Another shoe has dropped in Canada’s subprime mortgage market. Xceed, formerly a major player in alternative lending, has reportedly announced it’s pulling out of the uninsured mortgage market.
Xceed will apparently offer insured mortgages only, which are much easier to resell to investors.
It’s now becoming extremely challenging for those with weak credit profiles and small down payments to get decent financing.
Many lenders who are still entertaining these deals are charging significant risk premiums (i.e. higher interest rates and/or fees). They’re doing that largely because very few investors are left in the secondary subprime mortgage market. That’s resulting in much higher costs to get a subprime mortgage off the lender’s books (so they can make room for new mortgages).
According to industry executives we’ve talk to, it could take at least 1-2 years to see competition come back to subprime lending. Many cash-strapped credit-challenged borrowers might be stuck with two options in the meantime:
a) Rent
b) Use smaller lenders with less favourable terms.
Regarding option b), don’t be surprised if subprime interest rates and lender fees soon get more expensive, despite decades-low bond yields. Short supply + growing demand = high prices.
It’s also not unreasonable to foresee an eventual resurgence of private lenders. Back in the day, they were the main source of mortgages for people who didn’t qualify with traditional institutions. Now, privates could once again become one of the only games in town.
***************************************************************************
Yes, we’ve heard stories of private lenders cutting back as well, but most of them don’t have to answer to gun-shy shareholders or institutional investors. Privates are therefore much more likely to fill the void. Just don’t be alarmed if you see more rate sheets with 12%+ interest rates and 3%+ lender fees.
Last modified: April 25, 2014
Our firm has had great success with a few of the alt lenders who use an on-book approach and do not sell off to investors. GE Money is a great example of this. They have rates and fees that are less than the other Non Prime lenders for the most part, and the lending market for these loans has not totally dried up.
Your statement…
“Lenders who are still entertaining these deals are charging significant risk premiums (i.e. high interest rates and/or fees). They’re doing that because very few investors are left in the secondary subprime mortgage market. That’s resulting in much higher costs to get a subprime mortgage off the lender’s books (so they can make room for new mortgages).”
…is a very generalized and un-informed. What is a significant risk premium? 3.25% on 95LTV? Sounds like CMHC of old doesn’t it? If you review the rates and premiums in the current non prime marketplace, they have experienced a significantly different change than the proportionate change in the ‘A’ space over the past 12-24 months. The insurers ALT-A fees have caused this mis-information (6.00% at 95%LTV), but as someone who deals primarily in SubPrime / Alt A mortgages, I feel that your statement is not totally correct, and there are still many viable and affordable options to the consumer.
Please research your info before making general statements that can be misleading and cause incorrect discussion by your readers. A good broker/agent should be selling payment and cash flow in this day and age, rahter than rate. Any monkey can sell a low rate.
Hi Elliot,
Thank you sincerely for the feedback. We welcome all points of view and appreciate your perspective.
Please note that the story pertains to “cash strapped” borrowers with “weak credit profiles and small down payments.” Small can be thought of as 5% or less. According to GE Money’s rate sheet, GE Money does not offer 95% financing unless the client’s Beacon score is above 640. That is not “weak” in the traditional subprime sense and thus GE Money is not a natural fit for the borrower the story refers to.
The sentence you quoted should have stated that “Many” lenders who are still entertaining these deals are charging significant risk premiums. The story was not meant to imply “all lenders,” so thank you for raising the opportunity to clarify and correct that point.
It is true that the lending market for high ratio subprime deals has not “totally” dried up. It’s just that the costs of borrowing have risen in most cases. Just because a lender “does not sell off to investors” doesn’t mean that their cost of capital and required ROI are unaffected by market forces.
In addition, while cash flow and payment are factors to consider, the total interest paid by the client is the primary concern in most cases. That is why interest rates and fees do matter. In some housing markets, it makes more economic sense for the above type of person to rent–assuming 95%+ financing is not available to them at reasonable terms.
All the best,
Rob McLister
Co-Editor, CMT