Subprime Lending Market
Globe and Mail - March 26, 2009
As many as 25,000 Canadian homeowners who consistently met their mortgage payments could lose their homes unless Ottawa or other financial players help supply capital to the struggling subprime lending market. A loose network of about 12 alternative mortgage lenders began lobbying the Prime Minister's Office and the Department of Finance in January about what they say is a looming problem: An estimated $3-billion to $5-billion worth of subprime mortgages are coming up for renewal over the next four years, and the lenders say they can't renew them because capital has dried up for higher-risk borrowers.
"These are hard-working Canadians who could face foreclosure on their homes if they are unable to renew or find mortgage financing," said Paul McGill, the CEO of the N-B Group, an alternative mortgage lender that has been spearheading the campaign.
These mortgages were arranged in the headier times of the early 2000s, when investors easily bet money on complex securities backed by mortgages. Many investors were comfortable investing in securities with subprime mortgages because of the higher returns these investments offered. The torrent of money flowing into securitized investments, such as asset-backed commercial paper, allowed a new generation of lenders such as Toronto-based Xceed Mortgage Corp. and U.S.-based Accredited Home Lenders Inc. to offer mortgages to people with credit score blemishes.
When the global credit crisis struck in August 2007, investors fled mortgage-backed securities, forcing subprime lenders to turn to more conventional securities such as Canada Mortgage Bonds, which the Canada Mortgage and Housing Corporation administers. Because Canada Mortgage Bonds require borrowers to meet higher credit standards to qualify for their investment program, subprime homeowners who got mortgages a few years ago are on the verge of being orphaned.
Executives with subprime lenders said they have been unable to tap alternative sources of financing for the stranded borrowers. Unless Ottawa steps in to help support the homeowners, for example by buying or backstopping the loans, they warn that thousands of homeowners will lose their homes through foreclosure or power-of-sale proceedings.
"The bottom line is, these people made their payments," Mr. McGill said in an interview, repeatedly stressing that the number of affected homeowners in Canada - tens of thousands - pales in comparison to the subprime lending crisis in the United States. "It's not dismal. It's a problem that needs to be addressed."
He said another 1,200 of his company's mortgage customers will be in a similar predicament over the next four years. "They upheld their end of the bargain by making their payments. It would be fantastic if Ottawa stepped in, even temporarily, to help provide capital. The initial indications are that [federal government officials] are receptive."
Subprime lenders initiated about half of the foreclosures in Western Canada in 2008, although they held, at peak, only about 5 to 7 per cent of the market share. It's not known how many of these foreclosures were launched against homeowners who were up-to-date on their payments.
The group of subprime lenders has enlisted lobbyist Kaylie Wells to negotiate with the federal government, according to records with Canada's lobbying commissioner. In late January, Ms. Wells organized meetings with two policy analysts in the Department of Finance, Andrew Wallace, a policy adviser in Prime Minister Stephen Harper's office, and Neil Desai, the manager of the Prime Minister's Office.
"We are listening to a broad range of stakeholders on a broad range of topics," said Chisholm Pothier, a spokesman for Finance Minister Jim Flaherty. "We've been clear that access to credit is among the top issues facing this country."
He added that the federal budget contains "unprecedented measures" to provide financing. "Through the Extraordinary Financing Framework, we are making $200-billion in capital available to facilitate the flow of credit through the capital markets to lay the foundation for recovery."
Among the measures the government has taken, Mr. Pothier said, were reducing the maximum amortization period for new government-backed mortgages to 35 years; requiring a five per cent minimum downpayment; introducing new loan documentation standards; and establishing a consistent minimum credit score requirement.
