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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. If you are looking to invest in Canadian real estate or you are from Canada looking for U.S. real estate investments, click here for our blog.

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.