| The Subprime Mortgage
Woes of the United States Finance and Banking World
By now, the fallout from the sub-prime or subprime mortgage
debacle in the United States has made its initial effects
on the entire world. While influencing many of the world's
markets and increasing the credit crunch around the world,
the sub-prime mortgage problems of the US has actually not
been felt nearly as badly by our Canadian counterparts.
This article is used to explain and exaimine some of the
major reasons why the US sub-prime mortgage financing crisis
has not created a counterpart subprime problem in Canada
housing and credit crunches.
In the beginning, this is where the subprime
definition came from...
In many ways, US homeowners and people looking to purchase
property as well as the American general public, don't actually
understand what the term US 'sub-prime' or 'subprime' actually
means. In many cases, people believe that 'sub-prime' is
actually used to describe how home buyers and real estate
investors are able to get 'below prime' mortgage rates.
Of course, prime rates in Canada are like the key index
rate in the US, which is what all variable rate mortgages
are based upon. So the US general public believes the subprime
mortgages for homes is a way where people can save money
by getting a great deal on their mortgage. WRONG! Not only
is this incorrect, but you can hardly be further from the
truth! US Subprime mortgages or sub-prime financing by banks,
American financial institutions and other lenders means
that you, the borrower (or person trying to close on a pre-sales
condo or real estate property) is sub-prime. So what does
that mean? Basically, banks and lenders view you as a sub-prime
candiate ... or someone they would not associate with giving
a Gold Card or status to ... someone who is below average
and therefore needs serious help and assistance to purchase
a new home or subprime pre-construction condo property.
Therefore, the word subprime mortgages or American sub-prime
financing from lenders and bankers had crept into the English
real estate language dictionary.
American banks and US lenders provided
sub-prime mortgages and financing to people who would not
usually even be considered for borrowing
A recent study in the United States showed that more than
one third of all mortgages and lender financing for all
homes and presales construction condominiums and condo residences
are considered subprime mortgages. Can you believe that?
1/3 of all home mortgages whether it be for your old retirement
home or new pre-sales condo tower residence is considered
to have a sub-prime mortgage or finance lending. That is
incredible! During a normal American real estate cycle,
this means that about one third of all bank mortgages would
not even be granted to these homeowners or presales real
estate speculators in teh property market. Wow! Not only
does this create an unstable market, but sooner or later,
these subprime woes will fail banks and lenders and homeowners
will not be able to keep their homes. In many cases, US
banks and lenders provided sub-prime mortgage financing
of up to 100% of the home's value. In other cases subprime
mortgages fell under the 'reverse mortgage category which
meant that home owners would actually get paid cash by the
bank every month .. while their mortgage principal kept
on increasing. In many ways, the American sub prime crisis
in the United States has created a very unstable real estate
market both in completed as well as new presales pre-construction
condo markets. Not only have investors and homebuyers overextended
themselves, but this has also driven up the home values
in the most recent decade to absolutely abnormal highs.
This just can't go on. .
What are the next stepss in the US sub
prime crisis?
Many people have a question about how long the subprime
crisis will last in the United States. With the global credit
crunch already upon us and with US house and real estate
values plumetting to in some places more than 25% less than
this time last year, unfortunately, there seems to be no
end in sight. Other people have asked who's fault it is?
There are several key parties involved with the US subprime
crisis, and basically, it involves everyone. Firstly, the
banks and lenders should not have financed 100% or more
of people's homes .. so the subprime mortgage lending was
a bad idea to begin with. Basically, people who cannot afford
a traditional mortgage should not be able to get a mortgage
that seems to increase with time. Homeowners who can't pay
a traditiona mortgage amount are either purchasing presales
condos or property that is too expensive and unaffordable
for them, or they should not be able to get financing from
a bank. Period. Secondly, once the finance lenders and banks
started to provide subprime mortgages and other incentives,
the government should have stepped in and created some regulations
and terms surrounding sub-prime borrowing and lending. Obviously,
people who required sub-prime lending need more than having
the bank lend 100% and take even more money from them over
the long term. Thirdly, the US sub-prime crisis was also
the fault of the homebuyers and real estate presales condos
investors who fuelled the building boom and the increase
in teh real estate values throughout the US. It is because
of greed from home buyers and investors that led to some
of these problems. People getting greedy about owning their
dream home way too early in life and borrowing fromAmerican
sub-prime lenders packages to investors in pre-construction
condos who thought a quick flip or a quick condo assignment
would have them winning a huge cash fall from a single deal.
With demand for subprime mortgages and bank sub-prime lending,
the financial institutions just kept on giving them out;
and home owners kept on borrowing from their home equity
to purchase other doodads to fill up their warbdrobe and
their lives. Of course, now with the drop in home equity
values, home owners are stuck as banks are pulling back
equity and dissolving line of credits secured against property
if the values have dropped to a point where homeowners owe
more money that what is being financed by the bank. Sub-prime
mortgage woes are here to continue in the US until there
is a correction in values in the real estate market, sub-prime
mortgages are scrapped for traditional lending packages
and people move into these newly constructed homes that
are sitting idle and just waiting for the population migration
into the cities.
Is Canada prone to the sub-prime crisis
and subprime bubble?
Luckily, Canada has survived so far in this US subprime
crisis American that has seemed to grip all credit around
the world. The neighbors to the North seem to be bucking
the trend with real estate prices still skyrocketing and
increasing at a much faster rate than inflation. There are
several reasons why the Canadian real estate market seems
to be more stable than that of the US. Up until 2007, Canada
banks and financial institutions would only lend up to 75%
of the purchase value of a home or presales condo, meaning
that the home buyer would have to place a deposit of 25%
of more upon closing in order to purchase a home or pre-construction
condominium. This has since been raised to a ratio of 80%
bank financing and 20% downpayment. Even so, any more financing
from a lender or bank above 80% would require insurance,
which increases the mortgage rate by a whole lot. These
Canada sub-prime mortgages or subprime lending was not all
that common as the interest rates were much higher than
the traditional mortgages when compared against each other.
Therefore, most Canadians saved until they could get at
least 20 to 25% of a downpayment on a home before making
a purchase. The Canadian banks have been much stricter on
subprime lending practises when compared with the US sub-prime
crisis. It is this reason that it is known that under 3%
of all mortgages in Canada are considered to be subprime
lending or sub-prime mortgage packages. In most cases, Canadians
banks are very safe in their Canadian real estate holdings,
but the problem arises when many of these financial institutions
have holdings in the US or have leant money to US lenders
and banks to fund US subprime mortgages and lending practises.
This is where we see many billion dollar write-offs through
2007 and even 2008. Many people ask if the US subprime woes
will reach Canada's burgeoning real estate markets. The
answer is yes and no. Banks have been very careful in handing
out subprime mortgages to home buyers, so they are safe
that way. However, with the downturn of the American economy,
and with Canadian exports/imports so dependant on their
Southern neighbors, there is no doubt that growth in Canada
will also slow. However, the latest reports show that Canada
real estate is still expected to grow faster than inflation,
bucking the trend in the US where the subprime mortgage
lending practises have finally caught up.
Canadian Banks Cautious after US Sub-Prime Mess - is a
Canada Sub-Prime Meltdown on Its Way?
It's not unusual for homebuyers to be shocked by the amount
of debt lenders will let them take on, but the US sub-prime
mortgage crisis is making banks on both sides of the border
more cautious according to the Torstar News Service. With
the Canadian econmy slowing and financial markets fallout
continuing over the US sub-prime meltdown that has pushed
mortgage rates higher in Canada, banks are making sure people
know what they are getting into. "We are being more
cautious," says Joan Dal Bianco, a mortgage expert
and vice-president of real estate secured lending at TD
Canada Trust. "We have a discusssion about how much
you can really afford." She notes Canada house hunters
here don't face the same dangerous choices. Unscrupulous
US bank lenders were pre-approving borrowers for mortgages
at initial "teaser rates" as low as 1 per cent
- often not warning that payments could rise by a third
or more when the cheap rates expired. This is one of teh
major reasons for the current US sub-prime meltdown which
has not yet caused a Canada sub-prime mess just yet. "We
qualify buyers at the posted mortgage rates," she says.
Posted rates from Canadian banks are now in teh 7 per cent
range for closed mortgage terms from on to 10 years, although
it's easy to get a percentage point or more off by negotiating.
The rule of thumb is that mortgage payments shouldn't exceed
33 per cent of a family's gross income. That's not to say
buying a house in Canada won't land you deep in debt, even
as mortgage rates are expected to slide in teh coming weeks
- leaving variable rate mortgages popular because the interest
rates fall with the prime rate. The trick is to be fully
aware of how far in debt you'll be, and be comfortable that
your finances will cope. The amount a homeowner will end
up paying in principal and interest on the home mortgage
over the years can be double the amount borrowed says Greg
Johnston, senior consultant at mortgage broker Your Mortgage
Connection. That means, a $300,000 mortgage today can take
$600,000 out of your pocket. "new people coming into
the Canadian real estate market are somewhat aware of that,"
Johnston notes. |
