The large Canadian banks have always lent responsibly, and even now are tightening lending conditions, but this doesn’t appear to be the case with Canada’s growing sub-prime mortgage industry.
According to latest figures from the Canadian Real Estate Association, the number of home sales rose by 2.5% in March, with the average Canadian property selling for $369,677 which is slightly less than figures seen a year ago. However the last two years have seen strong gains.
The worry is that much of this growing boom has been due to more money being lent outside the major lenders. Most Canadian mortgages are insured by the Canada Mortgage and Housing Corporation (CMHC) which is a Crown Corporation set up to oversee the Canadian housing market. In 2010 and 2011 the Department of Finance changed the rules over who could qualify for a CMHC insured mortgage, and responsible Canadian banks won’t touch any loans that can’t be insured by the CMHC.
It’s thought the number of borrowers who are failing to qualify for CMHC insured loans could be as high as 20%. This has led to a growth of other lenders such as Equitable Group, Home Capital Group, and Counsel Corp who are stepping in to fill the gap, giving out the so-called sub-prime mortgages. At the end of last year the housing market in Canada was worth around $1.1 trillion according to Bank of Canada estimates, and it’s thought the sub-prime mortgage market could be as large as $85 billion, or nearly 10% of the market. Others put this figure even higher and think it could be as much as 20% of the market.
People applying for these types of mortgages include the self-employed, those without any credit history, and recent immigrants, and their numbers are growing. Some people think such mortgages aren’t strictly sub-prime, as many people running successful businesses would still fail to qualify for mortgage. Although Canada’s sub-prime mortgage market could be the same size as seen in the US in 2004, Canada is unlikely to be at such a high risk of the market imploding as mortgage securitization isn’t nearly so widespread.