The announcement by Wells Fargo that it is ceasing to offer consumer mortgages in Canada caught many industry observers by surprise. Wells Fargo was one of few major “alternative” lenders in Canada, i.e. a lender that offers non-prime or subprime mortgage products.
The press release was brief, stating only that after reviewing its operations and the current market, the company decided to pull out of the mortgage business in Canada. It will still honour existing mortgage commitments and offer personal loans.
Wells Fargo is the fourth-largest bank in the United States and the biggest originator of mortgages in that country. Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, was quoted in the Globe & Mail as saying that the departure of Wells Fargo will have a “very large impact on segments of the market.”
The word “subprime” has, of course, some very negative connotations, largely because of what happened in the U.S. during the recent mortgage crisis. The situation in Canada is very different. North of the border, the subprime market makes up only about 5% of the overall mortgage market. There are many reasons why subprime lending never took off in Canada, but the bottom line is that for some borrowers, subprime works.
Subprime loans are certainly not for everyone. They are more costly and they carry higher risk, but the financial culture in Canada ensures that the risks are manageable. In reality, these types of mortgages are beneficial for certain home buyers, allowing them to enter the real estate market and rebuild their battered credit ratings.
While the departure of Wells Fargo will be a bit of a blow (they are not the first subprime lender to leave Canada either), there are other players in the game, many of whom are accessible through mortgage brokers.
