How the U.S. Mortgage Mess Affects Canada

If you haven't been living in a cave for the last 6 months, chances are you've heard of the U.S. mortgage issues. If you don't already have a good handle on what's going on, click here for an overview on subprime lending.

But how has this issue affected Canadian lenders? Has the problem been safely contained south of the border?

First of all, we need to differentiate between the traditional banks, and trust companies. A traditional bank takes the money that is in depositor's accounts, and lends it to people to buy property. If the bank needs additional financing, it can raise it in the bond market, by offering actual collateral (ie. buildings)

Meanwhile, a trust company works a little differently. They (generally) have no depositors, and therefore have little cash on hand. When a trust company funds a mortgage, it is then packaged up with thousands of other mortgages and sold to investors as a bond. This is referred to as the now infamous "ABC Paper". The trust company makes money on the spread between the mortgage rates, and the yield it must pay investors.

And therein lies the whole problem with trust companies. When they package these loans to sell to the secondary market, they can't find buyers. The company is forced to either a) give investors a greater yield (to compensate for the risk investors now place with mortgage paper) or b) stop lending. If the trust company chooses a, not only do they make less money, (or, maybe even lose money) but their rates will have to stay higher to try to maintain their spread. This is why you've seen variable rates come down, but longer term fixed rates stay the same.

Trust companies deal primarily with mortgage brokers. Unless the client needs a specific product from a specific lender, a broker will use the company that gives them the best rate. As a trust company, high rates are the kiss of death. Banks get lots of traffic from people who just don't know any better. Trust companies rely on mortgage brokers.

So how is this affecting the Canadian mortgage market? Over the last little while, we've seen many of the trust companies pull their variable rate products off the markets. The general consensus is that we'll see some trust companies pull out of the Canadian market completely, especially those ones owned by American parents.

The good news is that even without the trust companies, you can still get a mortgage. Canadian banks are still lending, and even our subprime lenders are still lending. There's still lots of options out there.

Posted by Nelson (403)334-5555 or click here to email

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