Broker’s corner | Private equity — the canary in the mineshaft?

Dec 4th, 2014 | By FCT

First of three look-aheads for 2015

In the old days, decades before the advent of testing technologies, coal miners used canaries to test the air quality in mines for poisonous gases like methane and carbon monoxide—the poor birds were the most sensitive bellwethers for what the miners couldn’t sense themselves.

2015’s just around the corner.  With the Federal government’s 2012 B20 guidelines now heading into their third year, the refinancing marketplace, hard hit by those guidelines might well ask: what are the odds equity take outs might be the “canary in the mineshaft”—a use case to detect just how fragile government regulation has left this sector? And what of innovations elsewhere?

We’ll scope out the data here and then look ahead over the next two posts to brokers’ own “refinancing” thinking: a sharp look at the do’s and don’ts of investing in marketing communications and branding and, finally, a look at why the prospects for an end-to-end solutions toolkit for brokers have never been better.

CAAMP’s 2014 data for equity take outs documents that 11% of homeowners took equity out of their home in 2013/2014, with the average funding at some $55,000. Up-shot? Total equity takeout during the past year stands at $63 billion. And where did the money go? No surprise here: debt consolidation and repayment (about $20.6 billion); next up, $17.4 billion for home renos/repair, then $7.7 billion for investments, $6.6 billion for non-real estate (including university tuition/residence), and $10.3 billion for “other” purposes.

Here’s the canary: it’s the US, where market reaction to the subprime horror show of 2008-10 bred several highly innovative equity takeout strategies, the most intriguing of which is the rise of private equity and the commercialization of mortgage equity instruments.

One thing’s certain—the market abhors a vacuum: according to Inside Mortgage Finance, 24% of US real estate equity loans Q1-Q3 2014 were made by non-bank lenders. In the backwash of massive lawsuits, stringent banking standards and intense media scrutiny, traditional US banks have pulled back—way back, in some cases—from the mortgage industry.

In the US, mortgage brokers see this as very good news indeed, as equity loans were dying off, largely, as in Canada, because of tighter regulation (perhaps a good thing, given the precedent) and complex reporting requirements (a mess, according to EXPERT/ease’s research). For US property owners (and owners of multiple properties, especially), this is terrific news for 2015.

Historically, this species of US financing was pegged to the personal financial state of the borrower; now the US regulations allow the loans to be made solely on the property (or property portfolio) itself. These are commercial loans, not residential—and the market’s being driven by lenders seeking to place idle cash and portfolio customers rolling over multiple loans into one portfolio. The first products to market are adjustable rate mortgages, with 30-year amortizations and LTVs up to 75%; the US origination fee structure applies, of course.

Will the US “canary” inspire Canadian deal-making ingenuity in this space? We’ll see in 2015.

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