According to some experts, as lenders lower their standards, Canadians increasingly face mortgage risk. In a time where household debt is at an all-time high and the economy is considered unstable at best, lenders are loosening their standards when they should be, perhaps, being a little stricter.
According to a 152-page report obtained by Bloomberg News, both mortgages and credit lines are being granted without proof of income to high-risk candidates, including self-employed individuals and new immigrants. A recent article in the Financial Post compares the lax lending habits of Canadian financial institutions to those that led the U.S. to its current housing mess.
According to Bank of Canada Governor Mark Carney, the greatest domestic threat to Canadian financial institutions is record high consumer debts – 153% of disposable income, according to Statistics Canada.
How do our mortgages compare to those of the U.S.?
Canadian and U.S. lenders are quite different; lending in Canada is more highly regulated than it is in the U.S. In America, nonprime mortgages include two different types of mortgages – subprime and alt-A mortgages. Subprime mortgages, which are the more risky of the two, are mortgages that are granted to those who might have a tough time paying the loan back. Alt-A mortgages, which are considered less risky than subprime mortgages, are granted to borrowers who don’t have full documentation, and may have lower credit scores. According to a Credit Suisse Group report, subprime mortgages that required “little to no documentation of income accounted for 46% of all U.S. subprime mortgages in 2006,” says the National Post.
In Canada, there is no specific definition for a subprime mortgage. Benjamin Tal, deputy chief economist at CIBC World Markets in Toronto, says that since the financial crisis, subprime mortgages have fallen below 5% in Canada.
Penalties are different in Canada too. Not only are mortgage terms shorter, but also lenders can seek full reimbursement – even after foreclosure. In the U.S., mortgages are tax-deductible, but they aren’t in Canada.
Last week, I chatted with a mortgage broker and asked him his take on subprime mortgage risk in Canada. He said that it’s not so much the mortgages themselves that are a risk, but the ‘other’ products. The broker, who wished to remain anonymous, said that according to an insider’s report, the bank upsells 3.4 products per mortgage on average, including lines of credit, RRSP loans, credit cards and mortgage life insurance.
The Star’s Moneyville indirectly supported this claim yesterday, in a story about Mark Murakami, who is said to have made a good decision in accepting a line of credit offer. When he applied for his mortgage, Murakami was also offered a line of credit, and told that if he didn’t accept, the same loan could cost him thousands in fees later.
“Murakami hadn’t planned to get another loan on top of a mortgage, but not wanting to pay more for something he might want later, he took the mortgage representative’s advice. He ended up with a $68,600 line of credit, the maximum the bank would provide at the time.”
When asked about their lending practices, Bank of Montreal told the Financial Post that it has “prudent credit criteria, and we regularly review our credit qualifications.” Interestingly, when asked, other banks declined to comment on their lending practices.
While Murakami’s story is presented as a happy one – he saved thousands by saying yes there and then – it could have just as easily been the lead-in to a sad story of financial failure. Had Murakami been granted a ‘subprime’ mortgage, plus upsold the average of 3.4 products, he could be in serious financial trouble. It’s not so much mortgage debt, as it is all that ‘other’ debt that poses the problem.
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