The 2008 financial crisis was a watershed event for the private lending industry, laying the groundwork for a steady increase in the demand for private equity mortgages as an alternative to traditional ones. The recent economic upheaval brought about by COVID-19 has further entrenched this pattern, as financial institutions have once again tightened regulations for borrowers in a time of economic uncertainty.
These changes leave an important question for mortgage investors looking to take advantage of the growth in this market – will the growth of the private lending market continue or will a new normal put the brakes on private mortgage lenders and the investment opportunities they create? Below is an overview of the ever-increasing demand for private lending and CMI’s predictions for future growth.
A Pivotal Point of Growth for Private Lending
After the 2008 financial crisis, financial regulations tightened, shutting off access to traditional mortgages for some. Increases in the minimum down payment for uninsured mortgages, gradual shortening of maximum amortization periods, and new mortgage stress tests meant fewer homebuyers were able to qualify for mortgages.
The financial crisis proved to be a pivotal point for CMI as well. Amid the spike in demand for private lending, founder Bryan Jaskolka restructured the firm to include a private lending arm, using fintech software to seamlessly connect investor capital with mortgage brokers and their borrowers.
Since then, the private lending market has captured the interest of investors as the demand for private lending continues to increase with the steady rise of the gig economy, among other factors. Last year’s Statistics Canada report shed light on this rapid growth, showing that assets for the Mortgage Investment Corporation (MIC) market more than tripled in the period between 2007 and 2018.
The Pandemic Real Estate Boom
While Canada experienced a real estate boom during the pandemic, traditional lenders took a more conservative approach to lending due to business shutdowns and the resulting economic uncertainty. Prospective homebuyers turned to private lenders as pent-up demand for real estate collided with tightening restrictions from traditional lenders.
CTV News reported that data from the Canadian Real Estate Association (CREA) showed a 25% increase in average market prices from February 2020 to February 2021. Additionally, the Bank of Canada found national resales reached near record highs in April 2021. This has meant an increase in mortgage investment opportunities amid shifts in borrower patterns.
CMI Steps In to Meet the Needs of Borrowers
Over the course of the pandemic, we’ve seen more borrowers looking for bridge financing in the face of delays with bank financing. In a hot real estate market, more borrowers are buying firm, and are using bridge financing to meet their closing dates. For CMI, that has meant an uptick in high quality mortgage investments.
Today we’re seeing a private lending market that’s more robust than the pre-COVID one. Many credit-worthy borrowers remain unable to secure mortgages through traditional banks, a trend that’s likely to stay consistent until 2022 when interest rates are expected to increase.
Low interest rates have also left investors looking for solutions like private lending as traditional fixed-income investments are delivering lower yields. With the additional stress tests introduced on June 1 to offset the Bank of Canada’s lower interest rates, we anticipate a steady influx of diverse investment options as more borrowers look to private lending solutions.
What’s Next for Private Lending: CMI’s Projections
Based on the current trajectory of the private lending market, we estimate the demand for private lending solutions to remain between $200-$300B from now until 2022. For investors, this means a diverse range of private mortgage investment options to choose from as they look to stabilize their income and cash flow.
We expect quality of service to be a key competitive factor in the industry through 2021, as borrowers often need advice and assistance when navigating the private lending process, often for the first time. CMI’s strategy continues to be to differentiate ourselves in the space with ethical, client-centric lending practices that create opportunities for investors and borrowers alike.
If you’re interested in taking advantage of the investment opportunities in the private lending space, please don’t hesitate to reach out to one of our mortgage investment professionals.They can ensure these products fit your investor profile and risk tolerance while answering any questions you may have.