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Do Sub-Prime Mortgages Really Make Up Half of the Market?

13 October 2012

Just over a week ago the National Post ran a very interesting, and very thorough, article taking a look at the housing bubble in Canada. Within the article were some startling, and alarming, facts. One of them was that Canada’s sub-prime mortgage market now currently makes up 50% of the Canadian mortgage market. But is this true? If so, we do indeed have a very serious problem on our hands.

We all know that it was mostly sub-prime mortgages that led to the demise of the United States. Lenders simply handed out home loans to anyone who wanted them, no matter how much (if any) of a down payment they had, and no matter what their credit score was like. Was it any wonder when their system started falling in on them and a good portion of their homes all fell underwater when the crisis really hit?

Not really. And we as Canadians have snickered at their lack of foresight and due diligence, all the while congratulating ourselves on our stellar banking system and our top-notch lending standards. But are they really so great? If half of our mortgage market is currently holding sub-prime mortgages, we’re probably not any different.

Good thing that’s probably not the case.

The following infographic compares Canada’s mortgage market with that of the U.S.’, and it points out four different “shields” or protective measures that we have in place to keep us from falling into a sub-prime mortgage crisis. While all of the shields are definitely worth a look, skip down to #3 for just a minute. There you’ll see that in fact, only 5 per cent of our market is in the sub-prime category, not the 50 per cent that The Post was panicking about. Of those loans, none of them are interest only, and they also aren’t available with teaser rates – two features that have Americans headed for bankruptcy. And let’s remember that these stats are from 2007 – the height of the crisis, when the States had 20 per cent of their mortgages out in sub-prime standards. Have we really almost tripled their stats?

No. It’s that simple.

We also can’t forget that in addition to having fewer sub-prime mortgages, our lending industry is vastly different from that of the States, as the infographic shows. We have stricter lending standards, with banks and lenders pulling back now more than ever. And if you’re looking for a sub-prime mortgage in Canada today, you can all but forget about it. Even if you only have a 5 per cent down payment (the minimum you’ll get away with here North of the border,) you’ll still have to pay for mortgage insurance. And with CMHC nearly reaching its ceiling, there’s no guarantee that you’ll even be able to get it. That means that you might not be able to buy a home, which protects our economy from unqualified buyers tanking our economy.

Of course, as the infographic shows, our legislation is also vastly different. Not only are Canadians still responsible for a mortgage even when they default (unlike in the States,) but our government is trigger-happy when it comes to imposing new rules to make it tougher to get a mortgage. But while those four rule changes in just as many years may have seemed like a bit much to some of us, it’s this kind of protection exactly that’s keeping us from a sub-prime crisis that was seen in the States.

So, are half of Canadian mortgages currently sitting in the sub-prime market? The simple answer to this one is “no.”

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