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October 11, 2006

Canadians rush to U.S.-style exotic mortgages

Mortgage The following was just published by the Globe and Mail. What they mean by "exotic mortgages" are mortgages that fall outside of the normal 25-year amortization and minimum 5% downpayment. In the US 30% of new mortgages are now "exotic" meaning that they are for a longer amortization period and/or for less than 5% down - some companies will allow you to buy a home with no money down! This all sounds like a great idea when housing prices are rapidly increasing, but it's not such a great idea if and when the trend reverses.

One of the things that economists keep saying is protecting the Canadian housing market from falling into a slump like the US one has, is that Canadians are not mortgaged up to their eyeballs with high ratio loans. This article suggests that more and more Canadians are starting to opt for these "exotic" mortgages, but that we are no where near the US and aren't headed that way. I hope they are right...here is the complete article:

Canadians rush to U.S.-style exotic mortgages
Young people lured by new-style loans

High-risk mortgages are spreading like wildfire in Canada, new data show, but the country is not in danger of a U.S.-style overexposure -- at least not yet.

Non-conventional mortgages -- loans at high rates to homeowners who do not qualify for standard mortgages -- are growing by about 50 per cent a year, research by CIBC World Markets shows. That's almost five times faster than the growth of traditional mortgages, and this is a sign of things to come.

In the past year, about 85,000 Canadian households have taken on non-standard mortgages, CIBC estimates. They are most popular in rural and Atlantic Canada.

"Over the next five to 10 years, innovation in the mortgage market will accelerate at a pace not seen before in Canada," writes CIBC economist Benjamin Tal. "The genie is out of the bottle."
Print Edition - Section Front

But that doesn't mean that Canada's homeowners are drowning in debt or about to be seriously sideswiped by a slowing economy, like many economists are projecting for the United States, Mr. Tal argues.

For now, Canada's mortgage market is a far cry from its U.S. counterpart, where non-conventional mortgages make up about 20 per cent of the market. In Canada, it's about 5 per cent, Mr. Tal estimates.

As well, Canada's big banks have not fully embraced the non-conventional mortgage market the way U.S. players have, and Canada does not have the proliferation of mortgage brokers that are a driving force in pushing riskier mortgages in the United States, he adds.

But that's changing. Mortgage brokers, who act as intermediaries between borrowers and creditors, are quickly becoming more popular in Canada. The Canadian Institute of Mortgage Brokers and Lenders says more than 30 per cent of all new mortgages are dealt with by brokers, up from about 3 per cent a decade ago. Many of the new customers are young people, particularly from hot housing markets in Alberta and British Columbia, says institute spokesman Jim Murphy.

The brokers are driving competition among lenders, and lenders have responded with a plethora of new products. Mortgages with 35-year amortizations, interest-only or with only a small down payment are now considered almost mainstream.

Just last week, Bank of Nova Scotia and mortgage insurer Genworth Financial announced they would offer 100-per-cent mortgages, and other chartered banks are expected to jump on this bandwagon soon. (Genworth Financial was known as GE Mortgage Insurance Canada until two years ago, when parent General Electric Co. spun off its insurance operations into a U.S. publicly traded company called Genworth Financial. Genworth is the only private sector provider of default mortgage insurance in Canada.)

The innovations were born out of a thriving real estate market, growing demand from increasingly sophisticated home buyers and new, highly competitive market players from the United States, says Charles Lambert, managing director of mortgages for Scotiabank.

Most economists and bankers are quick to cheer more consumer choice and product innovation, saying self-employed people, divorcees, new immigrants and young people are now able to buy homes without much trouble. But they recognize that the sharp market downturn in the United States is providing Canada with a vivid example of what can happen when the economy turns soft, interest rates are high and too many homeowners are overexposed.

The U.S. experience will become even more vivid in the next 24 months, Mr. Tal writes, because $2-trillion (U.S.) of mortgage debt is about to be adjusted upward to higher interest rates.

But even then, the U.S. economy can probably digest the extra cost, Mr. Tal says. While delinquency will no doubt rise, and credit quality will deteriorate, the extra costs will probably amount to about $35-billion a year. And those costs will be offset by interest made on savings.

In Canada, the mix of government regulation of financial institutions, prudent lending and a conservative financial management culture will probably prevent Canada's homeowners from going down the same road, Mr. Lambert says. "There's a cultural pay-down-your-debt approach in Canada."

But the market is changing so rapidly in Canada that the next economic slowdown may well find the country to be far more vulnerable than it is now, Mr. Tal warns. "We have to be careful that we don't push the envelope as the U.S. did."


Subprime mortgage primer

What is a subprime mortgage?

A mortgage offered at relatively high interest rates and fees to borrowers who can't qualify for prime loans. It's not quite the same as a near-prime mortgage, which is offered at a small premium to borrowers who don't meet traditional bank guidelines but are still a good credit risk.

Are products like 100-per-cent mortgages or interest-only mortgages considered subprime?

No. These are innovative mortgage products that make it easier for people to buy houses, but usually borrowers need to qualify just as they would for a traditional mortgage.

How risky are subprime mortgages?

A truly subprime mortgage is high risk for lenders and borrowers alike.


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