Opportunity in Alt-A / B?

Many readers know that there are generally two options for people who can't put down 20% on a mortgage:

A)  Get a mortgage with default insurance (e.g. from CMHC, Genworth, AIG, or PMI); or,
B)  Choose a non-traditional (self-insuring) lender.

Come October 15, folks who choose option A will need to meet two new requirements (among other things):

• A 620 minimum credit score; and,
• A 45% maximum TDS ratio.

Unconventional borrowers who don't meet these requirements will be stuck with option B.  This is thanks to the federal governments new insurability rules.  These stricter requirements essentially mean that insurers are backing away from people who have less than stellar borrowing profiles.

Some observers feel this will actually create opportunities--opportunities for lenders that is.  With less competition from insured products, alternative lenders might theoretically spring at the chance to offer "Alt-A" and "B" mortgages at fat spreads (profit margins).

From a lender's perspective it sounds great on paper, except for one thing.  Investors willing to finance Alt-A and B mortgages have been few and far between since last summer's subprime blowup.  That's why so many Canadian lenders have had to exit subprime lending altogether.  Given this new opportunity, however, it will be interesting to see which lenders can find a way to raise capital for these "alternative" mortgages.

In recent weeks, we've been seeing a fair number of private lenders advertising their subprime products by email.  So maybe privates will be the first to take advantage of this gap in the market.  Then again, some people in the know think the banks will take the lead in promoting non-prime products, since their conduits are still operating.

One thing's for sure, subprime will be back in Canada--one way or another.  We don't know when, but when it returns, those lenders with the products and capital will make good dinero.

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If you have a prediction on the Canadian subprime market we'd love to hear your thoughts.