Saturday's Globe Story

The Globe ran an article yesterday about Canada's weakening economy.  From a mortgage standpoint, they said:

• People with weak credit who qualified for a mortgage a few years ago may find it tough to renew "if they have not improved their financial situations to the point where they would qualify for a more traditional mortgage."
• In markets where home prices have tumbled (or are tumbling), a number of people may have negative equity. In other words, owe more than their house is worth. Lenders don't lend, and often don't renew mortgages, in cases of negative equity.
• "Canadian banks are borrowing and lending in the same credit markets as U.S. banks, so if the credit markets seize up in the U.S., they're going to seize up in Canada, too." - Globe quote of McGill University economics professor Christopher Ragan

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Side Bar:  Scotia Economics recently wrote a report comparing our mortgage market to that of the United States.  Scotia listed many important distinctions including:

• Key differences in how Canada's securitization market works (it's less leveraged in Canada)
• Canada's more conservative underwriting standards
• Canadians' lower household debt-to-asset ratios

Each of these things, along with other items in Scotia's list, have fortunately served to keep some of the froth off of Canada's real estate market.  That doesn't mean Canadian home prices won't continue to fall. It just means we probably won't see the devastation witnessed below the border.

(Report link courtesy of Yatter Matters)

Comments

[Al]

The Scotia Bank article makes some good points, but they make some glaring errors/omissions as well.

1) They focus on debt to asset instead of debt to income. They point out that we have better ratios for debt to asset, but this could change very quickly if housing prices fall. Focusing on the debt to asset ratio is basically the same as saying our house prices won't fall because our house prices are high.

2) The report points out we don't have the same subprime market as the US, which is true. However they fail to point out that the US problems have moved well beyond subprime (it was never contained.) Subprime was the trigger for the meltdown. Here, the US meltdown/credit crunch is our trigger.

3) They correctly point out that we don't have the ARM products. However most Cdn mortgages have 5 year terms, which could lead to interest rate shocks at renewal as rates go up.

[Me]

Let's play tinfoil hypothetical for a second…

My mortgage term ends and I go to renew but no credit is available. I mean none. The system is frozen. What happens?

Note that I have stable job with good income, my house is not in a bubble market and I have excellent credit.

[Nerd Money]

I did not know that lenders won't renew if you have negative equity. It makes sense but it just never occurred to me. Learn something new everyday.

[Canadian Mortgage]

Hi NM, Often, lenders overlook your equity situation at renewal. Depends on the case. - Rob

[Canadian Mortgage]

Quote: "Let's play tinfoil hypothetical for a second…My mortgage term ends and I go to renew but no credit is available. I mean none. The system is frozen. What happens? Note that I have stable job with good income, my house is not in a bubble market and I have excellent credit."

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Hi "Me", I know the end of the world sounds near, but it's really not. Plus, you're a good borrower so you'd likely never need to worry about something like this. (Man I hate using the word "never").

What's more, there's almost always private money available at some price.

[JP]

to Al

you said...They correctly point out that we don't have the ARM products. However most Cdn mortgages have 5 year terms, which could lead to interest rate shocks at renewal as rates go up.

Canada has always had 5 year terms. It is nothing new. What is the point you were making? Do you advocate everyone taking out a 25 year term?