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Category: What's New in 2007
2 Major Mortgage Bankers Suspend Subprime Lending
CP News
Fri Aug 24, 9:57 PM
By Laura Bobak
TORONTO (CP) - Two major Canadian mortgage bankers say they have temporarily suspended subprime - or higher risk - lending in Canada, blaming the frozen market for asset-backed commercial paper, or short-term loans.
MCAP Financial, which provides mortgage financing through brokers and is a partner of the Bank of Montreal (TSX:BMO) and insurance giant Clarica, says it has temporarily stopped financing subprime loans through its Eclipse division, formerly known as MCAP Sub-Prime, adding all current mortgages will be honoured.
"Today's announcement has nothing to do with the real estate market here in Canada or the performance of the alternative lending programs," MCAP said in a memo to mortgage brokers.
"In fact, the Canadian real estate and mortgage markets continue to perform very well by contrast to the United States where the market is not strong and has resulted in the global credit crunch that is affecting us today. Some of the biggest Canadian financial institutions have been meeting to assist in stabilizing the commercial paper market. Until the market is back to normal, buyers of commercial paper are limited."
GMAC Residential Funding also confirmed it will no longer extend subprime mortgages.
"In response to a challenging mortgage market, GMAC ResCap continues to reduce its nonprime exposure and restrict originations of mortgage products with limited market liquidity," John Schipper, senior vice president of mortgage lending and sales, GMAC Residential Funding, said in a written statement.
"While ResCap's Canadian unit, GMAC Residential Funding of Canada, has historically had limited activity in the subprime market, the company is also reducing its exposure to mortgage products with limited market liquidity. Residential Funding of Canada continues to offer insured, A-type mortgage products."
A third, smaller company,N.B.rook, has made a similar announcement, mortgage brokers.
As the ripple effect of the North American credit crunch sweeps through the financial markets, it seems like there's still plenty of money available to lend to Canadians with good credit records.
However, consumer with less than perfect credit records are going to find it harder to get a loan as conditions tighten, lenders say.
Wayne Sudsbury, past president of the Independent Mortgage Brokers Association, and president of Verico Home Guard Funding Ltd., said about 35 to 40 per cent of his business is in subprime lending, although he prefers the term "non-conforming" mortgages.
Sudsbury said that although the resale housing market in Canada is booming in Western Canada, there are other pockets of the country that are being hurt, including the Windsor, Ont. area, hard-hit by auto layoffs, and Smiths Falls, Ont., which is facing impending layoffs with the closure of the Hershey's chocolate plant.
"Some properties are being taken back. There are always ongoing repossessions," Sudsbury said.
Lenders are reducing subprime exposure in these "secondary" markets and are reducing the amount of money they'll be willing to lend for a property. While in the past some might have lent 80 per cent of the value of the home, that is being reduced to 60 or 70 per cent, Sudsbury said.
However, borrowers with higher-than-average credit risk can still find help from a mortgage broker, he said, as there are still many companies willing to do a deal.
"Experienced mortgage brokers have depth of resources and have always been able to serve this part of the market," Sudsbury said.
Mortgage broker Vince Gaetano, vice-president of MonsterMortgage.ca, said the sub-prime segment is only about 15 per cent of MonsterMortgage's business.
"It's not our core business. We try to shy away from it," Gaetano said.
"If people have good credit there's more than enough money out there to be lent," he said. "It's all coming down to people's scores, and that's where the tightening has been on the lending side."
The tightening up can be traced back to the woes of short-term loan seller Coventree, which has impacted other companies.
The trend is expected to spread throughout the mortgage financing sector, said Nick Kyprianou, senior vice-president and chief operating officer of Home Capital Group Inc. (TSX:HCG), had also heard about GMAC and MCAP. He said he expects more mortgage bankers to "just pack it in" on subprime lending next week.
Home Capital, the grandfather of alternative mortgage lenders, doesn't dabble in sub-prime, but nevertheless has become more choosy in the past few weeks, he said.
"We have tightened up our market for borrowers," Kyprianou said.
Home Capital has been on a spending spree the past few weeks, buying up less risky mortgages that would have been packaged into commercial paper but now can't be since the bottom fell out of the market for short-term commercial loans, also known as asset-backed commercial loans or ACBP.
"This has actually been a really good opportunity for us but we're able to load it up on the cleaner end of the business," Kyprianou said, adding the mortgages that can't be repackaged into debt notes are piling up.
"It's like a traffic jam," he said.
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