Shadow Banks, No-Down-Payment Subprime Mortgages in Canada’s House Price Bubble
So no “major, major collapse in housing?”
“The pundits have been raising red flags on the Canadian housing market for more than five years – and have been consistently wrong,” former Royal Bank of Canada CEO Gord Nixon told BNN today, in response to the federal government’s new mortgage rules designed to tamp down on risk in the housing market:
“I appreciate why policymakers have been moving in the direction they have been moving but we have yet to have – and I don’t believe we are going to have – a major, major collapse in housing.”
It is always been said that the Canadian housing bubble cannot implode in the manner the US housing bubble did because mortgages are more conservative, because subprime doesn’t exist, because down-payment requirements are stiff…. And now there are new mortgage rules to make it even harder.
But there are ways and means of getting around the new mortgage rules and other requirements to get what you want in Canada’s delicious housing bubble. And in some cases: no down-payment, no problem.
The new policies – covering mortgages that qualify for the government-guarantee program and the lower rates that come with it – elicited pronouncements of being everything from “somewhat overdue,” from Toronto Dominion Bank chief Ed Clark, to “premature,” from Gary Mauris, president and CEO of Dominion Lending Centres.
The latter is a mortgage broker that negotiates with “shadow banks.” These mortgage finance companies, that include the less-regulated private lenders or mortgage investment corporations, offer a variety of loans, including for low-ratio refinancing, jumbo mortgages, long-term amortizations, and investment or rental properties. These “alternative” mortgages include subprime mortgages.
Mr. Mauris’ unfavourable review of the new rules may have something to do with the amount of business squashed therewith.
Dominion Lending Centres Chief Economist Sherry Cooper said that some lenders declared, “Until further notice, until the dust clears, we are no longer making loans, we are not making renewals.”
Shadow banking covers 12.5% of the $1.3 trillion Canadian mortgage market. Lenders like Merix, Street Capital, First National, Canadiana, and True North Mortgages don’t take deposits as banks do. They fund these mortgages by issuing bonds or mortgage backed securities. These monoline lenders who “can churn out approvals in as little as 4 hours” are not where the government mortgage insurer, Canadian Mortgage and Housing Corporation(CMHC), intended priced-out house-hunters to go, especially now that that it finally raised the housing market alert status to “red.”