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Developers Consider Helping Consumers on New Regulations

by Yvonne von Jena | December 29, 2017


Canadian developers are looking at providing loans to consumers who cannot close their deals under the new OSFI B20 guidelines, according to Garry Marr in an article for Costar.

The Expected Impact

The rules that kick in January 1st, 2018 will leave some consumers scrambling to close purchases and have some Canadian developers considering getting into the mortgage business to make sure deals do not fall apart. As noted recently in our blog and by Royal LePage, the new OSFI stress test is one of the most significant regulatory interventions in the housing industry in years, although Royal LePage does believe its impact is expected to be contained to the first half of 2018 for most major markets.

An Active Consideration

Writes Mr. Marr, industry sources suggest this is now an active consideration for developers who fear the guidelines will leave them with buyers unable to meet their commitments. "It's happening, but just not yet," said Benjamin Tal, deputy chief economist with CIBC World Markets, about developers picking up the lending slack. "They are ready to do this. Developers will come out and play hardball and tell consumers they need to close, borrow from grandmother if you have to. If they cannot close and the deal is at risk, they will go to option B."
Mr. Tal says buyers after January 1st will be forced to turn to mortgage investment corporations (MICs), which charge higher rates, but consumers who already have deals still need to close.

Some Developers Are Already Doing This

Eli Dadouch, chief executive of Toronto-based Firm Capital Corp., a publicly-traded boutique private equity real estate firm, says some developers have long had policies for taking back mortgages because of tax advantages they can get back from the federal government. It’s not necessarily the norm, and for developers doing it, they need a deep balance sheet.

Not a Long-Term Solution

"I think it makes sense (for developers) because it secures a deal, but it's not a long-term solution," says Mr. Dadouch, who thinks the market might be supplying these bridge loans for two to three years because of condo deals in the pipeline over that time frame.

No Dent Expected in Toronto and Vancouver Land Prices

He said the market for land in Toronto is so strong he does not expect the new regulations to have a significant impact. "Sure, if prices don’t go up (by the time a deal closes) developers will take back a mortgage. If prices go up, then they won’t have to do it," Mr. Dadouch says, adding a larger valuation means consumers can qualify for an even bigger mortgage than when a deal was first made.
Brian Johnston, the COO of Mattamy Homes, concurs. He said the changes do have the potential to affect deals in the pipeline for the time it takes to get a project done however, like Mr. Dadouch, he ultimately does not think it will put a dent in land prices.

Says the article, land values continue to soar in the Greater Toronto Area and Metro Vancouver, and this type of tactic is likely to be inflationary for those markets where average detached homes are already selling for slightly less than $1 million and a little more than $1.7 million, respectively.

Some Structuring Needed

Rob McLister, founder of ratespy.com, said it is feasible for developers to provide loans this way but they would have to be structured a certain way to get around rules that only allow a certain amount of debt relative to household income.
"The first mortgage holders, especially if they are federally regulated, must calculate debt ratio including the second mortgage," says Mr. McLister, adding you usually have to prove to a first lender where you are getting the balance of your funds to close. "(Developers) could do a vendor take-back mortgage whereby the debt servicing is low. They might do an interest only (second mortgage)."


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