The entrance of a new player into the alternative mortgage lending market is a signal that industry insiders continue to believe in the strength of the Canadian mortgage and real estate market despite the subprime mortgage meltdown in the U.S. and recent liquidity problems in Canada.

“Whenever there’s a situation of volatility, such as the one we’re seeing, there are some companies that see an opportunity,” says Paul Grewal, the president of Toronto-based Street Capital Financial Corp. , which began operations in November. “From our perspective, we see opportunity. We see an underserved market here in Canada.”

Street Capital intends to focus primarily on alternative mortgages acquired through the mortgage brokerage channel. The alternative market accounts for about 3% of the wider Canadian mortgage market, according to the Toronto-based Canadian Association of Accredited Mortgage Professionals. In comparison, the U.S. subprime market represents roughly 20% of all mortgages.

Street Capital also intends to offer conventional or prime mortgages, which will give borrowers who start out with a Street Capital alternative mortgage an opportunity to graduate to a conventional mortgage, at more favourable rates if they qualify for one at time of renewal.

“We wanted to create a full-spectrum company,” says Grewal, the former chairman of CAAMP who left Toronto-based FirstLine Mortgages, at which he was president, to start Street Capital. FirstLine Mortgages is a division of CIBC Mortgages Inc.

Joining Grewal in forming Street Capital is Ed Gettings, the new firm’s CEO and formerly executive vice president of mortgages, lending and insurance at CIBC, and chief finance and risk officer Lazaro DaRocha, who was vice president of CIBC mortgages and lending, product management. Two other senior executives at Street Capital also worked at FirstLine Mortgages.

“When you have people who apply for various positions, you tend to go with people who you’ve worked with in the past,” Grewal says. “Clearly, there were people who enjoyed working with us and wanted to join our team.”

Serving the alternative mortgage market offers a golden opportunity for non-bank lenders such as Street Capital, Grewal maintains. “The Canadian alternative market is in its infancy,” he says. “A lot of the banks aren’t in that segment, therefore, the Canadian mortgage market hasn’t had as much exposure to alternative lending.”

Alternative borrowers are loosely defined as homebuyers who don’t meet the credit-quality standards set by traditional mortgage lenders and insurers to qualify for conventional mortgages. Alternative borrowers can include new Canadians, who have little or no established credit history, or the self-employed and small-business owners, who might have fluctuating income. It can also include someone who has had a history of good credit, but who has now run into a life-altering situation, such as an illness or loss of a job.

Grewal, as well as other industry insiders, say that the alternative market in Canada bears little resemblance to the U.S. market, in which risky and irresponsible subprime lending practices has led to defaults, foreclosures and plunging home prices — not to mention a global credit crisis.

Regulatory differences limit the types of mortgages Canadian lenders can issue and a more conservative mortgage culture among Canadian lenders and borrowers means that Canada has not seen a similar housing crisis, industry insiders agree.

“The mortgage market in Canada is, frankly, quite healthy,” says Grant MacKenzie, CEO of Toronto-based mortgage lender Macquarie Financial Ltd. “Unemployment is the lowest it has ever been and people are feeling quite buoyant about the economy, even though there’s perceived mayhem south of the border.”

However, Street Capital’s launch comes at a time of some upheaval in the mortgage-lending market in Canada. The current crisis in asset-backed commercial paper, which saw major Canadian financial institutions agree to freeze the trading of the notes in August after investors grew concerned about their valuation, led to tightening of credit conditions and availability to mortgage lenders, particularly for riskier mortgages. Some mortgage firms tightened up their lending practices or suspended their alternative lending altogether.

“The cost of funds has gone up for everybody,” says MacKenzie about the ABCP crisis fallout. His firm, Macquarie Financial, continues to focus on the conventional mortgage market and has no plans to enter the alternative lending space. The company draws on the assets of its Australian-based parent, Macquarie Bank, for some of its funding, as well as other sources.

@page_break@The alternative mortgage market “is not really a place to go to look right now from our perspective,” MacKenzie says, “if only because of the added turmoil, which would be the liquidity issues.”

Street Capital, however, says it will have no difficulty finding financing for both its prime and alternative mortgages, as the firm has already signed deals with a number of financial institutions to fund its mortgages.

“There was a liquidity issue back in August and September,” Grewal says, “but now you’re seeing a bit of liquidity return to the marketplace. And over time, you’ll see the market normalize, particularly for prime customers.”

Street Capital intends to conduct its business through the growing Canadian mortgage broker network. The new firm already has agreements in place with several brokerage firms.

“Mortgage brokers have a significant amount of influence over their customers,” Grewal says. “We think with our strategy of offering both prime and alternative lending solutions, brokers will feel comfortable recommending us at time of renewal.”

Most industry observers believe there’s plenty of room for growth in the alternative mortgage market — especially as the Big Six banks tighten lending practices. Street Capital’s launch is a sign of the continued confidence in the Canadian mortgage and real estate market and the increasing availability of different borrowing options for lenders.

“It speaks to a trend in the industry,” says Jim Murphy, CEO of CAAMP in Toronto. “There are more lenders, more insurers, more brokers, more products. Street Capital is another indication of the overall health of the mortgage and real estate market.”

Firms such as Toronto-based lender Home Capital Group Inc. have actually benefited from the liquidity crisis as competitors have retreated from the alternative space. Home Capital, which works in the alternative mortgage market through its Home Trust Co. subsidiary, funds its own mortgages through GIC deposits and had no asset-backed commercial paper on its books when the ABCP crisis hit in August.

“We haven’t changed our product lineup,” says Nick Kyprianou, senior vice president and COO of Home Capital. “But some of our competitors have had to.”

In August, Home Capital bought a number of loan portfolios from other mortgage lenders caught in the liquidity crisis. In late October, the firm announced a third quarter profit of $22.8 million, representing an increase of 38% from the previous year.

For his part, Street Capital’s Grewal is bullish about the alternative market space, adding that Canadians and mortgage brokers need more options and choices.

“We think that getting in at this time is really opportune,” he says. “Over a period of time, you will see some normalcy in the marketplace. There are a lot of Canadians who are renting or living at home who can get into mortgages.” IE