The economic vibe for 2024 is like a mixtape of bad songs: high inflation, elevated interest rates, wobbly home values, stricter regulations, rising unemployment and escalating loan defaults.
This carnival of financial mayhem doesn’t sound like a great time to pour cash into mortgage companies. But if rates tumble as expected, 2024 could have some surprise hits among the B-sides.
In the grand tradition of sticking my neck out at year-end, here are four spirited predictions of how mortgage-related investments could fare next year.
Mortgage originator stocks
It’s been a year to forget for most companies that rely on mortgage revenue, including the likes of First National Financial, MCAN and mortgage brokerages.
One glaring exception is Equitable Bank, an alternative lender that set another 52-week high last Friday. Its 280 per cent gain since its 2020 low shows investor confidence that the mortgage market won’t implode. Equitable serves mainly mortgage brokers, an industry led by two colossal broker networks, Dominion Lending Centres Inc. (DLC) and M3 Group.
“Most industry stakeholders believe the worst is now behind us,” DLC chief executive officer Gary Mauris told me last week. “With more inventory coming onboard, lower interest rates on the horizon, a spring market and improving inflation numbers, we think 2024 will be a much better year than 2023.”
Despite a more optimistic outlook than 2023, the fact is that mortgage stocks typically fall as the Bank of Canada starts cutting rates. Since the turn of the millennium, the best time to buy them has been near the last BoC rate cut. That’s when long-term investors have traditionally locked in juicy dividend yields and significant price appreciation.
2024 could be a tough one for the Big Six banks. Loan losses will mount – which banks are already provisioning for – regulators could tighten the noose even more, commercial lending is souring, rate competition could get fiercer, and falling rates could temporarily compress banks’ interest rate margins.
A soft economic landing, higher loan demand from falling rates and a steeper yield curve (where long-term rates rise above short-term rates) could offset some of the above, but it’s hard to imagine banks having a blockbuster year.
As for when to throw your money at bank stocks, they tend to follow a roughly similar cyclical pattern as mortgage stocks – performing best after numerous rate cuts. However, this cycle may differ given lower expected unemployment and loan losses and more buoyant home values and fiscal spending.
So, it may make sense to lightly dollar-cost-average into banks. But maybe hold off loading the truck on bank stocks until the BoC takes a chainsaw to rates.
Mortgage investment corporations
A mortgage investment corporation (MIC) is a company that pools money from investors to lend out as mortgages. MICs are one of the more overlooked high-yielding investments, often paying almost twice the rate of a term deposit with little principal risk.
The following 12 months could be an opportune time to invest in larger, reputable, diversified residential MICs for two reasons: (1) their borrowers are renewing at higher rates, which generates more return for investors, and (2) MICs get to cherry-pick borrowers since there’s so much demand for MIC lending right now.
“We have four times more business than we can handle,” says Will Granleese, portfolio manager at Antrim Investments, Canada’s largest residential MIC, and its borrowers are renewing into rates in the 9-per-cent range and up.
“Investors should expect higher returns in the next 12 months, versus today. In the last 12 months virtually everyone has been paying. We’ve seen no material increase in defaults, which is a little shocking to me.”
Hali Noble, managing director at Fisgard Asset Management, agrees. “Are we concerned with where home values will land? Yes. And are we seeing an increase in slow or late payments and NSFs? Yes. But we’ve always been conservative and expect to have historically low defaults next year,” she predicts.
If you want to invest in a MIC, look for one that has:
- low defaults, historically speaking
- diversified its lending geographically
- been around since the global financial crisis (experience in down cycles is invaluable),
- $100-million or more under management
- a low average loan-to-value
- sufficient capital reserves to fund losses and redemptions
- never prevented investors from getting their money back in a reasonable time.
Many private lenders have considerably tightened lending criteria, pulling back on how much they’ll lend relative to falling property values. Money tied up with private lenders is often a less illiquid, less diversified investment.
The upshot is that returns can be higher for very well-managed privates. That’s especially true given today’s historically high demand, which results from stiffer qualifying rules at institutional lenders. Moreover, home prices should bottom out in 2024, thus reducing losses, and more people will need private financing in 2024.
Cutting to the chase
The time to go fishing for mortgage stocks is typically after the Bank of Canada has cut rates by 1.5 percentage points (or 150 basis points) more. Will this cycle be different? Possibly, but betting against history isn’t usually where the smart money swims.
Meanwhile, for liquid, risk-tolerant investors, a diversified portfolio of top-tier MICs could be a high-yield treasure trove. But when it comes to the private lending scene, steer clear of all but the most reputable, long-standing, diversified and well-run private lenders.
As always, don’t invest in something because some guy in the paper suggests there’s opportunity. Know your risk tolerance, invest only what you can afford to lose, and ask tough questions to your investment candidates.
Fixed Rates in Freefall
Fixed mortgage rates are cannonballing off the high diving board this week. The leading nationally advertised uninsured five-year fixed rate plunged 20 basis points to 5.59 per cent. (A basis point is 1/100th of a percentage point.)
But regional providers have even juicer discounts. At Butler mortgage, for example, you can get an uninsured five-year for 5.19 per cent in Alberta, B.C. and Ontario. For those with $800,000 loans or above, they’ve got 4.99 per cent on offer.
These new and improved fixed-rate discounts have considerably widened the gap between five-year fixed and variable rates. That should broaden the appeal of fixed rates, for now. Based on how mortgage qualifying works, it also boosts purchasing power by over 4 per cent for five-year borrowers with at least 20 per cent down.
Now if we consider the bond market’s forward rate outlook, as tracked by Candeal DNA, it suggests rates could drop 250 basis points in the next few years. If that proves true, today’s lowest uninsured variable at 6.55 per cent will save you more. But if we get even one or two fewer rate cuts than expected, the edge (on paper) shifts to that 4.99 or 5.24 per cent five-year fixed.
If you need an insured mortgage, True North Mortgage has a 3.99 per cent six-month fixed. In six months, it lets you renew into an adjustable-rate mortgage (ARM), presently around prime minus 1 per cent (6.2 per cent). It’s a decent play to take advantage of falling rates. But note, a 1-per-cent fee applies if you leave True North at that first renewal.
Alternatively, if you can find an insured ARM elsewhere at prime minus 1.25 per cent or better, that’s mathematically just as good, roughly speaking.
Rates were sourced from the MortgageLogic.news Canadian Mortgage Rate Survey on Dec. 21, 2023. We include only providers who advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment or switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.