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Growth of Reverse Mortgages in Canada Poses Risks, Report Says

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The explosive growth seen in the Canadian reverse mortgage market is accompanied by a commensurate increase in house prices, but the market is also subject to risks for product providers. That’s according to a new report from global credit rating agency DBRS Morningstar, as reported by Investment Executive (IE).

Canadian reverse mortgages – available to borrowers aged 55 and over – are supported by rising levels of home price appreciation in major markets like Toronto, Ontario and Vancouver, British Columbia. However, pandemic-era appreciation poses more and more risk for new loans, the report says based on the IE article.

“This rapid price spike makes recently created reverse mortgages riskier in a severe housing market downturn, but provides increased protection for older vintages,” the report says according to IE.

Canada has seen pronounced growth in reverse mortgages for an extended period, but additional cases have also caught the attention of the country’s Office of the Superintendent of Financial Institutions (OSFI), the agency charged with bolstering public confidence in the Canadian financial system.

In May, it was reported that OSFI would take a closer look at the product category in Canada, and in June the entity limited reverse mortgages to a maximum allowed loan-to-value ratio (LTV) of 65%, according to organization himself.

“OSFI is taking steps to ensure that federally regulated financial institutions are well prepared to deal with the risk of persistent and unpaid consumer debt which can make lenders more vulnerable to negative economic shocks,” OSFI said at the end of June. “Accordingly, this notice outlines regulatory expectations with respect to Combined Loan Plans (CLPs), loans with shared equity elements and reverse mortgages.”

Earlier this year, Canada’s reverse mortgage market leader, HomeEquity Bank, announced that it had surpassed C$1 billion (US$768.5 million) in originations for 2021, the first time that it reached such a threshold, and which also marked a 28% annual increase from its original figure in 2020.

The Ontario Teachers’ Pension Board announced last week that it has completed the acquisition of HOMEQ Corporation, the parent company of HomeEquity Bank, after acquiring the company from Birch Hill Equity Partners. Management Inc. In a transaction first announced last fall, the Pension Plan Board had seen “incredible potential in our product and our market,” according to Yvonne Ziomecki, executive vice president of marketing and of HomeEquity Bank sales at the time.

Read the piece on Investment Director regarding the DBRS Morningstar report.