November 20th, 2007


Blurb: Fallout from the U.S. sub-prime loan debacle has increasingly been spreading into Canada. But the effects on homeowners here are likely to be minimal.


Will U.S. sub-prime woes affect mortgage lending in Canada?


By Peter Diekmeyer •


In recent weeks, the fallout from the U.S. housing sector slowdown has been increasingly been spreading north of the border. Several banks including Royal Bank of Canada, ScotiaBank, Bank of Montreal and National Bank of Canada have written down hundreds of millions of dollars worth of asset backed commercial paper and securities tied to the U.S. sub-prime mortgage market.


Now the big question among housing sector stakeholders is whether local lenders will tighten up their standards as a result of the write downs. The stakes are high. If it becomes harder new homebuyers to get approved and for homeowners to roll over existing mortgages, then Canadian house prices, which have been going great guns, could begin to lose some steam.


“The short answer is no,” says Jim Murphy, a spokesperson for the Canadian Association of Accredited Mortgage Professionals, when asked whether association members are cutting back lending. “Most of the financial institution write-downs made here in Canada related to U.S. loan exposures. The sub-prime market in Canada is relatively small. So any adjustments that lenders make here are likely to be modest.”


Marie-Claude Lavigne, a spokesperson for National Bank of Canada agrees. “There is no housing crisis in Canada. We never did any sub-prime lending and our evaluation criteria have not changed,” says Lavigne. “In fact last month the amount of mortgages that we issued increased by 29 percent relative to October of last year.”


Sub-primes loan: a mostly American phenomenon

Despite the current optimism among lenders, there is legitimate cause for concern. The sub-prime crisis has been likened to blowing up dynamite in a pond: it’s the small fish that usually float to the top first. If that’s true, then the worst may not be behind us.


The initial philosophy underlying sub-prime loans was a good one: the idea being that mortgages with lower monthly payments but longer maturities (or with low introductory rates), would give more borrowers the opportunity to buy and own their own homes.


The problem was that what started out as a good thing, started gradually spinning out of control after the U.S. Federal Reserve began cutting interest rates and then keeping them low following the tech bubble implosion, the 9-11 events and the beginning of the Iraq War. Many Americans used the opportunity to refinance their homes at lower rates and then took the extra cash to finance current consumption. The more house prices rose, the bigger mortgages and home equity lines of credit that Americans took out.


It worked a bit like a Ponzi scheme. But it could only work as long as house prices kept rising and interest rates stayed low. Once those trends reversed, a surprising number of people found out they could no longer afford their mortgages. Soon after, major financial institutions began writing down tens of billions of dollars in loans.


The good news is that sub-prime lending never really took off here in Canada. True, many brokers did offer Canadians mortgage loans on behalf of lenders such as GE Capital, Home Trust Company, AGF and Xceed Mortage, HSBC and GMAC. However several have put a halt to their Canadian lending and others have been reviewing the way they do business.


Few negative signs in the housing market

So far, there are few signs that any of this is having a major effect on Canada’s housing market. According to the Canadian Real Estate Association, resale housing activity in Canada was at its highest level ever in October. The average price of homes sold via the association’s MLS service shot up an impressive 10.6 percent to $333,544 compared to last year at this time.


Canadian new home construction also seems to be doing quite well. Although the number of housing starts slipped by 22.0 percent during October, much of the dip was due to the fact that the September numbers were inordinately high. Canada Mortgage Housing Corporation officials expect that residential housing activity will remain strong until the end of 2007 and that they will taper off shortly after that.


That said, financial services professionals are not immune to developments in the United States, where lenders are dramatically tightening up their lending standards. That’s especially true of lenders that operate on both sides of the border. And thing is for sure: despite the fact that the mortgage market remains highly competitive here in Canada, the fact that there are less players competing for business means that those remaining, will have increased pricing power. That means at least some mortgages will cost more.


How bad could it get? Probably not too bad. But if you see any fish floating around: lock in your mortgage. Fast.



Peter Diekmeyer ( is a freelance business and economics writer.




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