Just How Big is the Subprime Mortgage Slice of the Pie?
While economists around the world have cited Canada for our prudent financial policies, it seems that we’re going to run into some subprime mortgage issues of our own. While we have managed, on the whole, to escape a U.S.-style financial and real estate meltdown, there are Canadian homeowners out there who have subprime mortgages and in the next couple of years are going to find that they can’t find a lender to renew their term. This is not good.
Subprime Mortgages in Canada
Depending upon who you ask, the definition of subprime or orphan mortgages changes, but the term usually refers to a high-interest loan made to consumers who are unable to qualify for a standard loan through regular channels. While many people who take advantage of subprime mortgages have bad credit histories, others are self employed and simply don’t qualify on that basis.
Before the financial crisis, there were at least a dozen subprime lenders in Canada. It was even the fastest-growing sector of the entire mortgage market, estimated to be about 5% of the total market. The loans were backed through the asset-backed commercial paper market (ABCP). But when the ABCP market froze in the financial crisis, lenders were left without a way to fund the high-interest loans.
Since the players in the subprime market were not deposit-taking institutions, they didn’t have to adhere to the stricter regulations that banks and other traditional lenders have to work with. For instance, there was no requirement for dicey loans to have insurance and they could lend in excess of 100% of the property’s value.
Which bring us to 2010. The majority of those subprime and orphan loans are going to be coming due in the next couple of years. It’s going to be very difficult for those homeowners to qualify for a standard loan and many foreclosures are expected.
