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Canadian reverse mortgage growth comes with risks, says report

DBRS Morningstar described that while Canada’s reverse mortgage market has seen sizable growth, that growth is not without risk to providers

The explosive growth observed in the Canadian reverse mortgage market comes with commensurately increasing home prices, but the market is also subject to risk for product providers. This is according to a new report by global credit rating agency DBRS Morningstar, as reported by Investment Executive (IE).

Canadian reverse mortgages – available to borrowers aged 55 and older – are being bolstered by the rising home price appreciation levels in major markets like Toronto, Ontario, and Vancouver, British Columbia. However, pandemic-era appreciation increasingly runs risks for newer loans, the report says based on the IE article.

“This rapid spike in prices makes recently originated reverse mortgages more risky in a severe real estate market downturn but provides increased protection for older vintages,” the report explained according to IE.

Canada has seen pronounced reverse mortgage growth for a sustained period of time, but additional business has also brought additional scrutiny from the nation’s Office of the Superintendent of Financial Institutions (OSFI), the body charged with reinforcing the public’s confidence in the Canadian financial system.

In May, it was reported that OSFI was going to be more closely scrutinizing the product category inside Canada, and in June the entity limited reverse mortgages to a maximum authorized loan-to-value (LTV) ratio of 65%, according to the organization itself.

“OSFI is taking action to ensure that federally regulated financial institutions are well prepared to address the risk of persistent, outstanding consumer debt that can make lenders more vulnerable to negative economic shocks,” OSFI said in late June. “Accordingly, this Advisory outlines regulatory expectations with respect to Combined Loan Plans (CLPs), loans with shared equity features, and reverse mortgages.”

At the beginning of the year, Canadian reverse mortgage market leader HomeEquity Bank announced that it had surpassed $1 billion CAD ($768.5 million USD) in originations for 2021, the first time it had ever reached such a threshold, and which also marked a 28% annual increase over its origination figure in 2020.

The Ontario Teachers’ Pension Plan Board last week announced that it has completed the acquisition of HOMEQ Corporation, the parent company of HomeEquity Bank, having acquired the company from Birch Hill Equity Partners Management Inc. In a deal first announced last fall, the Pension Plan Board had seen “incredible potential in our product and market,” according to HomeEquity Bank’s EVP of Marketing and Sales Yvonne Ziomecki at the time.

Read the piece at Investment Executive regarding the DBRS Morningstar report.

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