Canadian homeowners grappling with swelling mortgage costs have become such a significant issue that the government of Prime Minister Justin Trudeau is urging banks to go easy on them.

Nick Kyprianou, the chief executive officer of RiverRock Mortgage Investment Corp., is taking more of a tough-love approach.

Mortgage investment corporations — or MICs — like Kyprianou’s firm are navigating a tricky situation. The surge in borrowing costs has squeezed many homeowners, a problem more acute among MIC borrowers given that their loans often carry an interest rate of 10 per cent or more. But the companies don’t have the resources of Canada’s massive banks, meaning MICs often argue that they can’t afford to let stretched customers skip payments for as long, and have to act more quickly to stem losses.

So as soon as someone misses a payment, Kyprianou’s company reaches out to see if they can get back on track. If the answer is no, they deliver an ultimatum: Sell now or we’ll sell for you.

“We came out of the gate extremely aggressively last year,” he said. “When people ran into trouble, we said, ‘Look, you can’t afford it. Let’s go through your budget. OK, let’s sell the house. Let’s work together on this because you’re going to end up with nothing.’”

HOUSING COSTS

It’s the kind of pressure that Trudeau’s government is asking banks to mitigate. His Canadian Mortgage Charter, released last month, sketched out guidelines that banks should use to help keep borrowers in their homes after a historic surge in interest rates. With the high cost of housing emerging as one of the government’s biggest challenges, it’s seeking to avoid mass foreclosures.

But MICs such as Kyprianou’s RiverRock are overseen by provincial governments instead of the federal one, giving Trudeau no leverage to make them heed the new guidelines. And Kyprianou argues that private lenders who are too easy on delinquent borrowers are at risk of going out of business.

“I think not all MICs will survive,” he said. “I don’t think they’re being proactive on people that run into trouble. I think they’re being passive, hoping it will get better and the market will solve their mistake.”

There are signs that a nationwide jump in new listings since the start of the year is being driven in part by sales forced by MICs. And their position outside federal regulation may be pushing even more borrowers into their arms.

Though they claim only about 1.7 per cent of the national mortgage market, such alternative lenders have seen double-digit growth in recent years. That’s in part because they don’t have to administer the federally mandated mortgage-stress test, which forces bank borrowers to prove they have enough income to handle the loan if rates go up.

With rates currently at their highest level in more than 20 years, many borrowers can’t clear that bar, and more are turning to MICs instead. Assets at Canada’s 25 biggest mortgage investment corporations rose 7.1 per cent in the first quarter from a year earlier, compared with a six per cent increase for the industry overall, according to a recent report from Canada Mortgage & Housing Corp. This continued growth means many more Canadians will find themselves contending with this much less forgiving breed of lender in the years to come.

“This general financial crunch that Canadians are feeling across the board is pushing them to alternative lenders,” said Matthew Gibson, a Hamilton, Ontario-based real estate lawyer.

The number of mortgage actions crossing his desk from these companies has jumped three-fold compared to last year, he said.

“You do need to understand a big bank, because of their assets, because of their size, because of their security in other ways, may be slower to act,” he said. “Because of the vulnerability of private lenders in terms of the lack of the resources big banks have, it’s a taller order to call on them to be as forgiving as a TD Bank or an RBC when it comes to someone who hasn’t paid them in six months.”

FALLING BEHIND

But that action is often painful for the person losing their home. Since 2018, Jared Gage had been carrying a second mortgage from a private lender on his home in Kitchener, a small city about an hour and a half outside Toronto.

He and his wife needed the money after some other investments went bad. While the interest rate was 19 per cent annually — paid in monthly installments — his job at a local Toyota plant and his wife’s as a nurse meant they could handle it.

But in the last two years, inflation surged. With all the family’s other expenses suddenly rising, they were falling behind on their second mortgage by November 2022. In January, the lender, New Haven Mortgage Corp., said it was initiating a power-of-sale proceeding. Now, the family of four has downgraded from the four-bedroom home they lived in since 2008 to a three-bedroom condo.

“It gets scary when you don’t know if you’re going to have a roof over your heads,” Gage said.

He questioned why neither the lender, his real estate lawyer or mortgage broker warned him about carrying such a high-interest loan for so long, or made clear what could happen if he fell behind.

“We agreed to it, we didn’t look into it, it ultimately comes down to it being our fault,” he said. “But there’s no one really looking out for you.”

Many alternative lenders offer loans with shorter maturities, often one-year or two-year debt, meaning their borrowers have been among the first facing the effects of the past two years’ historic rise in interest rates.

That’s meant that a greater share of mortgage investment corporations’ loans are behind on payments. MICs had nearly 0.9 per cent of their mortgages in arrears at the end of the first quarter, according to CMHC data. For chartered banks, mortgages in arrears accounted for just 0.15 per cent.

The Trudeau government’s recent raft of guidelines have essentially encouraged banks to keep these arrears low. For some lenders, that means letting customers cut back, or even fully stop, monthly principal repayments, giving borrowers longer to pay back a loan.

Others are letting their floating-rate mortgage holders reduce interest payments too, tacking that amount onto the principal to essentially make the mortgage bigger. In all of those cases, it technically means the borrower hasn’t missed a payment.

But while these strategies may mean keeping people in their homes, they’ve also come under fire from critics who say they risk keeping homeowners in perpetual debt. Some borrowers are now facing amortization periods that stretch beyond 35 years, which means they may not have any realistic way to pay off the debt unless rates come down or values go up.

And the urgency has mounted as prices have dropped 12 per cent since their 2022 peak. If the value of a home falls below the mortgage amount, the lender may not be able to get all their money back, and the borrower would be left with nothing in a sale. Each missed interest payment only makes the hole deeper.

In this situation, a rebound in prices could save both the lender and borrower, and that may be what Canada’s banks are hoping for. For the alternative lenders who can’t or won’t hold on, though, the options are to seek a foreclosure, which effectively sees them take over the property, or force the borrower to sell in a power-of-sale proceeding, where they at least can keep any extra sale proceeds once the loan is paid off.

FORCING SALES

Exact figures on how many power-of-sale proceedings are occurring are hard to come by. But there are signs that pressure from alternative lenders is at least part of the reason the housing market has seen more homes listed for sale in recent months. The three month moving-average of new listings was up 21 per cent in November from March, with the surge concentrated in Ontario, the province where alternative lenders have been most active.

In Toronto, Canada’s biggest city, the number of listings that mention the terms “power of sale” or “mortgage” have risen to about one per cent of the total from less than 0.3 per cent a year ago, according to data compiled by local real estate broker Daniel Foch.

That measure likely undercounts the total number of power-of-sale proceedings underway, as not every listing will mention it as the cause, Foch said. And the data excludes homeowners who have been threatened with a power of sale and are taking action themselves before the lender initiates the legal process.

“There’s a lot of soft power-of-sales taking place,” said Foch. “Forcing a sale is the pragmatic option.”