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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.”  

True. 

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.

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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.

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