Canadian sub-prime lenders seek billion-dollar government bailout
An estimated 30,000 mortgages granted to Canadians with poor credit or insufficient incomes at the height of the Canadian housing boom will not be renewed when they mature over the next three years, according to a story on globeinvestor.com. The sub-prime lenders who granted the loans say that the investors who financed buyers at above market interest rates, and in many cases charging add-on fees that many might consider unconscionable, are no longer interested in these investments so they’re calling for full payment at the mortgage maturity date.
Knowing full well that calling these loans will lead to losses, these sub-prime lenders are hard at work using lobbyists to try to convince your government that you ought to be on the hook. Apparently, these are “healthy mortgages” given to individuals with “impeccable payment histories.” The lenders will be “forced to foreclose on them” if the government doesn’t establish a one billion dollar fund to bail them out.
The effort is cleverly disguised as a bailout of unfortunate homeowners, but hopefully the Canadian people can read between the lines. Apparently, most of these mortgagors would not qualify for financing through a mainstream lender, or for mortgage insurance. As the Canadian Mortgage Trends blog points out, “Makes you wonder how healthy they are if the borrowers can’t re-qualify.”
Ivan Wahl, CEO for Xceed, a sub-prime lender who will call loans on 1,100 Canadians when they come due reportedly said in an interview with the Globe, “The government certainly should step up to the plate to provide some facilities for people who got caught in the crunch.”
It’s clear what a win this proposal would be for these investors who would land on their feet with every penny due after milking this risky scheme for all it was worth. As sad as it would be for those homeowners who took these loans and lived up to their agreement, the taxpayer should not be on the hook for these mortgages. The mortgages should be dealt with in the manner prescribed within the agreement. Some people will lose their homes. That’s a harsh reality of these types of risky ventures. For those that have sufficient equity, the months ahead should provide some strong selling opportunities. For those who are in for more than the home is worth, let’s send that loss back where it belongs, to those who cooked up the hair brained scheme in the first place.
Homeowners that have been notified that their mortgage will not be renewed should immediately explore their options. Can you re-finance with another lender? Is there enough equity in the home that you may be able to sell the property? See a lawyer who understands foreclosure to find out what rights you have under the law.
I’m always happy to answer your Saskatoon real estate questions. All of my contact info is here. Please feel free to call or email.
Real estate geeks can follow our daily updates on Twitter @norm_fisher.
Norm Fisher
Royal LePage Saskatoon Real Estate
14 comments so far. We'd love to hear your thoughts.
December 10th, 2009 at 10:01 AM
Norm, I appreciate the heads-up on this Canadian version of the schemes we have seen to privatize gains and socialize losses. I am also heartened by your reaction to it, and I hope that those who make the laws will see it in the same way.
It is unfortunate that individuals got themselves into debt obligations that they cannot meet with a house purchase, and I can understand the pain and desperation that being in such a situation places on a family… but what must be remembered is that they put themselves there and nobody forced them into it. The situation is a result of free-will choices made by all parties (both lender and borrower) and these parties should fix the situation as governed by law and contracts… not by bringing in other parties (government, taxpayers, you, me) who had nothing to do with the transaction.
The thing to remember is that the bad situation for the family that is in the house will turn into a good situation for a family that is wanting to be in the house and who will purchase it at the reduced value.
December 10th, 2009 at 1:20 PM
Very true. They put themselves there with the help of these investors. They should work things out together. If the government wouldn’t touch these people in 2007 they certainly shouldn’t touch them now, except in those instances where the people have improved their credit and can now qualify.
December 10th, 2009 at 5:48 PM
If the government did decide to go thru with any bailouts of any kind in the future for those who have stretched themselves too thin it would really kill any motivation I still have for continuing to save for a decent down payment. By nature I am quite careful with money and my wife and I have been saving for a year now to get a good down payment together (in our mid 20′s). We hope to wait another couple of years before buying. But sometimes there are days I think why not just put a 5% downpayment for a 35 year mortgage for as much as we can get since if rates go up too fast and too many people start defaulting the government will do whatever it can to cushion the blow. It sometimes seems like it pays to be reckless. I wonder if there are a lot more people that are careful with their money feeling the same way.
By the way I’ve been reading your blog for months and think of it as a top quality blog.
December 10th, 2009 at 6:31 PM
The Government of Canada shouldn’t even venture into this with the deficit they’re running… all they need to do is look to the example from our neighbours to the south.
In those instances where sub-prime loans were given to borrowers with little or no credit history (and in many cases, fraudulently) and they defaulted or otherwise stopped making payments, after being refinanced the vast majority have subsequently defaulted — again — despite having the mortgage written down, the interest rate lowered and the monthly payment reduced. Except now the US Government is now on the hook for these mortgage guarantees.
Aren’t we already on the hook enough with CMHC as it is? People have to start getting use to the concept of naturally-occuring cycles through recessions and market corrections. Prices cannot simply rise forever; there have to be winners and (unfortunately) losers in this scenario. Each time the government steps in with a stimulus or bailout we run the risk of having a much more severe and prolonged economic downturn as a result.
The Central Bank is now actively warning on rising debt:
http://www.theglobeandmail.com/report-on-business/central-bank-warns-on-rising-debt/article1395615/
“The Bank of Canada warned Thursday that growing household debt is now the biggest risk to the country’s financial system, and repeated a plea for borrowers and lenders to remember that the current era of super-low interest rates won’t last. ‘Households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates,’ the central bank said.”
December 10th, 2009 at 7:52 PM
Bryan,
Thanks for the kind feedback, and for reading.
I agree with you 100% on the idea of a bailout. Somehow we need to get back to systems where careful people are rewarded and careless people suffer the consequences of their own carelessness. I can’t imagine anything less fair than you asking to finance sub-prime mortgages through your tax dollars while you save for your own place.
Jason,
“Aren’t we already on the hook enough with CMHC as it is?”
For sure, and why would we willingly take on debt that CMHC already passed on in arguably better times. This is just plain stupid. Unfortunately, that’s what we seem to be getting from our leaders more frequently these days.
December 10th, 2009 at 7:57 PM
Bryan,
Welcome to opposite land. The government has made it very clear by a number of measures that select politically-important groups will succeed. They are unions (the money given to GM), debt-holders (2.25% interest rates), bankers (.25% overnight rates plus CMHC backing of debt), trades (home renovation tax credit plus various stimulus programs). These are just what I can think of off the top of my head.
Currently there is quantitative easing happening in Britain, Japan and the US. This is just another word for printing money. I don’t think Canada has gotten into quantitative easing yet but given Flaherty’s language he seems to be in the same case as these other countries and I feel it is just a matter of time. When that starts to happen then that is when you as a saver are really going to be made to pay for your mistakes.
You need to contact your political representatives and let them know how you feel. Rattle their cages.
Jason,
Liked the central bank quote. It seems so hypocritical of them, they lower rates to stimulate the economy and then complain when people take advantage of the low rates. What possible other effect could there have been?
December 10th, 2009 at 8:12 PM
Yes Norm, rewarding fiscal stupidity and punishing reasonable prudence seems to be all the rage these days.
It seems quite clear that the strength of the lobby for this bailout is for the benefit of the “alternative” lenders, not those that are actually in the homes. It was a purely speculative gamble on the part of the lenders, based on the assumption that housing values would continue to go up and investors would continue buying their asset-backed commercial paper. These lenders were happy to take their vast profits while prices were appreciating, and now that a portion of their portfolio of mortgagors has become “non-performing” and too high of a risk, they ask to be backstopped by the taxpayer. As Bookrat says, privatizing the gains and socializing the losses is exactly what this proposal is, and I fear we haven’t seen the last of it yet.
Captcha: blunder justice.
It sure is. That Captcha thing is right on the ball.
December 10th, 2009 at 8:41 PM
Jen,
“It seems quite clear that the strength of the lobby for this bailout is for the benefit of the “alternative” lenders, not those that are actually in the homes.”
Ya, kind of a sweet deal for the lenders to eliminate the careless risk that they’ve taken, especially with all of the housing bubble talk. If the government says “get lost” these lenders will suffer big losses under their plane to call the loans. We know none of the mortgagors can qualify with a mainstream lender, and these bozos are the last of the great “investors” who might be stupid enough to buy these loans (government excluded of course). Anyone that has some equity will sell and the rest will be in foreclosure. If it goes anything like it did south of the border, these borrowers will live in the homes until every last legal second has passed and then they’ll exit with everything they can take with them.
Peter,
“…welcome to opposite land.”
I love that! That’s where we live.
December 11th, 2009 at 4:51 AM
I seem to remember a while back when everyone was denying that “sub prime” mortgages existed in Canada to any great extent.
Has to drop prices a bit, as we see where some of the “demand” was really coming from.
December 11th, 2009 at 4:56 AM
“Liked the central bank quote. It seems so hypocritical of them, they lower rates to stimulate the economy and then complain when people take advantage of the low rates. What possible other effect could there have been?”
Lower rates didn’t get us in trouble, its the 0 down mortgages (CMHC not Bank of Canada) and approving the uncreditworthy and overextended that got us in trouble. The Bank of Canada makes a good point, those who are uncreditworthy, spread thin over multiple mortgages, loans and debts, and owe nearly the entire value of their home, due to small down payments (or none) are a big issue. Many are royally disadvantaged and potentially done for, if interest rates go up. Not the fault of the low rate, fault of the bank and CMHC who let unqualified people spend $200,000 for an entry level condo in Saskatoon when they just graduated, maybe earn $40,000 a year, have student loans, and haven’t built up any capital.
Bank of Canada says don’t spend money you don’t have and pay off debts.
Now how can you argue with that?
December 11th, 2009 at 9:07 AM
There’s a part of me that wants this government to bail these reckless lenders out of this mess. It’s a sure-fire way to get thrown out of office next election. People were sick enough with the GM bailout, this will just be icing on the cake.
December 12th, 2009 at 8:39 PM
Sarah,
Low rates are exactly what got us into trouble. The credit meltdown was only started by sub-prime lending, everyone thinks that is the whole story but it is just the worst offender. Otherwise how do you explain the huge drop in commercial real estate prices in the US where there was no sub-prime? Real estate prices in Cali, Ariz, Florida went down 50%+, so in that case even your responsible lenders putting 5,10,20% down are now underwater to the extreme. As another example, hedge funds were liquidated with no sub-prime exposure because they were over-extended and the market took a turn for a worst. The problem is excessive borrowing stimulated by low interest rates. When the BOC lowers interest rates that is exactly what they are triggering and I just don’t see why people can’t see that.
December 18th, 2009 at 10:37 AM
Interesting bits all around.
I put down my 5% and am in a 40 year mortgage. My house – being in Winnipeg – isn’t quite the high price so I think the risk is lower. Especially considering my house has increased in value – being in a steady market like Winnipeg. So that lowers the risk as well.
While I would would relish the opportunity to knock down the debt owing on my house and thus improve the quality of my life overall, I do see the other side. People are totally right to be reluctant.
But I find this all fascinating, because so far the only point of manipulation perceived here is bank-side. So if we can for a moment just try to be fair here in placing the blame, without implying that the responsibility for the solution has to change, I’d say we’ll get a better summary of what’s gone down:
House prices went up completely out of the control of people who wanted to buy houses. Up until the time my generation and anyone doing the same started buying houses, most everyone enjoyed equal opportunity (of coursenot equal square footage though
, but that’s fine!).
Prices went up and the market was allowed to get out of control without anyone stepping in saying “If house prices keep jumping like this, the amount required for financing will bear great consequence on our collective wealth”. This is the main issue that people like myself were bleeping on about for months on end. The prices were just too high.
Nobody listened.
If we were all just trying to exercise the equal opportunity we grew up observing and everyone in the process were just milking us for as much as possible, then I have to make the case that house buyers don’t deserve much of the blame.
Looking back to what I said about how the problem is only being manipulated through the banks…Bail out the homeowners, leave the lenders with the debt. If I was faced with thousands of homeowners with millions of dollars of debt, why would I be throwing money at the bankers who are now doubling their money by getting bailed out and still collecting the full loan?! That makes no sense!
If everyone wants to teach the lenders a lesson, teach it to the people who took advantage of the situation. I have great credit, I started working on it the day I could and I work very hard at keeping it spotless. I didn’t do anything wrong except happen to do what everyone has been doing for years.
The government could invalidate all debt. Then say to the people, “but that doesn’t mean you’re off the hook, you owe us this much to us now”, and turn to the bank and say “you deal with the implications now”.
Not only is the homeowner *not* getting a free house – which I’m not saying I deserve, but the money they are now paying goes straight to the government where it can go to better use than some fat cat’s 4th house & boat.
I’ll gladly say now that my idea isn’t by a long shot perfect, but I think it’s a badly needed reminder that we still aren’t putting the blame squarely where it belongs.
December 18th, 2009 at 7:22 PM
Interesting post Alex,
While people must ultimately bear responsibility for their actions, I agree with you to some extent.
Lots of people line up to denounce first time buyers who “expect” a fancy new house. But it seems to me the market is set up that way. Seems like the house you get for $350K is more than twice as good as a house that’ll cost you $200K. Financial institutions are all pushing cheap credit (the federal gov’t included!), plus housing has been appreciating like mad, so going big can seem like the smart thing to do. I personally am way too cynical to buy into this; but I can see how/why people do.
They’re not building modest houses anymore – they’re all monsters that first time buyers can’t afford. This puts pressure on the lower end market and drives up the prices there, making the big new ones look like a better deal. The head of the SK Housing Const. Association (or something like that) was recently lamenting the lack of affordable new housing in a recent Leader Post article.
Don’t get me wrong – there’s plenty of spoiled brats out there who want it all and want it now. But this is Saskatchewan, most folks are more down to earth than that, even the young ones. Fact is, the cost of housing makes it tough for first time buyers. You’re signing your life away anyhow, might as well be comfortable! It’s a bit like giving people sh*t for having high student debt – hey man, to some degree it’s the cost of doing business these days.
Older folks love to rip into young people for their “expectations”, meanwhile they list their house for 5X what they paid for it when they were young and getting their footing.
But they’ll get theirs! When the CPP goes bust and the welfare state collapses under the weight of their collective hip replacements!! Ha ha!
On another note, I’m a bit suprised with the lack of activity on here. What with all the (renewed) talk of a RE bubble.
I think it has to correct. But housing isn’t a rational thing. It’s more about ego/identity than shelter. If you don’t own (more like buy) you’re seen by society to have failed, and you internalize that into your identity. Therefore people will go to extreme lengths to buy a home, because it impacts how they view themselves, since it’s tied up with their conception of self worth. That’s why the boom will only go bust under extreme pressure.
I’m lucky to have gotten into a cheap apt. that I like and can maintain a holding pattern. People say you’re pi$$ing away money on rent. But I don’t see it that way. I’m paying for a good/service – shelter.