Saturday, April 4, 2009

The significance of the alternate lenders failing


Yesterday we talked about how 12 alternate mortgage lenders were unable to secure funding with the credit collapse. Now they were unable to renew over 25,000 Canadian mortgages as they came due.

The 12 alternate lenders have gone to Ottawa to ask for financial assistance warning that - despite the fact all 25,000 Canadian homeowners have never missed a mortgage payment - the companies would have to begin initiating foreclosure proceedings against homeowners because the company was unable to find new money to lend to them.

These 25,000 Canadian homeowners were lenders who had been unable to secure loans through the traditional banks due to income or credit histories.

This story is just the start of what is coming. The fact of the matter is that Canada hasn't begun to feel the impact of housing crisis yet. This has lead many to smugly believe that Canada will not feel the same effects as the United States.

They are wrong.

The process in Canada is just getting underway. The depreciation in Canadian Real Estate didn't get started until one year ago, March 2008.

In the United States, the process has been playing out for several years. It started in 2005 and, contary to popular opinion, it didn't start with the subprime crisis. What started the problems was a MINOR collapse of about 10-15% in the value of real estate in several of the bubbly cities in Florida and California.

When mortgages came up for renewal in those cities in 2006, a calvalcade of foreclosures was triggered because those with subprime arrangements couldn't renew their mortgages in their underwater condition (the market value of their house was worth significantly less than the remaining mortgage amount).

This put even more downward pressure on real estate values. When regular homeowners with non-subprime mortgages went to renew, they couldn't. They were also too far underwater with the market value of their property.

This forced even more foreclosures and a massive domino process then devestated property values.

But it took a year before the problem even surfaced and another two years to play out after that. That same process is now starting in Canada.

Prices started to slide in March 2008. It takes about a year for risky mortgages to start to reveal themselves as they come up for renewal. Yesterday's post outlined that, not only do similar risky mortgages exist in Canada, but they are about to be placed in a foreclosure position.

It's playing out here exactly as it did in the United States.

The current price drops we have experienced from March 2008 until March 2009 have been caused by the collapse of the worldwide economy - not mortgage problems.

That collapse took away the wealthy Americans, Europeans and Asians and forced them to liquidate their Vancouver properties. This caused a drop in real estate values which, in turn, took the ever rising market out from underneath the local speculators... further exacerbating the price drops.

Until now the only mortgage-related stories we have seen are speculators unable to secure mortages for pre-sales contracts, placing them in defaut of their pre-sale contracts.

Only later this year will we really begin to see the real impact of mortgage issues on our real estate scene.

It won't become visible until later this summer/fall as the absence of these alternative mortgage suppliers leads to a further drop in real estate prices of another 5-10%.

Then the next mortgage domino will fall.

The 0/40 crowd and the 5% down group of home buyers who bought in 2004, 2005 and 2006 will surface. Most took out five year mortgages with the traditional banks. Those mortgages are coming up for renewal starting later this year.

Unless real estate values start re-inflating dramatically, these people will be in a serious underwater position of 15%-25% with their outstanding mortgage compared to the market value of their home.

TD, Royal, Scotia, BMO and CIBC will not renew their mortgages while they are in that kind of underwater state.

You simply cannot walk into a bank and receive a $600,000 mortgage on a property with a market value today of $480,000 (20% less). It doesn't matter that you have a spotless five year mortgage history of never missing a payment - it's just not going to happen.

And with the evaporation of the alternate mortgage lenders, it means Canadians won't have another avenue of securing a mortgage renewal after being denied by the regular Canadian banks.

This is exactly the way it played out in the United States between 2005 - 2009.

And now it is starting to play out here.

1 comment:

  1. Very well presented. Unfortunately, I can't see any reason why things will not play out the way you describe. I'm battening the hatches, it just seems prudent.