US crisis deepens, going into 3rd year. Today’s Breaking News.
‘Fabricating income’ a driving market force
The letter below came to me a few hours ago from Dave, a mortgage broker somewhere in Canada. He expands on my statements and belief that Canada does, indeed, have a serious ‘subprime’ mortgage problem. The consequences could be as far-reaching as those now being lived through by American homeowners. Rest assured, there will be plenty of blame to go around — Garth
I truly enjoy reading your very honest and candid opinions regarding the upcoming Canadian Real Estate market.
I have been arranging mortgages for the last 18 years in Canada, brokering for the last 12 and have seen many changes in the industry.
However, find it absolutely shocking that most Canadians donâ€™t think we even have a Subprime market in Canada.
The introduction of the 40 year amortizations, true no money down financing and stated income programs allowing clients to fabricate their income and purchase with 5% down are truly the driving force in the market. Do I agree with these programs? Noâ€¦. But these programs have seemed to become acceptable by the Bankâ€™s and the public as the new industry standards.
I honestly donâ€™t think the public even understands what a â€œSubprimeâ€ Mortgage is.
It never gets defined.
Does it only pertain to clients with blemished credit? Or is it the inability to provide documented proof of their actual income or completed tax returns?
Yes I think those qualify and maybe that was where this all startedâ€¦ But I now believe that the subprime market has evolved into a new much more diverse demographic. And what is most discerning is the fact the many consumers may not even be aware that they are now a part of this market.
My own personal definition of a subprime mortgage is one that is detrimental to the financial wellbeing of the end user. Now this may sound very generic, but the following will explain why:
The newest edition to the subprime market is those who are being attracted to allure of homeownership, but necessitate the requirement of the extended amortizations, and extended GDS and TDS ratioâ€™s to qualify.
The Bankâ€™s and Mortgage Insurance companies (CMHC and Genworth) have previously maintained 32% GDS and 40% TD ratios for as long as I have been providing mortgages, since 1990. However there are significant gaps in the credit application which is significantly understating expenses. Back in the early 90â€™s gas prices were half of what they are today, food cost, income taxes, heat and hydro would have been about 1/3 the cost today. But in recognition to these increases in expenses, what does the Banks and CMHC do?? Increase the GDS on exception to 42% and TD to 45%. Also the banks only require a monthly figure of $100.00 per month for heat as the sole supplemental expense relating to home ownership outside of the mortgage and property taxes and 50% of condo fees. No other expenses are being included. Well I live in a 2000 sq ft home and in the Winter my heat and hydro bills combined are coming in close to $400- $500 per month. Certainly not the $100 allotted by the banks. Now with high priced Cell phone bills, high speed internet, and the latest HD cable, most consumers are faced with a $200 â€“ 300 a month expense, also not included. Car insurance, I know some families with young drivers that are now paying close to $800 per month for insurance or if they have a less then perfect driving record. Finally, the clients commute to work; I had a client who was driving from St Catherines to Toronto 5 days a week. At todays gas prices and parking costs, easily an additional 500.00- $600 per month expense. Again not on the application. Now one can say that some of these are luxury items, however for the majority of people these are real expenses which have to be maintained in addition to the new mortgage payment.
So my first addition to the subprime market is any consumer who has not factored in these additional expenses, is running with a GDS and TDS above the original 32% and 40% and has had to extend their amortization beyond 25 years. In all honesty the Banks and Mortgage Insurance companies in recognition of these neglected expenses should be reducing GDS to 28% and TDS to 35%, this would give people a fighting chance to afford these additional expenses.
I find it amazing that the number of children a family has does not effect servicing. If you have no children or 6, the application is exactly the same. I have 3 children ages 13,10 and 7 and my monthly food bill now tops $1000 per month and yet this expense does not appear on the application. Fortunately I no longer require daycare, but at one point I was paying in excess of $1000 per month for that as well. And yet that expense does not appear either. Families with young children are likely paying out $2000 per month in daycare, food, diapers, clothing that has not been factored in as an expense. Now letâ€™s also look at a parent on a maternity leave who is now receiving usually less then half of the income for a full 12 monthsâ€¦..during that same period of added expense. Guess what, the bankâ€™s will approve a mortgage based on the full income.
So my next addition to the subprime market is the young Canadian family.
The newest stated income program, one example of this is the Genworth â€œALT A programâ€.
Which allows someone with a good credit rating who has been self employed for at least 2 years with conformation of no income taxes owing, can overstate their income to an amount that is justifiable to the bank for the job they are doing. This is a very gray and ambiguous area. If you happen to be a lawyer or a doctor, they will permit much higher stated incomes due to the fact that there are people in those professions making a lot of money. If you are operating a small business at home then their tolerance for six digit stated income is a little less likely. But never the less the clients are being approved based on income that they are not earning, nor have they ever earned that income, and at the same time they are amortizing these same mortgages based on a 40 year amortization, very low payment. In some cases client is more than doubling their actual income. Just because they have good credit, they are permitted to overestimate their income.
So this is my last addition to the subprime market, are self employed individuals who are significantly overstating their actual income to qualify for their current debt loan, plus the new mortgage payment.
Now there is one thing in common with all three of these groups, all three potentially have very good credit. Not your typical subprime mortgage customer. But guess what, over 85% of my applications since January of this year would fall in these categories. All of these clients could find themselves supplementing their monthly expenses with credit cards and or credit lines.
So, is their a subprime market in Canada? Yes and it is growing at a very rapid pace.