You’ve either heard of Alt-A lenders, and already have an opinion formulated, or you have no idea who they are, and what they do.
Since we’ve been talking about the mortgage industry quite a bit recently, and potential changes that are on the horizon, I thought it would be a good time to talk about alternative financing, just in case some of us find ourselves without traditional financing down the line.
I’ve asked my mortgage broker, Joe Sammut, to tackle the subject, since he can surely explain it a lot better than I can…
Alt A – Alternative Lender, they go by many names, but what are they and where do they fit in to the Canadian mortgage landscape? The definition of an Alt A Lender and product seems to be an intentional moving target, allowing the product and the institution behind it the flexibility to morph and serve current day needs.
Historically, Alternative Lenders have been thought of as the lender of last resort; the place to go when no one else would lend a mortgage. They were the hush-hush dirty secret in the mortgage business and the stigma of working with these lenders could linger like a bad smell.
Lending can be divided into many categories such as “A”, Alt-A, “B” and Sub-prime with plenty of grey area in between.
But first, a quick history…
The 1970’s offered financial companies that provided a service for non-prime borrowers
The 1980’s and 90’s the financial companies disappeared and created a need and an opportunity for Alt-A lenders such as Home Trust, Equitable Trust and the like.
The early 2000’s were all about the sub-prime lenders, and this brought many new institutions to the Alternative Lending space. They were securitizing their portfolio – packaging mortgages in a bundle for the purpose of selling them to investors, thereby raising new capital to lend to other borrowers. This becomes a new topic in itself to be studied as part of the US, Canada and Global recession.
The world has changed and so has the mortgage market in Canada. The Federal Government has tightened the mortgage lending rules a number of times, the Big Banks are being more selective than ever before and being more closely monitored by Government Auditors to ensure that they are compliant with new underwriting criteria.
B20 has forced lenders to articulate policies and guidelines which has created a state of flux for their front line workers. An example cited by Ron Swift, CEO of Pacific NA – parent company of Mortgage Architects and Radius Financial, there is confusion with Big Bank employees regarding investment properties. Many don’t know that different mortgage insurers view the rental income in different ways. CMHC may decline an application that Genworth would welcome. If the staff haven’t been trained and work exclusively with mortgage products, you may have a perfectly viable deal that won’t fly in the face of inexperience.
Enter the Alt A Lender.
Self employed owner of a small business? Not a problem! Blemished credit or discharged bankrupt? Let’s chat! New to Canada with no Canadian credit history? Welcome! Non-traditional property? Tell us all about it!
These lenders are looking for ways to make mortgages happen. They are lending on the value of the real property.
Who are Alt A Lenders?
They often represent investors coming together with available funds to put out in the mortgage marketplace, individuals looking to diversify their portfolio and large organized institutions known as Monoline Lenders (non-deposit taking banks), although not all are Alt-A lenders, they do have Alternative product offerings. To truly do the subject justice, it seems that there are two kinds of Alt-A lenders; those that have created their organization around targeting Alt-A clients and those that have set up a division or product to offer to a client that does not qualify for their primary product offerings, namely fully qualified, insurable “A” clients.
The qualifying rules are different and often more lenient than other lenders, giving the Alternative Borrower a place to call home. They look at a potential client from a different perspective. They have built an industry within the lending world based on the business that the Big Banks turned their noses up at. They got the cast offs and the turn downs and worked magic.
Today, the stigma is almost gone. Mortgage Brokers and their clients are looking for the solutions that the Alternative Lenders can bring. If you had the guts to leave your job and start up your own company you should not be denied the right to own a home. You moved your family to Canada why should you line a landlord’s pocket as a tenant for years to come. A savvy property investor with a positive cash flow should not be limited by the number of doors the Big Bank says they can own. Past credit issues and bankruptcy do not always indicate future behaviour and the Alternative Lender is willing to invest in this risk.
Let’s look at the reality of borrowing from an Alternative Lender:
*Yes the rates are higher than traditional banks, but often by only one to two percent. And there is room for argument here that if you were to approach your bank directly and settle for posted rates, you would actually be paying more than a Broker managed Alt A mortgage.
*There may be a fee associated for arranging the Alt A mortgage. You can expect to pay between 0.5 and 1% of the mortgage amount to the lender and an additional fee to the arranging Broker.
*Some lenders will self-insure their mortgages. Big banks will insure through CMHC, Genworth and Canada Guaranty. Alternative lenders can, at their discretion, charge a 1 to 2% premium and insure the mortgage themselves.
*Products can include an equity line visa to allow you to avoid a future refinance.
*You may not need to provide as much paperwork or face as many conditions to get to the approval stage with an Alt A Lender.
*Many have the same features and benefits as an “A” mortgage, for example 80% Loan to Value on a purchase, 1 to 5 year terms, up to 30 year amortizations. And the best part…prepayment priviledges…20% increase in monthly payment amount and 20% annual paydown of original principal balance. This will allow you to accelerate the paydown of the mortgage, increase the equity and ultimately qualify for an “A” mortgage.
Keep in mind that many of these lenders can only be accessed through a licensed Mortgage Broker. An experienced Broker can help you navigate the various lenders and products available and make sure you get exactly what you need. This is not a product that you would want to tackle alone. Make sure to partner with an expert in this industry so you can rest assured that you are taken care of.
Our thanks to David Fleming for the privilege of sharing our thoughts and opinions on torontorealtyblog.com
Joe Sammut, Broker
Every single person under the age of 40 should, after reading this, immediately call his or her father and ask, “What was life like in the early 1980’s when interest rates were at 21%?”
We have become so entitled, as borrowers, to this life of super-low interest rates that we can’t even fathom a world where rates were above 4%.
About five or six years ago, I had a client that was looking to purchase a home in North Toronto, for around $800,000, and I had him go to my mortgage broker for approval.
It turns out, this man had a $1,500,000 open line of credit for his wife’s medical practice, and the two of them didn’t have a penny to their names.
Mortgage rules were different back then, and in the age of 107% financing and 40-year amortizations, money was more easily accessible than today.
The 5-year, fixed-rate mortgage was around 4.49%, and my client was offered an $800,000 mortgage at 5.99% – a mere 150 basis points above the prevailing rate, through a private lender.
I remember him saying, “I’m not paying more than the prevailing rate! What the hell!@?!?!”
He just didn’t understand…
Some borrowers don’t have the down payment, income, and credit necessary to qualify for a traditional mortgage.
And if you’re somebody without a penny to your name, with $1.5M in debt, you should be so lucky to have people offering to lend to you!
I’m not saying that this person should have been buying a home. But I’m not saying that he should not have been buying a home either.
I’m just saying that there are options out there for people who can’t qualify for a traditional mortgage, if they want them.
Who am I to tell somebody how to spend their money?
When 107% financing was around, I had a client who purchased a $1,060,000 home for NOTHING, and he got $74,200 in cash on closing, from the lender.
His interest rate was around 4.99% if I remember correctly, but he was a hedge-fund manager, who had a 3-year running average return of about 15%. He asked me, “Why the hell would I put my own money into this house if I have somebody willing to lend to me at 5%, and I can make 15% on my own money?”
I’m a VERY conservative guy, and I would never go down that road.
But it doesn’t mean somebody else won’t…
Alt-A lenders are doing a ton of business in today’s economy, and they only seem to be gaining momentum…