive of Mortgages of Canada, says her clients are finding alternative lenders have become far more stringent.

Ms. Brookes points to the example of one elderly Ontario homeowner who borrowed against the equity in the property with a private lender.

The loan is up for renewal and the elderly owner faces exorbitant fees. Ms. Brookes says the senior faces losing the house because she doesn’t have the ability to repay the loan.

“There’s no equity left,” Ms. Brookes says. “It’s getting very, very tricky.”

Mr. Morris believes the market will regain strength in the long term. Meanwhile, he has tremendous sympathy for those caught up in the abrupt shift.

“We’re all taking our medicine for irrational exuberance,” he says. “We should be very, very sympathetic.”

728x90x4

Source link

Continue Reading

Real eState

Former B.C. Realtor has licence cancelled, $130K in penalties for role in mortgage fraud

Published

 on

The provincial regulator responsible for policing B.C.’s real estate industry has ordered a former Realtor to pay $130,000 and cancelled her licence after determining that she committed a variety of professional misconduct.

Rashin Rohani surrendered her licence in December 2023, but the BC Financial Services Authority’s chief hearing officer Andrew Pendray determined that it should nevertheless be cancelled as a signal to other licensees that “repetitive participation in deceptive schemes” will result in “significant” punishment.

He also ordered her to pay a $40,000 administrative penalty and $90,000 in enforcement expenses. Pendray explained his rationale for the penalties in a sanctions decision issued on May 17. The decision was published on the BCFSA website Wednesday.

Rohani’s misconduct occurred over a period of several years, and came in two distinct flavours, according to the decision.

Pendray found she had submitted mortgage applications for five different properties that she either owned or was purchasing, providing falsified income information on each one.

Each of these applications was submitted using a person referred to in the decision as “Individual 1” as a mortgage broker. Individual 1 was not a registered mortgage broker and – by the later applications – Rohani either knew or ought to have known this was the case, according to the decision.

All of that constituted “conduct unbecoming” under B.C.’s Real Estate Services Act, Pendray concluded.

Separately, Rohani also referred six clients to Individual 1 when she knew or ought to have known he wasn’t a registered mortgage broker, and she received or anticipated receiving a referral fee from Individual 1 for doing so, according to the decision. Rohani did not disclose this financial interest in the referrals to her clients.

Pendray found all of that to constitute professional misconduct under the act.

‘Deceptive’ scheme

The penalties the chief hearing officer chose to impose for this behaviour were less severe than those sought by the BCFSA in the case, but more significant than those Rohani argued she should face.

Rohani submitted that the appropriate penalty for her conduct would be a six-month licence suspension or a $15,000 discipline penalty, plus $20,000 in enforcement expenses.

For its part, the BCFSA asked Pendray to cancel Rohani’s licence and impose a $100,000 discipline penalty plus more than $116,000 in enforcement expenses.

Pendray’s ultimate decision to cancel the licence and impose penalties and expenses totalling $130,000 reflected his assessment of the severity of Rohani’s misconduct.

Unlike other cases referenced by the parties in their submissions, Rohani’s misconduct was not limited to a single transaction involving falsified documents or a series of such transactions during a brief period of time, according to the decision.

“Rather, in this case Ms. Rohani repetitively, over the course of a number of years, elected to personally participate in a deceptive mortgage application scheme for her own benefit, and subsequently, arranged for her clients to participate in the same deceptive mortgage application scheme,” the decision reads.

Pendray further noted that, although Rohani had been licensed for “a significant period of time,” she had only completed a small handful of transactions, according to records from her brokerage.

There were just six transactions on which her brokerage recorded earnings for her between December 2015 and February 2020, according to the decision. Of those six, four were transactions that were found to have involved misconduct or conduct unbecoming.

“In sum, Ms. Rohani’s minimal participation in the real estate industry as a licensee has, for the majority of that minimal participation, involved her engaging in conduct unbecoming involving deceptive practices and professional misconduct,” the decision reads.

According to the decision, Rohani must pay the $40,000 discipline penalty within 90 days of the date it was issued.

 

728x90x4

Source link

Continue Reading

Real eState

Should you wait to buy or sell your home?

Published

 on

The Bank of Canada is expected to announce its key interest rate decision in less than two weeks. Last month, the bank lowered its key interest rate to 4.7 per cent, marking its first rate cut since March 2020.

CTV Morning Live asked Jason Pilon, broker of Record Pilon Group, whether now is the right time to buy or sell your home.

When it comes to the next interest rate announcement, Pilon says the bank might either lower it further, or just keep it as is.

“The best case scenario we’re seeing is obviously a quarter point. I think more just because of the job numbers that just came out, I think more people are just leading on the fact that they probably just gonna do it in September,” he said. “Either way, what we saw in June, didn’t make a big difference.”

Here are the pros of buying/ selling now:

Pilon suggests locking in the rate right now, if you don’t want to take a risk with interest rates going up in the future.

He says the environment is more predictable right now, noting that the home values are transparent, which is one of the benefits for home sellers.

“Do you want to risk looking at what that looks like down the road? Or do you want to have the comfort in knowing what your house is worth right now?” Pilon said.

And when it comes to buyers, he notes, the competition is not so fierce right now, noting that there are options to choose from.

“You’re in the driver seat right now,” he said while noting the benefits for buyers.

Here are the cons of buying/ selling now:

He says one of the cons would be locking in the rate right now, then seeing a rate cut in the future.

The competition could potentially become fierce, if the bank decides to cut the rate further more, he explained.

He notes that if that happens, the housing crisis will become even worse, as Canada is still dealing with low housing inventory.

An increase in competition would increase the prices of houses, he adds.

Selling or buying too quickly isn’t the best practice, he notes, suggesting that you should take your time and put some thought into it.

Despite all the pros and cons, Pilon says, real estate remains a good investment.

According to the latest Royal LePage House Price Survey for the second quarter of this year, the average home price in Canada is $824,300. That’s up 1.9 per cent from the same time last year, and up 1.5 per cent from the first quarter of 2024.

In the Ottawa Housing Market Report for June 2024, the average price of a home was up 2.4 per cent from this time last year to $686,535, but down 0.6 per cent from May 2024.

Experts believe many potential buyers are still hesitant of jumping into the housing market and waiting for another interest rate cut of 50 to 100 basis points.

“I don’t think it’s going to be the rush that we see in the past, because people are used to more of a conservative approach right now,” said Curtis Fillier, president of the Ottawa Real Estate Board. “I think there’s still a bit of a hold back, but I definitely do think with another rate cut, we’ll probably see a very positive fall market.”

With files from CTV News Ottawa’s Kimberly Fowler

 

728x90x4

Source link

Continue Reading

Real eState

Real estate stocks soar to best day of year on rate cut bets

Published

 on

(Bloomberg) — The stock market’s worst group notched its best day of the year as a cooler-than-expected inflation report stoked bets that the Federal Reserve will start cutting interest rates in September.

Shares of real estate companies jumped 2.7% Thursday for their biggest gain of 2024, climbing to their highest level since March as investors snapped up homebuilder, digital and commercial real estate stocks alike. Real estate also was the best-performing group in the S&P 500 Index Thursday, with volume that was around 30% higher than the 30-day average, according to data compiled by Bloomberg.

Arguably the most significant news to come from the latest consumer price index reading was a pullback in housing-related inflation. Shelter costs rose just 0.2% for the slowest monthly increase in three years. Homebuilders, which have risen 7.1% this year, were up 7.3% for the session, the most since 2022. Shares of D.R. Horton Inc., which is scheduled to report earnings next Thursday, gained 7.3%.

“Housing has really been the last shoe to drop in terms of winning the battle against high inflation,” Preston Caldwell, chief U.S. economist at Morningstar wrote in a note to clients Thursday. “Leading-edge data has strongly indicated for some time now that a fall in housing inflation was in the works.”

A rally in real estate stocks is bad news for short sellers who have been piling into the group, which is the worst performer in the S&P 500 this year. To start the week, short interest as a percentage of float hovered near 49% in the SPDR Homebuilders ETF, the highest level since February for the exchange-traded fund, according to data from S3 Partners.

Property owners are rallying as well. Real estate investment trusts, which were brutally penalized during the two-year run up in borrowing costs, advanced by as much as 3%. And the outlook for the group appears to have turned a corner, according Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers Capital Management.

“We think this is a compelling backdrop for listed REITs especially as fundamental growth remains on solid footing,” he said, referencing the latest inflation data and rate outlook. “The rally that started in October of 2023 pushing returns more than 20% above their trough looks set to continue if inflation cools and interest rates continue to decline.”

Shares of industrial REIT Prologis Inc., which reports second-quarter results on Wednesday, rose 3.3% to hit their highest level since April. U.S. Treasury yields tumbled, with the 10-year bond falling to 4.2% and the policy-sensitive two-year note slipping to 4.5%.

(Updates indexes and stock prices for market close.)

 

728x90x4

Source link

Continue Reading

Trending