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Higher-risk mortgages continue to grow: CIBC
DAVID PARKINSON
Globe and Mail Update
More Canadians are landing mortgages without having the sort of credit records or income profiles lenders have typically demanded in the past and it looks like an accelerating trend, CIBC World Markets said in a report Tuesday.
CIBC economist Benjamin Tal said the market in Canada for so-called “non-conforming mortgages” — those lent at relatively high interest rates and fees to consumers who lack a strong credit history, proof of a steady income and/or significant assets — is still relatively small, accounting for about 5 per cent of all mortgages, compared with 22 per cent in the United States. However, this market segment surged by 50 per cent in the first half of 2006 compared with the same period a year earlier, enabling 85,000 Canadian households “who otherwise would have been shut out of the market” to purchase homes, he wrote.
“Overall, look for originations in the non-conforming market to rise by an annual average of 20 per cent in the coming five years — more than double the pace expected for prime mortgage lending,” he said. (Prime mortgages are those lent to customers with good credit, assets and income.)
That pace of growth will double the size of the Canadian non-conforming market in five years, to about 540,000 households holding non-conforming mortgages, Mr. Tal said.
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While the growth of the segment may pose risks for lenders, Mr. Tal suggested consumers stood to benefit from the expansion of the non-conforming mortgage market.
“Competition in this segment of the market will only intensify in the coming years, in the form of aggressive marketing tactics, price competition and innovation in product design,” he said. “The growth in the non-conforming market will introduce even more pricing tiers and product types, which will help move the mortgage market closer to a pure price-rationing or risk-based pricing state.”
Mr. Tal attributed the growth in this non-traditional lending segment to the entry of new lenders into the market and the adoption of U.S. business models by Canadian lenders. He added that the growth of mortgage brokers — of which there are now almost 10,000 in Canada — has lowered costs for both borrowers and lenders, and allowed smaller lending entities to reach more potential customers than they would have otherwise.
The growth in the segment has even convinced the big banks to get into the act, in pursuit of customers they had previously avoided. Bank of Nova Scotia acquired non-conforming mortgage lender Maple Trust earlier this year, while Toronto-Dominion Bank bought a sub-prime car-loan company, VFC Inc.
“We do not suggest that the current fantastic pace of growth in the non-conforming market is sustainable, nor do we expect its share to reach the level seen south of the border,” he said. “However, it appears that in the foreseeable future these non-conforming mortgages will remain by far the fastest-growing segment of the mortgage market — propelled by increased numbers of sub-prime players and the growing role of mortgage brokers in the Canadian market.”
Mr. Tal said the projected slowing of the Canadian economy over the next year, and the likely subsequent increase in unemployment and consumer bankruptcies, will only serve to expand the customer base for non-conforming mortgages. He noted that the segments of the Canadian market with the highest prevalence of non-conforming mortgages — Atlantic Canada and rural areas — are characterized by income volatility and relatively high unemployment. (High cost of housing doesn't seem to be a major factor: British Columbia, which has the worst housing affordability score in the country, also has the lowest rate of non-conforming mortgages.)
While this suggests an increasingly risky market for lenders, Mr. Tal argued that it is a misconception that non-conforming mortgages are, by definition, higher risk. He said that in the U.S. market, almost 70 per cent of non-conforming mortgage loans have an “adequate or better” credit score, implying that while the bulk of customers lack “proper proof of income,” they nevertheless are a solid credit risk.
However, the risk to lenders is substantial in the lowest-rated portion of the non-conforming market, the so-called “sub-prime” category, where borrowers have poor credit history, a low asset base and relatively high debt. Mr. Tal said this group accounts for just 30 per cent of the U.S. non-conforming market, but almost two-thirds of the losses in the business, and its risk of default is six times higher than that for prime loans.
Source http://www.theglobeandmail.com/servlet/story/RTGAM.20061010.wsubprime1010/BNStory/Business/home |
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