Facing Foreclosure

FinanceMortgage & Debt

  • Author Alex Vitti
  • Published January 26, 2010
  • Word count 752

For the past three years, Lisa Matthews has never missed a mortgage payment - handing over $292, like clockwork, every week.

But if nothing changes, a bailiff, acting at the request of her mortgage lender, will ring her doorbell and tell Ms. Matthews, her two daughters and her boyfriend to vacate the two-storey house for good.

"This was a pure slap in the face," said Ms. Matthews, a 36-year-old clerk with the City of Hamilton, who was recently told that, despite her perfect payment record, her mortgage will not be renewed at the end of its three-year term.

Ms. Matthews is one of many Canadians being abandoned by a breed of alternative lenders that have stopped lending to customers, who, because of poor credit scores, lower-paying jobs, or minimal home equity, couldn't obtain financing from a traditional lender, such as a bank.

Everyone from the chief executive officer of Ms. Matthews' lender, Xceed Mortgage Corp., to senior officials in Ottawa, agree that borrowers such as Ms. Matthews, who have dutifully paid their mortgage bills, are being unfairly stranded. What they can't agree on is how many Lisa Matthews are out there.

Records obtained under the Access to Information Act show that a lobby group representing these lenders has warned the federal government that, unless taxpayers offer help, they will be forced to foreclose on as many as 30,000 homeowners over the next three years.

These "orphaned mortgages," as the industry is calling them, are held by customers who have impeccable payment histories.

But they can't be renewed because the credit crunch has shut off the funding pipeline of non-bank lenders, the lobby says.

This wave of forced sales and evictions will hit its crest this coming year when nearly half of these mortgages - most of which were issued during the real estate boom of 2007 - will not be renewed, the mortgage companies say.

Executives with alternative mortgage companies say they cannot renew the stranded mortgages because the once-thriving securitization market that attracted investors to these risky - and lucrative - mortgages collapsed in the wake of the U.S. subprime mortgage crisis. To replace the lost pool of capital, lenders are asking the federal government to back a special billion-dollar fund that would renew the healthy mortgages of borrowers who do not qualify for loans from traditional lenders.

Finance Department officials, however, have responded to the lobby group's alarm bells with caution and questioned their estimates, according to sources close to the negotiations. These sources say Ottawa is frustrated that some of the companies in this small segment of the Canadian mortgage market have been unwilling to hand over data so the problem can be fully assessed, one source said.

"The government thinks this group is asking for help for itself," said the official close to the talks, which bogged down this summer. "Had they been willing to co-operate with the government and provide that information, some sort of program could have been designed. But you can't design a program on anecdotes."

The roots of the problem can be traced back to the housing and lending heyday of half a decade ago, when an assortment of "non-conforming," or subprime mortgage lenders launched operations. Some, such as Xceed and Mississauga-based N-Brook Mortgage Group Inc., had roots in Canada, and others, such as San Diego-based Accredited Home Lenders, migrated from the saturated subprime market in the United States.

Many of these mortgage companies aren't federally regulated so, unlike a bank, they aren't required to insure mortgages when the down payment is equal to less than 20 per cent of the value of the home. And unlike banks, they could - and often did - give loans to people who couldn't afford a down payment. After extra fees were piled on, some of these mortgages added up to as much as 104 per cent of the value of the house being purchased. Interest rates hovered as high as 11 per cent.

Within a few years, this sort of lending started to explode and the new players quickly took hold of 5 per cent of the Canadian market.

But when the financial crisis struck last year, and "subprime" became a dirty word, the pension funds and investment banks that these companies relied upon to fund their mortgages, spurned them. Investors that previously had a ravenous appetite for securities backed by high-risk mortgages were now demanding their money back from companies like Xceed. These investment windows are closing at a time when thousands of mortgages, like Ms. Matthews' loan, are coming due.

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