CALGARY — In a market not known for welcoming homebuyers, prospects for a new home looked to some like tall grass for many two decades ago.
And if you wanted to take any kind of leap in a market where even renting a house can be a challenge with so many people chasing the same properties, you simply couldn’t.
That’s when Neo Business Credit Corporation came along.
Born in 1997 with the premise that “your real estate is your banker,” Neo became Canada’s first venture into renting. The Calgary-based company’s interest was in providing a true alternative to both lenders and homeowners for any sort of mortgage, mortgage payment or loan.
Today, the company has taken part in more than $6 billion in mortgages, including mortgages with two banks and an entirely over-the-counter product offering. Of the over-the-counter sales, more than $2 billion (combined) are sourced from the syndication market, in which lenders join together to sell mortgages.
The core of Neo’s lending strategy and its service model has remained unchanged, a simple website where anyone could apply for a mortgage, pay it off and own or mortgage with no deposit or any kind of upfront cost, and because it takes up only a fraction of a fraction of a per cent of the principal balance of the mortgage, it is strictly income driven.
“We see each customer as a credit risk,” said Mark Ives, Neo’s executive vice-president of finance and business development. “They have to go through and apply for the product based on our financing model and then you’re a candidate to make the purchase.”
For now, the company still focuses largely on the RRSP market because, with income-based lending practices, it’s seen as more fair, responsible and affordable to offer. However, that may change as it works on providing more financing alternatives than mortgages.
However, building a valuable asset as a part of a customer-level customer relationship in an unconventional way can have its challenges. Ives said there is evidence that credit has declined among many clients and a good way to feed more borrowers to its banking partners and buyers is to work with existing players in the markets it is already in.
The company has partnerships with Canada Mortgage and Housing Corp., the Federal Home Loan Bank of Canada, the Bort du Nord Mortgage Agency in France, the Malaysia Mortgage Guarantee Fund, Lendite Belgium and the Netherlands Federal Mortgage Authority, and has done business with 10 banks, including two in the United States, said Jorrit Hauksland, executive vice-president of sales and business development.
“We do think there is a real need (for another alternative to mortgages) as there is for every other kind of service,” Hauksland said. “You still have the same people going to a bank to apply and they still have the same conversion rate from underwriting to final approval. When you’re first putting in the bid, it’s not about you. It’s about what your ability to repay that mortgage.
“If we could reduce that conversion rate, that would be a real positive for everybody.”
But being the only one to solve the issue is never easy. While the company’s original format seemed to be working it has been challenged with banks introducing competition — Bank of Montreal has loans with BMO Mortgage Plus and loans with BMO Select Home Buyers Guaranteed Mortgage, for example — but so far, there has been no let-up in attracting clients to its business model.
As with any banking industry, you can be late in establishing a foothold and risk having customers find their own way to learn the ropes. However, for an industry that has challenged itself with financial engineering to provide profitable loans, it may have all the makings of a perfect storm in the online world.
Neo is often asked if its customers, which are mostly Canadians and many non-Canadian residents, are the sort who would rather rent a home and pay a monthly mortgage payment than own a mortgage and pay a mortgage payment? Ives said it is not that easy.
“The majority of our customers want to become homeowners,” he said. “For every borrower who says ‘I don’