Lenders Want A Billion For Subprime Rescue

Subprime-Rescue Thousands of Canadians will be unable to renew their subprime mortgages, despite never missing a payment. Now, some of the lenders who issued these mortgages want the government to pony up a billion dollars for a rescue package.

That’s the gist of this story by the Globe: ‘Orphaned' homeowners face foreclosure

It appears that a subprime lender lobby is trying to get the federal government to guarantee a billion-dollar fund to help renew “healthy mortgages of borrowers who do not qualify for loans from traditional lenders.”

Makes you wonder how healthy they are if the borrowers can’t re-qualify. The story suggests that the main thing these homeowners have going for them is that they’ve made their payments on time. Unfortunately, it takes a little more than that to get a mortgage.

The story also quotes one broker as saying: “These (the affected homeowners) are people that didn't do anything wrong.”

That’s kind of counterintuitive, you would think. These “orphaned” borrowers, as they’re called, don’t qualify for a mortgage. They must be doing something wrong. In actuality, they don’t qualify because their loan-to-value is too high, or their income/debt ratios are poor, or their credit is shoddy, etc.

The orphans might have qualified if investors were still freely loaning money to high-risk borrowers. But this isn’t 2007 anymore, and they aren’t.

It’s important to remember that, when a subprime borrower gets an 11% mortgage (a rate quoted in the article), it’s supposed to be temporary.

You’d be nuts to pay that rate for long. The idea is to pay it for a year, get your act together (settle up debts, get new credit, establish repayment history, etc.), and then refinance with a prime lender.

If you’re a “B” client and you don’t follow the above plan, then you face the risk that the orphans face today—that lenders won’t renew you at favourable terms, or at all!

It’s sad because no one likes to see people on the street. For some, as Xceed's CEO, Ivan Wahl, says: “It is an absolute disaster.”

But should the government fork out 1,000 million dollars to help "a sliver” of the country’s homeowners?  Not everyone's convinced.

The story quotes an unnamed official as saying, “The government thinks this group (the lender lobby) is asking for help for itself.”

Mortgage broker, Vince Gaetano, thinks that much of this really boils down to “a predatory lender who has earned an 11% yield and a mortgage broker who has been paid handsomely” and may have provided “bad advice.”

And, of course, the borrower has to take some responsibility also.

Gaetano says, “Postponing the homeownership dream by 12 to 18 months could have put these people in a better situation.”  


In addition, brokers have a responsibility in the subprime business to coach borrowers—so the borrower doesn’t get overleveraged, and so he/she can qualify with a prime lender at renewal.

“These clients should have been given a plan to clean their credit rating and improve their beacon scores, save some money over the next 18-24 months, and consider purchasing at a later date,” says Gaetano. “This could have put them in a mortgage with possibly half the interest rate they were charged, a 2.75% insurance premium and a healthy financial situation.”

In the end, the hard truth is that some disasters can be avoided…and not everyone deserves to be a homeowner.


Sidebar: The Globe estimates that up to 30,000 Canadians are facing foreclosure because they can’t renew their mortgage. 30,000 is 6.5% of the 460,200 home sales projected in Canada in 2009.

  1. “Makes you wonder how healthy they are if the borrowers can’t re-qualify.”
    That’s exactly it Rob. Some people
    should be renters for their own good.
    A “B” mortgage is a temporary solution. If you need more than a few years to get back to where you can get a mortgage from a major lender then you have ask whether the responsibility of home ownership is for you.

  2. Are these lenders the top tier banks, life insurance companies? I thought that Canada was supposed to be the envy of the internation lending community. Why should they need government intervention?

  3. This is the reason I now really appreciate what my mortgage broker did for me. When I first showed up looking to get a mortgage he told me flat out reviewing my credit report (which I brought along because I was worried about it) that I shouldn’t apply at that time. He set in motion a year long plan to get a better payment history going and a year later I went back to him and applied. I had no trouble getting on with a bank based lender. It was actually a pretty smooth transaction all around.

  4. Great job on analyzing this story. I read the story in the paper and wanted to know a real analysis and here it is! Not every person should be homeowner is the key. It is not an inherent right to “OWN” a home and in many case renting is much better financially. The government should NOT be bailing these people out.

  5. The last comment is unfair I find. Any lender would be more than happy to renew with A1 customer who would always make the payment on time. However, due to external restrictions the renewal process can not take place legally anymore. Therefore a homeowner is faced with choices, either to get a mortgage elsewhere, which is hard enough to do, sell or foreclosure….. This is by no means the fault of a lender who is faced with changing lending conditions in Canada over the last 2 years. No lender wants to do that, and no lender wants to feel powerless not being able to help their prime customers!

  6. In response to Monty’s post, these lenders were NOT banks, life insurance or trust companies. They were mortgage companies only in most cases, and not operating under the bank act. They would fund these mortgages and in most cases sell them as asset backed commercial paper. Well, when the bottom fell out of the ABCP Market and there was no investor appetite for these products, most of these lenders folded, left the Canadian market or tried to pass themselves off as Prime lenders (hint ~ starts with an X).
    At any rate, because they were not operating under the Bank Act, these mortgages did not have to be insured, so they could take any borrower that they wanted at any LTV and charge handsomely for it. And one of the worst of the bunch is the one lobbying now for government support.

  7. Not all homeowners caught up in this situation got subprime financing to begin with. Three years ago I got a prime, insured mortgage with, well, that mortgage company associated with GM cars. I could have gotten a bank mortgage, but just happened to know an AMP who worked for the other lender.
    Well, now that lender has informed me (after I emailed to ask) that they are “no longer renewing” their mortgages – even the insured ones. This means they will demand the balance from me in 18 months. And, during the recession, my previously good credit rating took a big hit. I have been quite alarmed about keeping my lifetime home.
    I suppose it’s possible that this mortgage co. will find someone to buy their insured paper, but I am left not knowing. My broker thinks he can find financing for me if I work hard to improve my credit rating in the intervening time – and save some $$$ to lower the LTV – but it will be close.
    So, not everyone alarmed by this situation relied on subprime financing for too long. Some never used subprime at all!

  8. Wendy you’re right in the case of GMAC, but that doesn’t change things. It’s still not the government’s job to bail out people who don’t qualify for a mortgage.
    Hopefully you can get your credit back above 600 by renewal.

  9. It is nicely reflected in the article, that ‘B’ lending is a form of a credit rehab, and customers are given a chance to make things better for themselves in order to qualify for a prime mortgage as soon as they can. However, this does not give us the entire picture of ‘B’ Lending. I find that there are 2 types of borrowers that are forced to go to ‘B’ lending vs Prime. People go to ‘B’ lending because of circumstances or because of character. And YES, I do agree that Character troubled borrowers should be guided out of credit slump and should get their act together in order to qualify for the prime mortgage down the road. However, what about those who are in ‘B’ lending boat because of circumstances? There are a number of people who are affected by life-shocks, such as unexpected illnesses, accidents, death in the family, lay offs, etc, etc and etc. These are the customers that due to negative events suffered credit declines, and were no longer able to qualify for a Prime mortgage. The solution was to go to ‘B’ lender and to get a temporary solution until things become better. And now, this group of customers no longer has an option to renew a mortgage and perhaps to keep their home. This make matters worse for them. This is why I agree that government needs to step in, and help those who are in trouble. These people should not be left behind, and unfortunately some of the lenders can not help them anymore despite a great mortgage repayment.

  10. Fairguy,
    If a person has been paying a rate of 8% to 12% for 3 years and still has not corrected their “circumstances”; from a purely financial point of view you have to ask whether you would even want to renew for another 3 to 5 years at 8% to 12%. Rent for a while, repair your credit, and then buy when you can get an “A” loan at a much lower rate.
    The fact is most “B” borrowers will be able to renew, somewhere.
    The percentage that won’t be able renew at all is tiny. That may still represent 1000s of people, but whether the taxpayer should pay to keep to keep them in their home when lenders have decided that they now represent to much of a risk. I’ll let you decide.

  11. fairguy
    I feel you brother. Circumstances suck.
    Let’s be truthful though. Is it the government’s divine duty to keep people in their house if things go bad?
    No, no and ummm….no

  12. Hi All,
    As one of those who may require “B” lending due to ‘circumstances’ (I’ll have no problem qualifying for a bank mortgage in about 2 years, but I’ll be needing a refinance in 18 months), I appreciate Fairguy’s post very much.
    Still, even I wonder if it’s time for the government to step in. It’s true that I am one of those who has the wherewithal to plan ahead, gather info, see my broker years before the end of my current contract, etc. I will likely be OK. But I still feel for folks who have been making regular payments, have received very short notice that they will not receive a renewal, and may not be able to find a refinance.
    After all, people are creatures of habit. If a person’s habit has been to make regular payments on a mortgage for two years, despite being otherwise financially challenged, despite the recession, etc. – well, that person is very likely to continue that habit into the future. There is a pool of quite worthy homeowners here, who will be left underserved.
    If I am right about that last part, wouldn’t the natural course of events lead to investors noticing this pool of customers, and the mortgage industry eventually being able to open their doors to them once again?
    Well, I expect the above is true, but the problem is that it will take time – possibly a few years (but possibly not). Still, worthy homeowners are being stranded in the here and now – and I wouldn’t be against the government providing a short-term “bridge”.

  13. This is a joke, Xceed asking for bailout money for the customers they put into the position they are in, hilarious really, way to go Ivan. Didn’t we already bail out Xceed anyway via the Canadian Bond Fund? Exactly! Xceed time to go the way of Abode, or start renewing off your balance sheet Ivan.

  14. Not everyone should be a homeowner? I think I said this a few months ago and got my head chewed off by you Rob! I think the come-back was that who was I, or who was a lender to decide who was fit to own a home and who wasn’t. Times sure have changed, but glad you finally came around.

  15. Hi Chris L,
    Are you referring to me, Rob McLister? If so, might you have me confused with another poster?
    I try not to chew too many heads :)
    and don’t recall writing “who is a lender to decide who is fit to own a home…”
    Do you have a link to the comment you’re talking about? I looked through each of your posts and wasn’t able to find the remarks in question.

  16. John from RMA is the most accurate in his description of why these deals can’t be renewed, as there is no ABCP market any longer. That is where companies like Xceed, Accredited, GE Money, and Money Connect all got their funds to lend. When these funds dried up, it’s not like they could go dig into their investors deposit base to get the money to lend out as they had no deposit base. And the funds that were loaned were only for the term, not the amortization. Why do you think Xceed is going for bank status now? So that they can take on deposits and lend their own money. That way they don’t have to rely on ABCP, just deposits…like Home Trust, Equitable Trust, TD Financing Services (aka VCF), and Firstline Access do for their subprime lending. The future of subprime is at the banks, not the private subprime lenders of 2007.

  17. Does it really matter why Xceed and the other lenders can’t renew? Whether a tornado wiped out their office and staff, or whether ABCP collapsed, the result is the same: The borrwers aren’t qualified to go elsewhere and it is not the governments role to bail them or their lenders out.

  18. If you’ve searched all the replies then it could have been someone else. I’m pretty sure it was on this site though. Would have been a long time ago at this point.

  19. Rob isn’t this comment “In the end, the hard truth is that some disasters can be avoided…and not everyone deserves to be a homeowner.”
    the same as this comment?
    “who is a lender to decide who is fit to own a home…”
    After all someone has to decide who is fit to own a home or not!
    I believe my point was that whomever has the cash gets the house, but with zero down and free money it seems like everyone gets a home indiscriminately. Homeownership is now nearing 70% which is pretty insane. Be glad to see the doors shut to these subborrowers for the sake of our economy.

  20. Hi Chris L.
    Try as we might, we weren’t able to find the reference you mention.
    Regarding your question, in a literal sense they’re not the same, but–depending on the context–they could overlap I suppose.
    Per your last point, not “everyone” gets a home (I know you meant this figuratively), but I’d agree that a small percentage of people do get a home that probably shouldn’t.
    Have a good w/e,

  21. That’s okay Rob. It was a while ago anyway. Don’t worry about it. I’ll eat soup or shoes or whatever the saying is, I forget (crow I think). Not that I care who gets a house, but when CMHC is footing the bill aka taxpayers and for some reason we’re taking the risk on just about everything these days I guess I get to take my shot at deciding who gets to buy a house and who doesn’t. Even if it doesn’t count and only ends up on an obscure (dig for effect) blog! Have a Merry Christmas and weekend too. Still enjoying the balance on this blog so keep up the good work.

  22. It wasn’t so long ago that CMT and a number of posters here were ridiculing the Globe and Mail for its supposedly alarmist coverage about the perilous state of the mortgage market in this country. And now comes this story.
    So now the Canadian subprime guys want a billion dollars. And that’s on top of the $200 billion of government money the big guys have already gotten through the Conservatives’ Extraordinary Financing Framework giveaway.
    Hmmm, maybe a little CMT self-criticism is in order?

  23. @ Nathan – ?
    Do people actually re-read previous posts before they start making wild claims? After taking a look at one of Rob’s earlier posts on the G&M’s mortgage coverage (March 22, 2009 – “Canadian Subprime in the Globe… Again”, I don’t see the inconsistency you’re pointing to.
    In this post, Rob writes, “…the borrower has to take some responsibility…” and “not everyone deserves to be a homeowner”. In his earlier post, referenced above, he criticized the G&M for “…[attributing] no blame to the borrowers themselves”.
    He also criticized the Globe for offering inadequate context and mislabeling Alt-A mortgages as subprime, among other concerns, which is valid, IMO. If you could point out how this post invalidates the earlier ones, I’d be all ears.

  24. Rob, great post. You actually captured the essence of the argument in my opinion.
    Sadly, you also captured that the “b” mortgage broker has a lot of responsibility here. As Gaetano said, these brokers received a very large commission and then in most case abandoned their customer. But alas I am a believer that ultimately people have to responsible for themselves.
    After perusing the comment stream I thought it would be prudent to add just a small dose of further reality to this. That is most people did agree, and I also agree, that the government has no business using tax dollars to bail these orphaned people out, and that truthfully most of the 30,000 will be able to renew somewhere else.
    However, the problem that we as an industry and a country will have to absorb is the ones who will NOT be able to renew elsewhere and then will have to accept their brutal reality and go rent, are also intuitively the ones who will likely have overleveraged LTV ratios and thus will have difficulty selling because they will not have the funds to close.
    The result of that scenario will be foreclosure for those people, only way to go, which will cost us all, but it will cost less then funding a billion dollars of tax payer money.
    Thanks for this forum

  25. You are right to mention that some people should be renters.
    During the mid 2000’s when RE was surging my parents purchased a house. My parents, although fantastic people, are financially unsophisticated and a combination of misfortune and some poor choices left them as renters late in life.
    In 2005, an opportunity arose for them to purchase through a sub-prime borrower. Not wanting to burden me they never discussed the financial details and I never pushed into their business, I was just happy that they were able to own. They never missed a payment and in 2008 I had a discussion with my Father on how he would prepare for retirement.
    I almost swallowed my tongue when I found out that in addition to large fees that ate up their down payment the borrower had issued a second loan for 5% of purchase price at 32% interest on top of a 13% mortgage. Over three years they had paid off $300 on their modest house. We immediately paid out the loans with a prime mortgage.
    The lender profited handsomely over this time frame for their above risk lending which I can only describe as predatory. A billion dollar taxpayer bailout would make me sick.

  26. I would normally think that the government should stay away from sub-prime lending at all costs but the government’s job is to protect the best interest of Canadians and maybe there is a way for the government to bail out these loans and benefit all Canadians.
    In short I’m okay with CMHC insuring the renewal of sub-prime loans or purchasing existing sub-prime loans as long as they set the terms (loan to value ratios, upfront fees, interest rates on purchased loans…) up in such a matter that they’re is virtually no risk of the government loosing money.

  27. Thanks Rob, and everyone, for a very intelligent discussion! As a person with a mortgage from one of those companies that’s bailing, I find it very helpful (indeed, essential) to be informed.

  28. If these loans could be packaged with no risk then lenders would be renewing them. Lenders like no risk deals too. :)
    The fact is, most of the borrowers needing a bailout are high risk.
    Either way, why should the government spend our money on people with bad luck or bad decision making?
    If I lose my job and can’t make a mortgage payment, is anyone going to bail me out? (Please say yes.)

  29. Hi Nathan,
    I’ll try to clarify.
    It was, as you put it, the “alarmist coverage about the perilous state of the mortgage market in this country” that we were commenting on in the story you cite.
    I say “commenting on” and not ridiculing because there is a difference.
    The Globe’s coverage was, in fact, alarmist–based on the facts available. Moreover, Canada’s mortgage market is nowhere near perilous. That was our position based on the facts as we know them, and this position hasn’t changed.
    I’m not quite sure what you’d prefer that we criticize ourselves on, but we’re always open minded. :-)

  30. Hi folks,
    Thanks to each of you above for contributing your own unique perspectives.
    Your views provide an interesting cross-section that seems to represent all the different stakeholders. In a cost-benefit debate like this, diverse views are vital to putting the arguments to the test.

  31. Dale, yes we will bail you out if you work for one of the car companies, the chosen golden workers that we all must subsidize. That’s a whole other topic.

  32. What is wrong with these comments? Aren’t they just stating the obvious? Aren’t subprime borrowers basically bad people who made stupid decisions, or people who are just plain “crazy”as suggested by the original blog? Who says that the government should “bail out” these irresponsible people anyway?
    What’s wrong with the whole tone of the conversation is that it perpetuates a point of view so common among lenders and brokers, and among high Beacon score individuals, which is that qualifying for an insured mortgage is morally superior.
    “People who don’t qualify for this insurance shouldn’t be allowed to own houses at all”, according to this perspective.
    This point of view is similar to the old Calvanist idea that prosperity is next to Godliness and poverty is evidence of evildoing, and badness. Being unemployed is evidence of inferiority. Even self employment (which disqualifies many from getting insured mortgages) is inferior to wage employment where someone else takes responsibility for providing a wage.
    In Victorian England the equivalent statements basically led to children from poor homes being rounded up and put into poor houses, and men and women going to debtor prison for an inability to pay their debts.
    Recent changes in bankruptcy laws in Canada may reinstate these old laws, it now being much tougher to go bankrupt.
    Middle class Canada, and their bankers are having a field day at the expense of those poor unfortunates who didn’t take good enough care of themselves, and now risk losing their homes and their financial futures.
    And this is good?
    My next blog (TheMortgageBrokerSummit.com)will talk about how all those people who don’t have insured mortgages are subsidizing all of those self satisfied people who do, and whose tax dollars support CMHC and the National Housing Act while they themselves gain no benefit from programs that were initially set up for the sole purpose of providing affordable housing to people who otherwise wouldn’t be able to buy a home. Also, how a facility specifically designed to distribute wealth to the less fortunate has actually transferred billions of dollars into the hands of the upper middle class and the wage earners.
    Poor people be damned! and self employed, commission based, or otherwise contracted employees as well!

  33. Donald this isn’t a rich or poor thing. It’s a matter of personal responsibility. The government should not be subsidizing the rich or the poor when it comes to housing. If a person can’t afford or qualify for a home, they should rent.

  34. Donald Wilson: How are Canadians are subsidising the homeowners who get insured mortgages. According CMHC’s financial documents (http://www.cmhc.ca/en/corp/about/anrecopl/loader.cfm?csModule=security/getfile&pageid=193996) CMHC’s income exceeds its expenses and it generates a net profit.
    As for the comment “Poor people be damned! and self employed, commission based, or otherwise contracted employees as well!”. I don’t understand how this fits in. My wife and I have below average income based on my self employment and her maternity leave pay but we were able to buy a house with 5% down using an insured mortgage in one of Canada’s most expensive cities. Admitedly my income is only $2,000/year below income of the average man who works full time in my city (according to Statistics Canada) and I have being self employed in the same line of work for over 4 years.

  35. CMHC does earn a profit just as would you and I if we could convince the Canadian taxpayer to guarantee all of our issued debt, as does the Government of Canada on CMHC’s bonds and direct endebtedness. Therefore, the fact that CMHC returns a profit to the taxpayers doesn’t mitigate the fact that they are dependant on all of the taxpayers for use of our national creditworthiness, not just those who qualify for benefits.
    What the CMHC loans does is leverage the credit worthiness of the Canadian government to ensure that you can buy really low interest rate loans. The decisions on who and why people should qualify are to a fairly large degree political rather than truly risk based.
    The current risk on CMHC loans is very low, far lower than it actually need to be to be actuarily sound. The changes made a year ago or so were made purely for political consumption rather than to respond to any actual change in risk in the marketplace. Indeed restricting insurance depressed the marketplace and actually harmed tens of thousands of Canadians by depressing the value of their real estate.
    The current malaise in housing starts, commercial real estate, and yes, alternative residential mortgages are all a function of the fact that these sectors of the real estate economy received no direct or indirect subsidy by way of Federal government loan guarantees through CMHC.
    Perhaps I was overstating (a little)what I see as a prevailing attitude of entitlement by CMHC qualified borrowers (and “A” brokers) at the expense of the self employed, commission income employees, small business operators, contractors, etc., all of whom come under the category of alt prime or sub prime, and yet all of whom contribute through their taxes to supporting loan guarantees for the rest of you who have the advantage of being able to buy government backed and supported insurance, and thereby obtain low rate mortgages that the market without insurance simply would not be able to provide.
    It is not simply a matter of responsibility. How is the owner of a small business own employing other people and maintaining a business in extremely trying times less responsible than someone who has simply got a job and done the same days work over and over again for years.
    It is perceived risk that determines CMHC (and others) eligility criteria. It is not a statement of moral superiority, or even of superior responsibility.
    The current system works to maintain the status quo for well qualified borrowers. Well, good for you. I hope you never suffer a bout of illness, unemployment, or just plain old bad luck.

  36. Dear Don
    As a taxpayer you should be pleased that CMHC is subsidizing your taxes with the profits they generate for Canadians. Their use of Canada’s credit worthiness should not concern you. CMHC mortgages default less than 1/2% of the time.
    Decisions on who CMHC insures are a bit political but they are mostly risk based. It is doubtful that CMHC will ever put Canadian taxpayers at risk by insuring subprime loans. I would personally NOT want to see this because it encourages bad behaviour among borrowers.
    I totally agree with you on one thing. CMHC seems to have a severe bias against the self-employed. CMHC’s Self-employed program makes no allowance for corporation owners who use 100% legitimate and legal means to minimize their reported income. It’s a horrible policy because most of these borrowers are actually very strong candidates. CMHC is essentially penalizing self-employed applicants for choosing to work for themselves and not declaring a salary.

  37. Circumstance in life lead to peoples credit being affected, but shouldn’t a good history/record of paying a mortgage on time for 3 years cancel out any credit rating loss that has occured expecially if your mortgage is in foreclosure to the economic foreclosure of an American Based company who claimed bankruptcy in their country and had to shut down canadian chapters who held mortgages for canadians. People get laid off, lose hours,lose a spouse which causes income loss, lose revenue from loss of sales at their business. So if someone falls behind with a payment on some bills but keeps there mortgage payments on time then there should be some grace. otherwise there will be alot of people becoming homeless. Just a thought. If anyone knows of any aid for people who are caught in the middle of a companies bankruptcy and foreclosure due to not finding someone else to take over the mortgage due to the economic downfall with the recession and jobloss let me know.

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