Subprime Mortgage Renewal Risk

Subprime-renewal-riskSubprime mortgages are meant to be short-term financing solutions for borrowers who have hit a rough patch.

When you get a subprime (aka, “B”) mortgage, the idea is to choose a term that’s just long enough to rehabilitate your credit (or fix the problem that makes you a high risk borrower). Thereafter, you can refinance into a prime mortgage with a better rate and features.

People who don’t improve their credit while in a subprime mortgage put themselves at risk. If they have to renew, they could be forced to do so with their existing lender at unfavourable terms.

Worse yet:

  • Their lender might decide not to approve the renewal, or
  • Their lender might cease to exist altogether.

In either case, high-risk borrowers with few resources (especially those with loan-to-values over 80%) could be stranded with no lender options. That can mean foreclosure if they can’t sell their house in time.

There’s a lengthy list of subprime lenders who have departed the Canadian market. It includes names like:

  • Abode Mortgage (Abode was also a prime lender)
  • Accredited
  • Citi Financial
  • GE Money
  • GMAC (GMAC was also a prime lender)
  • Moneyconnect
  • N-Brook
  • Noble Mortgage
  • Wells Fargo

There have also been several existing lenders who closed their subprime divisions in the last four years, including:

  • First National
  • MCAP (It has since brought back non-prime lending.)
  • MyNext Mortgage (now Radius Financial)
  • ResMor Trust (now RMG Mortgages)
  • Street Capital (It has since brought back non-prime lending.)
  • Xceed

The credit crisis claimed a lot of lenders as victims. One of the latest is HSBC Finance, the subprime subsidiary of HSBC Bank Canada.

But it doesn’t take a credit crisis for a subprime lender to disappear. TD Financing Services is a good example. See: TD to Halt Non-Prime Lending

HSBC Finance

Hsbc-finance-canadaIn HSBC Finance’s case, HSBC Bank Canada spokesperson Fabrice de Dongo, says, “We are (currently) informing all clients of HSBC Financial Corporation Limited that, as part of the winding down of the business, we will renew their mortgage for a one-year term, after which they will be requested to secure financing from another financial institution.”

He says, “Our renewal policy is based on credit score and payment history. More specifically, we determine the overall risk of a customer, and therefore the renewal qualifications, based on payment history and internal and external credit scoring. Simply missing one payment over the course of the mortgage term does not disqualify a customer from renewal, but repeated non-payment is clearly in nobody’s best interest.”

De Dongo adds, “The interest rate that is charged is entirely dependent on a customer’s credit profile, and at renewal this rate may be greater or lesser than the previous one.”

The takeaway…

If you get a subprime mortgage and don’t improve your credit profile, you can face serious renewal risk. That threat is heightened when home prices fall, your debt ratio increases, your income takes a hit, or you can’t prove all of your income.

Any good mortgage planner can assist you in creating a plan to rehabilitate your credit. As a subprime borrower you need to leverage that advice, stick to their plan and become a “bankable” client as soon as you can.

Rob McLister, CMT

  1. Thanks for the article…for the private mortgages that I complete, I find that in most cases it takes about 2 years for a borrower to climb out of a bad financinal situation. We can normally get them back into a “AAA” mortgage product, but if the private mortgage continues after 2 years, I find that typically there are problems with paying the mortgage. Borrowers should be aware that brokers can help them get out of a bad financial situation, but they also need to take ownership of their financial situation and improve their credit history and employment situation.

  2. This is an article for buyers to be aware of the risks which is a good thing. I wonder how many subprime buyers know the information in this post?
    Of course there is subprime in Canada. That doesn’t mean it’s nearly as prevalent as it was in the US

  3. Exceptions aside, its usually Beacon scores below 600 that make it a B deal.
    As the article mentions though, there are many reasons other than poor credit that can force you to a B lending scenario. Lack of income proof, non conforming properties, of payout of tax’s etc.
    Good advise over all though, you should NEVER sign a B deal without a clear plan to get back to the A side. Otherwise, you are likely better off selling the home today, and not wasting money on attempting to delay the inevitable.

  4. Is it though? I assume you mean that if the client doesn’t qualify at renewal, they will be forced to go to a ‘small private lender’ which in turn is good for their business.
    My take is that if you can’t repay your B loan at 5%, how would you hope to pay a private at 10%? Private lenders are of course wise to this as well, and you may find that if you are not being renewed at your B lender because of payment or credit issues, (depending on LTV of course) the private lenders will not touch you either!
    See my post above: If you can’t afford the B lender, then most likely the best solution is not to go private, but to sell and rent instead. Often the payments of private mortgage are WELL above what you could rent the same house for!
    Just my 2c!

  5. Excellent point Sandra. Mortgage processionals need to educate their clients about the roads ahead. This all starts with making your client take ownership of their situation. Once a client sees that their habits created there situation than they will be more apt to change and adapt a healthier financial lifestyle. Client who don’t own their financial demise will be in the same mess years down the road regardless of the term , rate or counselling. For those brokers and clients who blame the economy for their undoing, really? The percentage is so minimal. The economy crutch is getting very stale.

  6. The information is great. I would like to have a dollar for every time I’ve heard someone say that there are no subprime loans in Canada.

  7. I get confused when people say there was more subprime in the US than there is currently in Canada. Is that because they’re counting option ARMs made to people with high enough scores to qualify for a conventional A loan (typically 640 in the US), and jumbos (mortgages too large to qualify for government insurance, which CMHC used to have, but no longer does)?
    Bubble peak homeownership rates, median household incomes and median home prices were all comparable in the US and Canada, so I find it difficult to believe that the claimed differences in loan quality could be that large.

  8. I have never heard anyone say there is no subprime in Canada. You must surround yourself with a lot of uninformed people.

  9. A credit report with a collection on it, a prior bankruptcy or less than 2 years of employment with a company can also mean that we have to look at an Alt A lender. This is not necessarily a private lender. There are other lending banks out there other than the Big 5 who will give mortgages. Their rates may be a couple % higher than a prime lender but very manageable. However they usually only go to 80% LTV and require an appraisal.
    The big problem is when we have to look at private mortgages. These are where there are a lot of fees to the person trying to get the mortgage. Perhaps they are behind on their taxes or have a credit card in collection. These are the ones we need to see if this will help them resolve their financial problems over the next year or two.

  10. For one thing, there is no comparison between the number of sub-600 FICO mortgage holders in Canada and the U.S. (pre-bubble). American lenders ignored sane underwriting standards and gave out mortgages like candy. In 2006, 1 out of 5 mortgages were low-quality sub-prime. This is paper that would never ever be insured in Canada.

  11. We have been utilizing ScoreMaker to help maximize the clients credit score in the shortest timeframe as part of our plan to rehabilitate and rebuild a client’s credit to help get them back onto the ‘A’ side as quick as possible. Much of the time, it is ScoreMaker that sets the timeframe to determine how soon the client can accomplish their goal.

  12. Do you have some references for these stats? I don’t know of any source for canadian mortgages that breaks it down by score below 600.

  13. Knowing who you are placing that “B” mortgage with, the lender’s background and track record is important key too. Home Trust is celebrating 25 years of servicing the “B” customer, and offers renewals to every qualified customer (rarely not offering renewals, but usually that is due to poor paymnet history on their mortgage). When choosing who to place that “B” mortgage with, look at the strength of the lender first…will the be around in a year (or for 25 years…shameless Home Trust promo there).

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