Canadian Subprime: Don’t think it didn’t happen here

I know for a fact (from personal experience) that there was a fair bit of subprime activity in Canada, albeit in a milder state: I saw nothing that rivaled stated income, negative amortizing, teaser rate mortgages in Canada (that apparently existed in the US).  Though I have seen many mortgages possessing each of those characteristics, just not all in one might-as-well-foreclose-now package.

Naked Capitalism links to a fairly lengthy Globe and Mail article that attempts to expose the role Conservative legislation played in allowing AIG (them again???) and others to expand into the Canadian market and spread risky mortgages to Canada.

“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.

…

irtually 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 article makes no secret that it intends to lay the blame for part of the Canadian real estate decline (and our vulnerability to the housing problems of the US) on the Conservative Harper government.  I do not follow Canadian politics enough to have much of an opinion on that issue.  It does, in making it’s case, provide a fantastic time line on how GE’s Genworth Mortgage Insurance Co (known in the industry as GEMICO) became the provider of approximately 30% of Canadian mortgage insurance by taking over the struggling Toronto-based MICC (the rest being provided by the public company, CMHC).  With a Canadian government guarantee, no less.  I’m embarassed to say that I did now know the origins of GEMICO despite working in mortgages for a couple of years.

The article goes on to argue that changes in legislation allowing more private American insurers — beyond GEMICO — to compete in the Canadian mortgage insurance industry caused CMHC and others to insure riskier mortgages (going from insuring 25 year mortgages to 30 year mortgages) and setting off an arms race between the various insurers, all possessing some sort of Federal guarantee, to expand their markets and court the business of non-prime borrowers and lenders.

It seems understandable to me that competition might be encouraged to break up the duopoly of CMHC and GEMICO, but I am baffled as to why a federal guarantee was required to entice additional competition into the Canadian mortgage insurance market?  The article does not attempt to explain it and actually tends to stress the appeals of the Canadian mortgage insurance market for the US insurers.  Why was a Federal guarantee required to sweeten the deal?

Many within the Canadian banking and mortgage industries that I converse with have baffled me in their expression of safety in Canadian real estate, believing Canada’s downright-puritanical banks (relative to US and European counterparts) and lending standards would protect us.  Now that the Canadian housing market has started to turn (in Toronto and Vancouver especially), the Canadian employment situation has turned, the country has entered recession, and information about the prevalence of loose lending has begun to trickle down, I am expecting housing downturn equal in length if not depth to the US housing bust.  Of course, areas that experienced  the greatest housing inflation (i.e. Vancouver) are likely to fall first and farthest, as proved the case in the US (Nevada, Arizona, Florida, and California).

… and the cow goes moo