Private Lending and Technology Are we ready for peer-to-peer lending? by Harry Singh
T
he private lending market has been
A government that wants to slow down
around for as long as there have been
the supply of mortgage funds available to
events. And, it’s natural for every borrower
down the amount of borrowing) may look
when it comes to borrowing money.
by imposing additional guidelines or by
unforeseeable circumstances and major life to expect the lowest possible rate and fees
Traditional Lending Model Traditional banks generally are the cheap-
est sources of funds for borrowers. They can
do this thanks to the rock bottom yields they
provide to their investors in return in the
name of security, which in Canada originates
borrowers (an indirect measure to slow
to restrict or limit the securitization activity imposing a maximum ceiling on what an institution can securitize. The measure
would slow down the supply of credit and indeed reduce competition, which would
put upward pressure on the cost of borrowing for borrowers.
The Canadian governments have, over
from depositor insurance provided by Canada
the last nine years or so, been grappling
Federal Deposit Insurance Corporation in
rates needed to be kept low while keeping
Deposit Insurance Corporation and the
the U.S. Additionally, it is easier for banks
to securitize mortgages, at least in the U.S., where the capital markets are a lot more robust than in Canada.
The concept is quite simple: raise capital
from depositors like you, pay minimal return on the deposits with minimal risk, lend the
with a unique situation where the interest the consumer debt to income ratios and
boisterous real estate markets in certain
parts of the country in check. The Canadian government using its watchdog, the Office
of the Superintendent of Financial Institu-
tions (OSFI), chose to restrict the mortgage credit availability through a progressively
funds at higher rates to borrowers, pool the
tighter set of guidelines that have shifted
via third parties to investors to replenish the
previously would have been funded through
mortgages into portfolios and then sell them capital. Well-capitalized financial institutions with large and deep balance sheets are diversified, while institutions that are not as well
capitalized run the risk of restrictions on the
a significant share of the business that banks, alternative institutions over to
Mortgage Investment Corporations (MICs) and private lenders.
Private lenders and MICs have previously
securitization process or viability. This may
funded a relatively insignificant portion
tization model, but it captures its essence.
in the Canadian market, but over the last
perhaps be an oversimplification of the securi-
of the overall mortgage credit outstanding
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