Spin, spin, spin.

I listened to one of the Big Bank economists being asked by a reporter why the US housing market crashed and ours is still full of air. ‘Lending practices,’ she said. In Canada, mortgage lenders are ‘more responsible.’ No subprimes here, baby. Just good, honest, debt-fearing, practical, realistic lenders and humbled borrowers.

We now go directly to one of those lenders, a guy who this week lost a client. In this email, he tells me why:

The client wanted to purchase a new home for $320 000.  They owned their duplex clear title which had an assessed value of $220,000.  They’re a young couple with four children and an annual income from employment of $24,000. Government cheques for the children brings another $12000 into the household.

Reading your column daily Garth, I wanted to tell them to run the other way but they were referred to me by a builder and realtor who I have done business with over the years and I have bills to pay too.  Sounds like an impossible deal in this market, but not so…

The first lender approved an equity take out mortgage for the downpayment on the duplex for a mortgage of $160,000…no appraisal required. All info was disclosed to the lender with respect to the  intended use of the funds and the additional payment the  client would be making on the  mortgage for the 2nd home.  The rate offered 2.65%…5 year variable.

The 2nd application went to a different lender as a 50% loan to value ratio mortgage.  Due to the downpayment, no income verification is required. Both mortgages approved. Again, a $160,000. mortgage at 2.65%.

Unfortunately for me, the client sensed my reluctance to proceed and fired me….first time this has ever  happened to me.  She went to the same lender where I had arranged the mortgage for the purchase and proceeded with them directly.

Evidently reading your blog is bad for my business.   The reality is this,  The duplex assessed at $220,000 is probably worth 185,000 in today’s market.  The lender who offered the first commitment will have the mortgage insured by CMHC with no cost to the client.  The lender will pay the fee. Net monthly income for the client $1000 (government) $1500 (employment) $1000 (rental of duplex) = $3500.

Monthly payments Mortgage P & I are $1167.  Taxes $400  Hydro $125.  Gas $200. Phone $80. …and they have $1500 left over for  Groceries, school supplies, shoes, clothes, prescriptions, vehicle repairs, home repairs, cable TV,  internet, etc..per month for a family of six.   Take another $368 off that if prime goes up just 2%.  Or worse, have   the duplex vacant for a month and disaster will ensue

Evidently I should seek new employment…any suggestions?

Summary: A family of six with an income below the poverty line has just qualified for not one, but two mortgages of $160,000 – enabling them to buy a home they clearly can barely afford with a mortgage rate of 2.65%. Two separate lenders approved this family. No income verification. No appraisal.

Now, let’s review how this is different from subprimes in the US:

• Of course, in that crazy country, mortgage loans were made to people with very low incomes who could never actually pay them back.

• In the American real estate bubble, irresponsible lenders would dump money on borrowers based on what they were buying, not who was buying. The assumption was house prices would go up, so who cared if the schmucks were over their heads?

• In the States, there were those cruel ‘teaser’ loan rates which meant people could afford to carry a home for a while until interest levels inevitably rose and they lost everything.

• American lenders, greedy and myopic, considered mortgages to be assets, and pushed them out the door not even bothering to verify incomes or property values.

• And subprimes flourished because lenders could transfer the mortgage risk to investors who bought the loans, thinking they were Triple A assets. In Canada, risk is transferred to taxpayers through CMHC.

So, see? No comparison.

I heard it on TV.