Another shoe has dropped in Canada’s subprime mortgage market. Xceed, formerly a major player in alternative lending, has reportedly announced it’s pulling out of the uninsured mortgage market.
Xceed will apparently offer insured mortgages only, which are much easier to resell to investors.
It’s now becoming extremely challenging for those with weak credit profiles and small down payments to get decent financing.
Many lenders who are still entertaining these deals are charging significant risk premiums (i.e. higher interest rates and/or fees). They’re doing that largely because very few investors are left in the secondary subprime mortgage market. That’s resulting in much higher costs to get a subprime mortgage off the lender’s books (so they can make room for new mortgages).
According to industry executives we’ve talk to, it could take at least 1-2 years to see competition come back to subprime lending. Many cash-strapped credit-challenged borrowers might be stuck with two options in the meantime:
b) Use smaller lenders with less favourable terms.
Regarding option b), don’t be surprised if subprime interest rates and lender fees soon get more expensive, despite decades-low bond yields. Short supply + growing demand = high prices.
It’s also not unreasonable to foresee an eventual resurgence of private lenders. Back in the day, they were the main source of mortgages for people who didn’t qualify with traditional institutions. Now, privates could once again become one of the only games in town.
Yes, we’ve heard stories of private lenders cutting back as well, but most of them don’t have to answer to gun-shy shareholders or institutional investors. Privates are therefore much more likely to fill the void. Just don’t be alarmed if you see more rate sheets with 12%+ interest rates and 3%+ lender fees.
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