Sunday, March 15, 2009

Yikes!

Someone at the Globe and Mail decided to do some real journalism, and went digging into the subject of Subprime Mortgages in Canada.

What they found - at least in Alberta and BC calls into question the statements made by many of our politicians to the effect that Subprime Mortgages aren't a problem in Canada.

I remember seeing ads for what sounded like dubious lending offers in the early 2000s - especially in e-mail. I had always assumed that these ads were simply misdirected garbage out of the United States. Apparently, I was quite mistaken, as these lenders were moving into Canada - or at least Western Canada.

Despite having just a share of about 7 per cent of the national market, subprime lenders in Alberta accounted for 56 per cent of the foreclosures in 2008. In British Columbia, the tiny subprime market laid claim to 42 per cent of the province's 2008 foreclosures. In comparison, Canada's five largest banks accounted for 33 per cent of the foreclosures in Alberta in 2008, even though the country's chartered banks account for about two-thirds of Canada's total outstanding mortgages.


Okay, 7 percent of the total mortgage market isn't that much, but, the impact of that seven percent on the housing market in Alberta and B.C. has the potential to be significant - especially when they account for over half of the foreclosures in the region.

We would be ill advised to ignore the medium and long term impact of these loans on the rest of us. Those whose properties are being foreclosed by these predatory loan companies have been taken to the cleaners. The rest of us stand to see our investments in property devalued quite considerably while the housing market tries to absorb a sudden influx of foreclosures.

These loans should never have been created in the first place. Now that we know that they do exist as a measurable fraction of Canada's mortgages, it is time for us to examine how best to remediate these loans. These are truly toxic assets, both for the borrowers and for the rest of Canadians. I think I would like to see a program for converting these loans into more conventional mortgage structures, and reset the payment history on the revised loans. I'm not saying that the borrowers get off the hook at all, but rather that we remove the most predatory aspects of these loans (such as the surprise changes in payments) from the picture, and give the borrowers a chance to succeed in paying off the debt that they have incurred.

There will be some who simply cannot pay their debts, and those will still go into foreclosure. But we can at least remove the worst aspects of these loans from the picture and do something constructive with it all.

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