A Money Coach in Canada

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HouseI spoke with Beatrice Scott, a Vancouver mtg. broker with Invis about the whole subprime mess. What is a subprime mortgage? Why did it cause my portfolio to tank? (grrrrrr….). Here’s what I learned.

When a person qualifies for a mortgage, the bank of course looks at the person’s credit, profession, income and downpayment. When a person doesn’t qualify for a mortgage (usually because their credit rating indicates they struggle to make their debt obligation payments) they can sometimes turn to other companies for a sub-prime mortgage.

A sub-prime mortgage is one that charges higher interest rates (sometimes significantly higher) in exchange for taking the risk with the individual. They are usually floating interest rates, that started at 4%, but now with interest rates having risen in the States are at 8%. You can imagine the pain of having your mortgage payments double, in under 5 years!

Note: I (Nancy) personally nearly got sucked into one of these when my mtg was up for renewal. I had just started my new business 4 years ago, and (erroneously) figured a bank wouldn’t be interested in me. I saw a couple very attractive sounding adverts on TV by non-bank mortgage companies who pretty much guaranteed I’d get my mortgage. It sounded reasonable, until (money coach that I am) I read the fine print carefully. OUCH! It was, in my opinion, nearly criminal. There were all kinds of hidden fees and the way the interest was structured would have left things pretty shaky for me. Thankfully, I got a mortgage broker and discovered I would indeed qualify for a terrific mortgage through a bank.

Not everyone was so lucky. In the US 20% of all people who have mortgages had a subprime mortgage as compared to 5% in Canada. There are some significant differences in the US and Canada in terms of qualifying for a subprime mortgage. The differences are the tighter rules in Canada for this type of mortgage.

In the US last year, subprime mortgages accounted for 1 Trillion dollars. These subprime Mortgages were sold to different companies all around the world. Now, those companies are in dire straights because their clients are not able to meet their payments and are defaulting. It also means the US housing market has deflated significantly, and caused a global credit crunch – ie., institutions are less likely to lend out money, since they can’t recoup their previously loans.

Case in point: The US Federal Reserve Board decreased their lending to commercial banks by half a percent.

What is surprising is that the effect on the stock markets world wide isgreater than the actual financial implication. Investor’s emotions have played a key in their reaction to the collapse of the US subprime Mortgages.

An interesting effect here in Canada was the increase in the dollar. We had our biggest gain in the Canadian dollar since June 2006. It increased all the way to 94.22 cents.

Currently Canada’s prime lending rate is at 6.25%. Before the US subprime collapse, Canadian economists were predicting that the Bank of Canada would increase it to 6.50% in September. It is now predicted that we may not see that quarter point increase.

About the Author


Imagine if Canadians were known for being all over their money. Engaged. Proactive. Getting out of debt. Savvy. Saving. Generous. Nancy wants to help. Nancy started her own journey with money over 15 years ago, and formed her company “Your Money by Design” in 2004 to help others along the same path. It’s not the usual financial advising/investment stuff. It’s about taking control of day-to-day finances –managing monthly cashflow effectively, spending appropriately, getting out of debt, saving. If you're ready to take control over your finances, pop by her business site, YourMoneybyDesign.com

4 Comments

  1. fascinating! thanks for explaining this in terms that even i can understand!

    [Reply]

    Aug 23, 2007
  2. Nancy – just where have you obtaned your US Mortgage facts from? 1 in 5 Americans HAVE NOT had a sub prime mortgage.

    Plain and simple; less than 12 % of all US Mortgages are Sub Prime.

    A Sub prime mortgage is a loan offered to someone with significatnly less than stellar credit and employment who other wise could not obtain a conventional or government insured loan.

    The risk is offset by the rate and untill recently, the term and the reduced loan to values.

    The present crisis has been derived because these sub prime lenders had been willing to offer in some cases in excess of 100% of the purchase price and not give consideration to a borrowers ability to repay the note.

    Add the softening US real estate market, rising mortgages rates and energy costs, and you have the perfect storm.

    Please feel free to contact me if you would care to have more accurate information for your articles. I have been a mortgage originator in the US for 9 years, 18 months at a sub prime shop , 1 at a mortgage lender, six at a bank and recently a broker (because i dont have faith in the lenders).
    ___________________
    Money coach’s response: thanks for chiming in, Ricardo. I’ll refer your question about the 20% stat back to Beatrice, the Cdn. mtg broker who gave me information as a guest poster. I quickly checked Wikipedia, which also gave the 20% figure. Perhaps the Canadian definition of ‘subprime’ differs from the U.S. definition, and according to the Cdn. definition, 20% of US are indeed subprime. Alternatively, we could just have gotten the stat wrong! Note too that the blog is not usually about mortgages, but rather, various reflections on money. I like to think most articles are ‘accurate’, or more to the point, they often are a little more reflective, so the accuracy issue doesn’t arise. In this case also, the point of the post was oriented more to the way in which subprime mortgages have effected our portfolios. Do feel free to chime in again on other posts!

    [Reply]

    Aug 24, 2007
  3. Thanks for the comment on the stat for how many people in the US hold Sub Prime Mortgages. I got my stat that 1 in 5 people hold a subprime mortgage in the US from a national Canadian Newspaper called the Globe & Mail and I found it on their front page last Sunday. It isn’t the first time that number has been quote in Canadian Financial News.

    An interesting side line…………. I have two nonbank lenders this week scale back on their subprime mortgage lending products. These lenders sell off their subprime mortgages once they are issued and the impact in the US is now being felt here in Canada. Emotions are definitely playing a role in our Financial Markets. The appetite for these subprime mortgages by investors is decreasing.

    [Reply]

    Aug 24, 2007
  4. tinfoiling

    The effect on the stock market is not surprising. National Bank and othesr have been flogging packages of this type of lending to large businesses. So if a treasury department of a large company has $45 million to park for a short term he/she looks pretty good getting an 8% return instead of 4%. That looks good for the department, and maybe it’s bonus time at the end of the year. But the old adage – higher returns also come with higher risk is not remembered. And we always trust sound and secure banks. So now the treasury department needs the parked cash and guess what? No body wants the paper. Crunch – with the effect on the stock market as now we see a lot of businesses possibly having done this.
    Now the injured will be screaming for help. And the prudent will pay. The Fed probably cut their rate hoping it will help. There are going to be some interesting decisions in the new few months.

    [Reply]

    Aug 24, 2007

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