Sub Prime Market in BC

Many people think that the Sub Prime Mortgages will effect our British Columbia Real Estate Market. A recent article by British Columbia Real Estate Association (BCREA) sheds some light on the Sub-prime issue.

At MyMortgageBC.com only a very small percentage of the business that we do is ever considered a candidate for sub-prime. As mortgage brokers we always try obtain a mortgage for our clients through a conventional lender.

Sub-prime primer

• Sub-prime mortgages are mortgage loans to borrowers who have tainted or bad credit histories. While the terms and conditions of sub-prime mortgages can vary widely, one common form offers an introductory two-year term interest rate before resetting to a much higher interest rate (the combination of the index rate plus a margin).

• In Canada, a prime mortgage is known as a conventional mortgage; Canadian prime mortgages are comparable to US prime mortgages. A home-buyer with a down payment less than 20 per cent (high ratio mortgage) needs to secure mortgage insurance like the kind provided by Canada Mortgage and Housing Corporation (CMHC). Conventional and high ratio mortgages in Canada and the United States use similar underwriting practices. However, sub-prime underwriting is far less comprehensive south of the border, creating a higher risk. US sub-primes don’t require mortgage insurance.

• The benefit to the borrower is that the initial two-year period allows them to build credit and, as long as home prices rise quickly enough, the increase in equity allows them to refinance with a prime mortgage instead of suffering the consequences of the interest rate reset.

• Mortgage funds for sub-primes are typically raised from investors. Sub-prime portfolios are often repackaged according to risk and resold. The so-called credit crunch is a result of the inability to raise funds from investors in light of sharply rising defaults. The most popular mortgage-backed securities in Canada are pooled mortgages that are fully backed by mortgage insurance from CMHC.

• Approximately 20 per cent of US mortgage origination’s are of the sub-prime variety. Falling home prices combined with a wave of interest rate resets have dramatically increased the number of American borrowers in arrears and facing foreclosure.

• The US mortgage industry is different than Canada’s when it comes to sub-primes. Canadian sub-prime mortgages represent less than 5 per cent of mortgage origination’s, and less than one in four of them have more risky variable rates. While US home prices are falling on average, home prices in Canada continue to rise. The economic fundamentals in Canada remain strong.

• The impact of the US sub-prime problem likely won’t directly impact BC home-buyers. Prime or conventional mortgage funds in Canada are not facing problems with liquidity. US sub-prime defaults are expected to peak in the first quarter of 2008, as the largest number of interest rate resets will occur at that time. Longer term, lower US consumer confidence has the potential to indirectly impact BC households through a possible reduction in the quantity of BC’s exports and slow growth in tourism.

If you any questions regarding obtaining a mortgage don't hesitate to contact Brent Irving at 604-764-6336.