Lenders view with concern a rising demand for ‘alternative’ financing
Kristin Goff
Sun
OTTAWA – Rising demand for no-down-payment mortgages and other “alternative” financing means Canadian lenders need to learn from the U.S. sub-prime crisis, says an industry group.
“We are looking very hard at what’s gone on in the U.S. to try to make sure we don’t make the same mistakes,” said Andrew Moor, incoming chairman of the Canadian Association of Accredited Mortgage Professionals.
“These are complex kinds of issues, but we are trying to make sure we are looking after not only our members, but also the consumer at large.”
While Canadian mortgage lenders have not been accused of the kind of widespread, aggressive — and in some cases fraudulent — practices that have swept through parts of the U.S. sub-prime market, the American problems serve as a warning, Moor said.
Products like no-down-payment mortgages, which are relatively new to Canada, can be a challenge because they could “be useful and helpful to somebody in one circumstance and the same criteria can be abused or put someone in a bad situation in another circumstance,” he said.
To help deal with such issues, the CAAMP will put an emphasis on the importance of “responsible” lending over the next year, Moor said.
The national mortgage brokers organization will work to improve disclosure documents so consumers get clear and relevant information about what their mortgage obligation involves, Moor added in an interview on Monday.
It also may “clarify” the language in its own code of ethics to make certain its members know clearly what is expected of them in terms of responsible lending, said Moor, who is also president of the Equitable Trust Company.
Moor was among participants at workshops on “alternative lending,” which the CAAMP took across the country in response to industry concern about fallout from the U.S. sub-prime-mortgage crisis.
Canada‘s sub-prime, or alternative, loan market had been growing quickly in recent years, although it probably represents only three to five per cent of the Canadian mortgage market, officials said at a workshop in Ottawa on Monday.
Canada‘s lending practices have generally been more conservative than those in the U.S., where one in five mortgages is sub-prime. As well, Canadian lenders rely less on raising funds by selling mortgage-backed securities, said Paul Grewal, president of Street Capital Financial Corp. and outgoing chair of CAAMP.
Still, three or four lenders withdrew from the Canadian sub-prime mortgage market because they could no longer get financing in the security market once the U.S. mortgage problems created a global credit crunch, said Grewal.
There are still many options available for loans to people who may require alternative financing because of a past bankruptcy, a impaired credit rating or because they are new to Canada with no credit history, he said.
Canada has no system for reporting sub-prime or alternative loans, but it is estimated that about three to five per cent of outstanding mortgage loans are alternative loans, said Tony Roberts, market growth manager for Wells Fargo Canada. That amounts to at least $24 billion of Canada‘s $800-billion mortgage market.
Roberts told the conference he thinks the “phenomenal” growth of recent years will continue for alternative loans, because rising housing prices make it harder for Canadians to afford houses. As well, he said a high divorce rate, rising debt loads, rates of self-employment and influx of immigrants all suggest more people won’t be able to qualify for regular bank loans.
His estimate is that Canada‘s alternative loan rate will reach almost nine per cent or around $70 billion in the near future.
Once people understand that Canada‘s lending market is still healthy, the rapid growth in Canada‘s alternative loans will continue, he said.
But Moor disagreed. While the Canadian industry adjusts to the fallout from the U.S-sparked credit crisis, further growth next year is likely to be “flat, at best,” he said.
© The Vancouver Sun 2007