We like to drop in on Garth Turner every now and then to see if the world is any closer to ending. We enjoy his stuff, if for no other reason than he makes you think.
He had an interesting guest post Monday that reiterates Turner’s claim that Canada has a subprime mortgage problem brewing.
The post’s author argues Canada’s subprime market is much bigger than 5% of all mortgages, as industry stats suggest.
The writer feels there are at least three other classes of borrower that should be classified as “subprime:”
- Anyone who has GDS/TDS ratios over the standard 32%/40%, a 40-year amortization, and significant living expenses to which lenders are oblivious (high electric or heating bills, high car insurance and gasoline expenses, high condo fees, etc.)
- Young families with multiple dependents, large child care expenses and food bills, and a mother on extended maternity leave
- Self-employed borrowers who significantly overstate their incomes (of which there are many)
The theory is, if the economy and housing values go south, these folks above could increase defaults and accelerate the fall.
It’s an interesting post. The guest on Garth’s blog makes a lot of seemingly valid points. And a lot of people have posted replies supporting his arguments.
In your opinion, are those claims indeed valid? Do you agree that those categories of borrowers are ‘sub-prime’?
Unfortunately, the only thing worse than the media being oblivious to the looming “sub-prime” disaster in the US in 2005/2006 was the media taking the term “sub-prime” and using it to describe anyone who has a debt problem anywhere.
For example, a wave of “Alt-A” resets are getting started in the US which some say will be worse than Sub-Prime because there are (apparently) a lot more Stated Income loans that are Alt-A than sub-prime. In this way, the Alt-A loans seem to be a little more of a black-box than sub-prime.
Anyone want to buy a pool of Alt-A mortgages made up of people with great credit scores who’s unverified income is $100K and who’s job description is “hospitality industry”?
I tend to think that Canada’s 40 year and 0% down mortgages are more like Alt-A than sub-prime except that we wont have the same kind of stated income problems the Alt-A loans in the US (will probably) have.
As a former sub-prime lender employee, I can say it was amazing to see the number of deals that went to “A lending” that we would never touch due to the risks involved.
Sub-prime deals in Canada generally required a lot of documentation, good quality appraisals and some sort of rent or mortgage payments history. It wasn’t about beacon score, it was about getting repaid.
If the market falls in Canada it will not be because of sub-prime lenders, but because of lax lending requirements of “A lenders” as long as they can get the deal insured.
More Canadian BS (bullxxzx) Tuner has been wearing cowboy boots too long its squeezed all the blood from his brain.. 99% of lenders in this country are way to conservative.
Catherine hit the nail on the head. A lot of lenders don’t seem too worried about defaults as long as they can get the deal insured.
Good point on the AltA stuff in the US. I think you can look up the information on those directly at the Fed’s website.
Subprime/AltA, whatever you want to call it, we are arguing semantics. At the end of the day, these are all tools designed to increase artificial demand into the equation. Simply put, wages are not rising fast enough to support the rising cost of homes. Due to the affordability problem, the only way first-time buyers in Canada can “afford” to pay for a mortgage is to spread the payment over 40 years instead of 25.
It was the same in the US. Subprime and AltA and option-ARMs (option ARM probably the worst of all) were just tools designed to get people into homes they couldn’t afford by conventional methods. Zero-down/40 year terms here is the equivalent, regardless of whether the borrowers had good credit or not. The intent is still the same…get borrowers into homes they cannot actually afford.
I am curious as to what percentage of mortgages originated in canada are packaged up and sold as securities/derivative products, as compared to the US. Anyone have any data?