Bank of Canada has increased rates 5 times already in 2022. These sharp and successive rate hikes have come contrary to earlier messaging re-iterated by Bank of Canada Governor Tiff Maklem during the pandemic
and early recovery which indicated rates would remain near zero until 2023 – and that inflation was ‘transitory’ (examples here, here, and here).
So, what changed? These very decisive steps are now being taken with one primary objective: reign in inflation. It is easy to be frustrated with the Bank of Canada’s guidance when they say one thing, and do another, but I do concede that a series of major unanticipated global events occurred (first a pandemic… followed by stronger than expected economic growth during said pandemic (overcorrection), mix in supply chain failures, a War, and ensuing energy crisis). I’m willing to accept that this called for a change of plans, and once again we are finding ourselves using the phrase “unprecedented times.”
I haven’t read any economists who are suggesting we can afford to ignore the inflation problem, so the BoC has found themselves in a “better late than never” situation. At Hosper, we now must look forward at the expected changes and the impact they have had and will continue to have to the equities markets, housing market, and particularly the private mortgage market.
7 Ways Hosper is Navigating the Changing Market Conditions
Here are 7 ways Hosper is responding and adjusting to the changing market, with the goal of maximizing yield, minimizing risk on existing loans, and maximizing protection on all new loans.
1. Scaling back Loan-to-Values (LTV)
The best hedge we have against home price decline is to maintain or increase our LTV buffer. Effective July 1 our underwriting group began scaling back our maximum LTVs by ~10%, in certain locations, without a reduction in our pricing. This means deals added to our 3 MIC Funds and deals closed with our Direct Mortgage Investment (DMI) program will see an overall lower risk profile for the same (or possibly even better!) return.
2. Increasing our pricing (a.k.a. Investor rates)
Investor rates are rising in both our MIC and Direct Mortgage Investment (DMI) program. Private mortgage rates, like bank rates, are cyclical and tend to fluctuate over time. We are currently in a rising interest rate environment which is giving us the ability to generate higher returns for investors.
It is important to note that our pricing is not tied to the BoC rate, however, competitive forces, like supply and demand of capital and the pricing of our competitors, dictate our pricing.
3. Ensuring point in time valuations are extremely current
Our underwriting team has always diligently reviewed appraisals to ensure the valuations are accurate based on the point in time of the appraisal. The biggest change we have implemented recently is what we deem a “current” appraisal. Historically appraisals and comparables were considered “current” for 90 days.
In todays market, Hosper is paying a premium to ensure appraisals are updated (if they are significantly more than 30 days old). Hosper reserves the right to requests an updated appraisal with new comparable properties if we feel there has been a material change in the market since the report was prepared. If a re-valuation is required, Hosper then lends against the re-set values.
4. Changing our renewal process
We are overhauling the way we do renewals on the DMI side in order to give us the ability to increase pricing for investors on renewing mortgages. All renewals will increase by 50bps in the subsequent term. You will be notified of upcoming renewals at least 30 days prior to the maturity date.
5. Avoiding properties that are harder to sell
Hosper is being more selective on the type of properties we accept as collateral. We are avoiding unique properties that tend to be difficult to sell in a less certain market.
6. Increasing the Loan Loss Reserve
Hosper is using the surplus income from higher yields to increase the amount allocated to our Loan Loss Reserve across all 3 MIC Funds. To date Hosper has experienced a 0.0% loss rate across 4,000+ deals, but in the event of a loss on a mortgage in our MIC, the Loan Loss Reserve absorbs the loss. This is a primary reason that we view the MIC as a lower risk option than direct mortgage lending.
7. Acquiring a higher number of first mortgages
Across the MIC and DMI platform, we are shifting marketing to acquire more first mortgages. With returns on first mortgages climbing, first mortgages (within both our MIC Fund and DMI program) are a good place to park your money. A unique attribute of mortgage lending is that you have the ability to make a positive yield even when the value of the collateral is flat or declining.
In 2020 investors would have likely faired better to buy real estate vs lend against it. 2022 and 2023 is likely a time where it will be better to lend and collect a coupon, compared to owning the asset. Low risk first mortgages create the biggest opportunity to make a positive yield, even if the home value declines.
Within our MIC we have better ability to adjust the portfolio from month to month as we are adding new deals weekly. To further scale back on the overall risk of our investments, our team will be shifting our acquisition targets from Second Mortgages to First Mortgages.
If you have any questions about how Hosper is navigating the changing market, please contact your Hosper Investment Representative. No question is too big or too small – We’re happy to help!