How Will the Recent Changes to Mortgage Regulations Affect Equitable Group Inc.?

2018 should prove to be a critical year for alternative lenders like Equitable Group Inc. (TSX:EQB). Find out if you’re better off buying in or steering clear.

| More on:

This year should prove to be interesting for alternative lenders like Equitable Group Inc. (TSX:EQB) thanks to recent actions taken by governments to curb household borrowing in Canada.

Across all levels of government, politicians in the country are focused on making sure that the Canadian housing market doesn’t get out of control, as was the case in the United States a little more than 10 years ago.

To date, there have been several restrictive prohibitions put in place, including reducing the length of time a borrower can amortize their mortgage and lowering the amount a homeowner can borrow against their home in refinancing, but perhaps the biggest test will be the recently enacted “B-20” Guidelines.

There are several changes that will come forth with the new regulations, but the most notable change will be a new requirement that all mortgage applications — including those with down payments greater than 20% of a home’s value — will need to undergo a series of “stress tests.”

The new stress tests are designed to measure whether a prospective borrower will remain able to service their debt not only in the current environment, but also if rates were 200 basis points, or 2%, higher than the levels in place when the borrower applies for their loan.

Only time will tell how the changes shake out in the marketplace, but some experts are suggesting that perhaps as many as 10% of uninsured mortgages that were approved between 2016 and 2017 would not have been approved under the new system.

There are also some suggesting that under the new rules, prospective homeowners may be forced to settle for a property that is some 20% cheaper than what they would have been able to afford under the old system.

What is the expected impact on Equitable Group?

Equitable Group is forecasting that loan originations will slow in 2018 and may even shrink from previous levels.

To be clear, the company is still expecting its loan book to grow in 2018, as it will continue to add new clients to its business; it’s just that the pace of that growth will likely not be the same as in the past.

In its 2017 annual report, Equitable Group estimates that certain segments of the real estate market that have been its clients in the past may be eliminated from participating in the market.

Yet there is a silver lining in all of this: because the new regulations will make getting a new loan more difficult, it will serve to make it easier for lenders like Equitable Group to retain their existing books of a business — definitely a good thing for a company that may face challenges in attracting new business.

What should you do?

Despite having a strong track record of operating performance, Equitable Group’s shares still trade at a sizeable discount to the market.

For a company which has grown its shareholders’ equity by 84% over the past five years and which generated returns on equity of 15.8% in 2017, the company’s shares almost inexplicably trade at just 0.83 times book value on the company’s balance sheet — a conservative measure used by many value investors.

Despite the headwinds forecast for 2018, Equitable Group’s shares present as a compelling investment opportunity, but one would be remiss not to mention that when Warren Buffett made his foray into Canada’s alternative lending space in 2017, it wasn’t Equitable Group that he bought a stake in, but rather one of its nearest competitors, Home Capital Group Inc.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jason Phillips has no position in any of the stocks mentioned.

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »

Tractor spraying a field of wheat
Dividend Stocks

Is Nutrien Stock a Buy for its Dividend Yield?

Nutrien is down more than 50% form the 2022 highs. Is NTR stock now oversold?

Read more »

golden sunset in crude oil refinery with pipeline system
Dividend Stocks

Best Stock to Buy Right Now: Enbridge vs TC Energy?

Enbridge and TC Energy rebounded nicely over the past year. Are more gains on the way?

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

2 Utility Stocks That Are Smart Buys for Canadians in November

Are you looking for some of the smart buys to consider in November? These utility stocks offer growth and a…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is Power Corporation of Canada Stock a Buy for its 5% Dividend Yield?

Is Power Corporation of Canada (TSX:POW) stock's 5% dividend yield worth it? Discover why this resilient stock could be a…

Read more »

hand stacks coins
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These three dividend stocks are ideal for strengthening your portfolio and earning a stable passive income.

Read more »

man touches brain to show a good idea
Dividend Stocks

3 No-Brainer REIT Stocks to Buy Right Now for Less Than $200

REITs have long been touted as some of the best dividend stocks out there if you want recurring, strong income.…

Read more »