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The Globe on "High Risk" Mortgages

Globe&Mail The Globe & Mail ran a story this weekend on Canada’s “version of subprime mortgages.”

Here is the article.

According to the story, $0-down mortgages and 40-year amortizations were nothing more than “risky” “sub-prime” products.  The Globe slams pretty much everyone who played a role in their existence.

For those intimately familiar with “0/40” mortgages, however, this article comes across as superficial at best.  Here is why….

  1. To the authors, 40-year amortizations are “risky” and “subprime.”  When we read that we immediately wondered if the writers knew what “subprime” means.  Up to 95% of 40-year mortgages were prime.  That means applicants needed solid credit and income to be approved.  In a lending sense, borrowers like this are not “subprime” or “risky.”  Many people who got 40-year amortizations, for example, could have qualified at a 25-year amortization.  Moreover, experts estimate that the average 40-year mortgage will be paid off in just 20 years.
  2. There were definitely 0/40 borrowers who overextended themselves.  That’s a fact.  On the other hand, the story makes no effort to acknowledge the utility that zero-down and 40-year products provided to responsible borrowers.  These products had real value to real estate investors, the self-employed, and other sound borrowers with higher priority uses for their cash.
  3. The authors unapologetically denounce 40-year amortizations and zero-down mortgages without providing any evidence that they’re actually causing a problem.  There is no doubt that some Canadians with 0/40 mortgages will lose their homes in this market correction.  That is a harsh cyclical reality.  But, will 0/40 defaults be an epidemic like in the U.S.?  Far from it.
  4. The story draws no lines in its assumptions.  Obviously, 100% financing (103% after insurance fees) is bad if real estate values are sinking.  But so is 95% financing.  So is 90% financing if prices sink 20% and you have to sell.  Where do regulators draw the line?  Do we require everyone to put down 20% when buying a home?  How far do we go to legislate how people spend their money?
  5. The Globe knocks U.S.-based mortgage default insurers for bringing these evils to Canada.  This too, is ludicrous.  U.S. insurers have not harmed Canada’s real estate market any more than CMHC has.
  6. The story suggests Ottawa was short-sighted for allowing Genworth and AIG into our insurance market because of the risk they pose with their 90% government guarantees (CMHC gets a 100% guarantee by the way).  The authors seem to have no idea what our default insurance market would be like without Genworth and AIG.  From our perspective the result would be disastrous.  Canadians would be worse off as there would be little to drive product innovation and lower premiums.
  7. The authors criticize the institutions that promoted 40-year and zero-down mortgages but say little about the borrowers that demanded these products.
  8. The article suggests CMHC was forced by other insurers to “aggressively push…risky U.S.-style lending.”  Again, ridiculous.  CMHC is a great insurer but the fact is, CMHC was the first insurer to launch long-term amortizations.  Thereafter, they quickly jumped on the 40-year wagon as well.

The Globe tried to write a “60 Minutes”-style expose here.  The thing is, there isn’t that much to write about.

40-year amortizations and zero-down products were not Canada’s version of subprime.  They were simply powerful financing tools designed to be used responsibly.

Canada’s mortgage industry is one of the most prudent in the world.  Mortgage policies like long-term amortizations are not the cause of our present housing issues.  If you want to know why home prices are falling here, look south of the border.  Our problems are macro-economic, not financing-driven.