# Canada Doesn't Have A Subprime Market



## Rickson9 (Apr 9, 2009)

Really?

http://www.canadianmortgagetrends.c...-specialty-mortgage-mortgage-of-the-year.html


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## Berubeland (Sep 6, 2009)

Nope.

Here are some of the more interesting mortgages available in the US

Although most home loans do not fall into this category, subprime mortgages proliferated in the early part of the 21st Century. About 21 percent of all mortgage originations from 2004 through 2006 were subprime, up from 9 percent from 1996 through 2004, says John Lonski, chief economist for Moody's Investors Service.[1]. Subprime mortgages totaled $600 billion in 2006, accounting for about one-fifth of the US home loan market.[6]
As with other types of mortgage, various special loan features are available with subprime mortgages, including:
interest-only payments, which allow borrowers to pay only interest for a period of time (typically 5–10 years);
"pay option" loans, usually with adjustable rates, for which borrowers choose their monthly payment (full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan);
and so-called "hybrid" mortgages with initial fixed rates that sooner or later convert to adjustable rates.

This last class of mortgages has grown particularly popular among subprime lenders since the 1990s. Common subprime hybrids include the "2-28 loan", which offers a low initial interest rate that stays fixed for two years after which the loan resets to a higher adjustable rate for the remaining life of the loan, in this case 28 years. The new interest rate is typically set at some margin over an index, for example, 5% over a 12-month LIBOR. Variations on the "2-28" include the "3-27" and the "5-25".
[edit]

Until we start seeing these kind of mortgages we won't really have have a "sub-prime" market


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## Four Pillars (Apr 5, 2009)

I think the existence of subprime products would technically indicate the presence of of a subprime market but... I think the more relevant information is how many people actually use/have been approved for these products and can they afford those products?

Things like ARM mortgages in the US are perfectly good products for certain situations - but when lenders/borrowers are using them to finance unaffordable houses they become a problem.

This could be happening now in Canada if someone gets a variable mortgage and stretches to get the most expensive house they can afford. If interest rates go up then they might need a bailout.


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## Berubeland (Sep 6, 2009)

The biggest issue facing borrowers in the US is not their mortgage payments but rather the issue that their house value has gone down so much they will never be able to refinance with any mortgage company. 

For example even if you have a conventional mortgage on a house you paid $100,000 for and you put down 25%. You will still owe $75,000. So you pay your mortgage for 5 years and you have to refinance. Well you still owe say 65-70,0000 on that mortgage. But if property values went down 50% which is possible in some areas your house is only worth $50,000

So to refinance you need to come up with cold hard cash. How many people have $30,000 extra to put down on their mortgage. 

SO this idea that only deadbeats are involved in this problem is absolutely wrong

This actually happened to one of my teachers here in Toronto during the last RE crash we had. She had to come up with $80,000 she did not have or walk away from her house. She did still owe the $80,000 though.

This article was very interesting..... 
http://www.thebigmoney.com/articles/money-trail/2009/10/08/go-ahead-walk-away?page=0,1


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## ssimps (Dec 8, 2009)

Four Pillars said:


> This could be happening now in Canada if someone gets a variable mortgage and stretches to get the most expensive house they can afford. If interest rates go up then they might need a bailout.


I would be bold enough to suggest rewriting your comment to read:

'
This WILL happen in Canada for all the people getting a variable mortgage and stretching it to get the most expensive house they can 'afford'; where afford == the advise the bank gave them on what was OK for them to take on. WHEN interest rates go up then they WILL need a bailout. 
'

Berubeland gave a good example and I know neighbors of mine that this WILL happen too; they even admit to it over a beer, but just drink another beer to make the problem go away.  Oh boy.

It is a double wammy if house prices drop significantly again, because these people will not even be able to sell there house and pay the bank back what they owe them. Then what happens....... We get to have AZ right here at home!


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## Four Pillars (Apr 5, 2009)

Berubeland said:


> The biggest issue facing borrowers in the US is not their mortgage payments but rather the issue that their house value has gone down so much they will never be able to refinance with any mortgage company.
> 
> For example even if you have a conventional mortgage on a house you paid $100,000 for and you put down 25%. You will still owe $75,000. So you pay your mortgage for 5 years and you have to refinance. Well you still owe say 65-70,0000 on that mortgage. But if property values went down 50% which is possible in some areas your house is only worth $50,000
> 
> ...


I don't know the popularity of various mortgage products in the US but from what I've read "most" home owners take out either a 15 or 30 year fixed mortgage which means they don't have the same kind of refinancing risks that Canadians have since we generally only lock in for 5 years or less.

Does anyone know this info? ie what percentage of homeowners have a mortgage that is coming due for any given year?

I agree there are some people who have ARMs or shorter term mortgages that won't be able to refinance - good point!


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## Four Pillars (Apr 5, 2009)

ssimps said:


> I would be bold enough to suggest rewriting your comment to read:
> 
> '
> This WILL happen in Canada for all the people getting a variable mortgage and stretching it to get the most expensive house they can 'afford'; where afford == the advise the bank gave them on what was OK for them to take on. WHEN interest rates go up then they WILL need a bailout.
> ...


How dare you rewrite my perfectly crafted comment! 

The problem is that I don't know how many people are in this situation and I also don't know what will happen with interest rates in the future. Yes, the newspaper has many interviews with people in this potential situation but the media specializes in finding out the worst case scenarios.

As for turning into AZ - very unlikely. Certain areas in the US had huge percentages of speculator purchases which meant the values went up quickly and then went down just as quickly.

Again, I don't know the numbers but the fact that some people might/will lose their house due to inability to refinance doesn't mean they are a significant percentage. If they do represent a large percentage (ie >5%) then yes, real estate values will be affected. If it's a small percentage then I don't think real estate values will be affected very much.


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## Berubeland (Sep 6, 2009)

In Canada the government would do something to help the people. 

In the States their culture is very different about what the government should do for their people.

Initially I though the way to "bailout" the banks was by helping the people renegotiate. This way the banks loans would be solid. 

Lets face it if I lend money out to my friend and they lose their job i feel fortunate to get my capital out. Why didn't the banks do this?

As far as I know it is still very difficult to renegotiate your mortgage. 

The Times had an article about when it is good business to walk away from your mortgage and how the different banks are walking away from their mortgages themselves and how people should be taking care of themselves and their finances rather than feeling guilty and ashamed.


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## ssimps (Dec 8, 2009)

Four Pillars said:


> How dare you rewrite my perfectly crafted comment!
> 
> The problem is that I don't know how many people are in this situation and I also don't know what will happen with interest rates in the future. Yes, the newspaper has many interviews with people in this potential situation but the media specializes in finding out the worst case scenarios.
> 
> ...




I'm not trying to freak anyone out or be a doom and gloom guy about this. I agree that my AZ example was overboard.

I have no idea what the % is either, but I would not be surprised if it is 5% or more. I know many people on my street that have become victims of getting their house refinanced based on very high / unrealistic market values (valuated by a bank appraiser) so that they have $ to spend on putting in marble kitchens, pools, and crap like that. They can only afford it now because of the low rates and it seems like variable rates are pushed a lot by the banks. So it is only a matter of time.

I don't see 3 - 4% loan rates lasting for ever.


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## canadianbanks (Jun 5, 2009)

Most mortgages in US are fixed, meaning fixed interest rate for the entire mortgage, while in Canada almost all mortgages have to be renegotiated even if they have been fixed for certain period (3, 4, 5, 7 years etc.). This makes the Canadian RE market more vulnerable that the US one, as the borrowers bear the interest rate increase risk. 

I would call any mortgage with less than 10% down and with amortization over 25 subprime. As we all know we had and still have plenty of those around. The Canadian RE market is finished even if rates stay that low for many years to come.


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## Four Pillars (Apr 5, 2009)

This article provides some of the data that I was wondering about (ask and ye shall receive?).

http://www.theglobeandmail.com/repo...e-with-mortgages-report-finds/article1430801/

If nothing else at least the article looks at the situation from the point of view - how many homeowners will be in trouble if interest rates rise quickly?

As I suspected it doesn't look like there is large percentage of households who will lose their house if rates start climbing.


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## dogcom (May 23, 2009)

You can listen here to Michael Levy on this subject today here http://www.cknw.com/podcasts.aspx all you have to do is listen starting at 10 am after the news. He says the percentage is very low and it is well worth a listen.

I still believe myself however that it should be like the old days and that is 25% down and 33% percent of your gross income. 

I also agree with berubeland that banks entered into a bad loan to people as much as those people entered into debt they could not afford. So both parties should have to find a middle ground if possible to live up to what they did.


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