Tonight's first order of business: the part of the financial market that lives in the shadows — less regulated or not regulated at all — is a fast-growing one in Canada.
That's the bad news. The good news is that it is still relatively small, and, if you're a borrower who can't get a loan any other way, perhaps a necessary one. Still, it's worth asking — if you can't get a loan any other way, do you really need that loan? And if it's a mortgage, are you putting yourself and perhaps others at risk, by taking one?
— Amanda Lang
Just two months ago, the Bank of Canada warned of the dangers of low interest rates — encouraging household debt, and lending to riskier borrowers. And yet, faced with plunging oil, the Bank cut rates just weeks later. The potential problems prompted CIBC to ask: How much of mortgage lending in Canada operates in the shadows?
Shadow lending can strike fear in the hearts of policy makers. After all, it may have played a big role in the subprime market that triggered the collapse of the U.S. housing market back in 2008. So how does Canada compare? Loan activity by lenders who don't take deposits has doubled since 2012. That meteoric growth is a bit startling, until you realize those alternative lenders are still a small piece of the pie, just 2.5 per cent of the total mortgage market.
'It's not as aggressive as it was in the U.S. People in Canada should not be concerned' - CMHC president Evan Siddall on subprime lending in Canada
Since the financial crisis, major banks have faced stricter regulation and may be lending less. CIBC writes, "That may lead to a transfer of risk from regulated players to unregulated players."
Still, the numbers show those less-regulated players make up less than five per cent of the market. Also, CIBC calls this subprime lending specifically "the mother of all measures" and at the moment it accounts for eight per cent of new mortgages in Ontario in 2014.
Subprime lending in the U.S. was much higher, peaking at nearly 24 per cent before the crash.
So far, it's small enough that the CMHC isn't worried. Here's what that agency's president Evan Siddall told the CBC in a recent interview: "I'm not that worried about their practices in fact and certainly it's not as aggressive as it was in the U.S. People in Canada should not be concerned about that."