Opportunity in Alt-A / B?

MoneyMany 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.

  1. There can be little doubt that the subprime market will be back and that in the meantime things are going to be a lot tougher for people with nonconforming credit profiles or situations.
    For brokers in the business of providing “B” business mortgages it means that there will be a lot more demand for the Mortgage Investment Corporation products as well as privates.
    This will result in the formation of new MICs, as well as the rapid expansion of established MICs.
    Along with a number of other brokers my conmpany is in the middle of establishing an entirely new Mortgage Investment Corporation to respond to this new market opportunity.
    For investors, MICs respresent a relatively safer mechanism for investing in mortgage portfolios. Unlike the US experience, Canadian MICs have done extremely well over the past five years, with performances ranging from 7% to 13% per year depending on the blend of mortgages in the portfolio of the MIC.
    This certainly bodes well for our ability to raise capital, even with the US subprime experience in the recent past.

  2. In three to five years, someone will take a shot at “B” again in a big way, the start-ups will come again. Until then the banks/privates will eat well from the gap.
    Investors are hesitant to be the first one’s back in the water, but eventually the water will be warm to enter.

  3. To be honest, I just can’t see a rebound in the subprime market in the near or medium future.
    The removal of the 40 year and 0-down will take the marginal buyer out of the market. This should put downward pressure on house prices.
    With downward pressure on house prices, the most credit-risky buyers, those with low downpayments and high TDS, become much riskier.
    Meanwhile, investors are going to be much more wary of private insurance given the problems experienced by Ambac, PMI, MGIC, Radian, etc, in the US.
    Finally, I don’t think there’s any guarantee that the Canadian government is going to stop at 40-year and 0-down. As some have pointed out, the 35 year, 5% down is almost as risky. If risk is what the gov’t is trying to eliminate, they may tighten standards further.

  4. Anyone have a list of the non-traditional lenders?
    Would Home Trust and Equitable be in this group? I don’t think they are self-insuring, but I may be mistaken.

  5. Mortgageman99 there are other non-traditional lenders out there besides Wells. Home Trust, Effort Trust, Citi, Peoples Trust, Equitable Trust, etc.
    I’d agree with you Don that MICs will start getting more recognition in this environment.

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