Canada's sub-prime

Interesting analysis in the G&M today regarding low-down extended amortization products. Here's some low-lights:

In the first half of this year [2008], as the subprime mortgage crisis was exploding in the United States, a contagion of U.S.-style lending practices quietly crossed the border and infected Canada's previously prudent mortgage regime.

New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.

Virtually unavailable in Canada two years ago, high-risk mortgages proliferated in 2007 and early 2008 and must now be shouldered by thousands of consumers at a time when the economy is sinking quickly and real-estate prices are swooning. Long-term mortgages – designed to help newcomers get into the housing market sooner – are the most expensive in terms of interest costs, and least flexible when mortgage-holders cannot meet their payments and need extensions.

The Bank of Canada this week warned that the perilous economy could lead to a doubling of so-called “vulnerable households” – those unable to meet their debts – and perhaps cost thousands of Canadians their homes. The central bank, which is always cautious with its words, said in a report that there is the potential for “a substantial increase in default rates on household debt.”

Banking and insurance officials were so concerned about the alarming rush to 40-year mortgages at the beginning of 2008 that one bank executive warned the Bank of Canada's chief financial stability officer, Mark Zelmer, in a meeting that “the government has got to put an end to this.”

Critics, including former Bank of Canada governor David Dodge, say the lax mortgage policies only further stoked soaring house prices.

I remember those days very clearly. I was shocked to learn we could stretch our mortgage payments out to 35 years. I was equally awed when we next learned we no longer needed a minimum 10% down. Imagine my response when we were told we could put 5% down, extend the amortization out over 40 years and even qualify for a 7% cashback option that would give us our downpayment and closing costs; it was almost as heart attack-inducing as when I learned we could skip the cashback and put nothing down, thus "saving" ourselves an interest "penalty."

I wrote about this last September. I even did a radio show on CBC last summer when this was considered a new and innovative market designed to "help" people like me. I called the 0 down 40 year products a "life sentence to the poor house." I'd like to re-name the now defunct products and their still-proliferating brothers and sisters--5% down 35 year amortizations and the cashback options--to something more indicative of what more and more experts are starting to recognize them for: "a quick trip to foreclosure."

So much for Canadian consumers being different.