The problem with "alternate" mortgages

Greg McArthur and Jacquie McNish

Globe and Mail Update Published on Sunday, Dec. 06, 2009 8:06PM EST Last updated on Monday, Dec. 07, 2009 7:29PM EST

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.

Few of the low-income borrowers who were targeted by alternative lenders gave much thought to where their mortgage money was coming from.

"The way we understood it, as long as our mortgage was paid, they would just
renew it. The joke was on me," said Joyce Marentette, a cook in Chatham,
Ont., who was also told last year by Xceed that she would have to find other
financing, when her three-year term came up.

The problem is more acute in depressed areas such as Southwestern Ontario and parts of Alberta, where there are fewer private financiers and property values have sagged, industry insiders say.

Mortgage brokers in Ontario cities such as Windsor, Chatham and St. Thomas say they regularly receive frantic phone calls from homeowners who are shocked to receive a letter explaining that their mortgage won't be renewed.

"We're not talking about a scoundrel that brought it upon himself. These are people that didn't do anything wrong," said Joel Katz, a Windsor mortgage broker. Mr. Katz said he believes the issue isn't on the government's radar because this type of lending accounted for such a small segment of the market compared with the United States. "The problem wasn't as big here, and there are people who are getting stepped on and overlooked."

But exactly how many people are being "stepped on?" Public records in Canada
are so scarce, it's impossible - even for lawmakers - to know for sure.

Ottawa relies on Canada Mortgage and Housing Corp. for data, but because none of these subprime players insured their mortgages through CMHC, the public agency knows very little about their state of their books. One source close to the Finance Department said officials at the Crown corporation figure that stranded borrowers account for only "a tiny sliver" of the country's homeowners.

Paul McGill, president of mortgage provider N-Brook and spokesman for the
mortgage lenders lobby, argues Ottawa is understating the problem. He said he has supplied federal officials with data showing that $1.7-billion of healthy mortgages could be stranded and that these borrowers lack high enough credit scores to qualify for loans from more conservative lenders.

Mr. McGill said federal officials responded by asking mortgage lenders to supply extensive borrower details such as marital status and garage dimensions. Mr. McGill said the requests would have cost too much time and money to fulfill. Lenders have scaled back their proposal to call for a $1-billion Ottawa-backed fund that could renew stranded mortgages. He said Ottawa has not been supportive.

In response to questions, the Finance Department issued a statement saying: "The government is monitoring housing and mortgage markets in order to ensure they remain stable, strong and competitive."

Far away from the push and pull in Ottawa, Ms. Matthews has put her house up
for sale. A handful of prospective buyers has wandered through, but she has
received no offers. A few weeks ago, she received a letter from Xceed's lawyers, explaining that she owes the company nearly $128,000. This means that, despite paying Xceed about $40,000 over the past three years, she now owes $1,000 more than she originally borrowed.

When she opted to buy her first home, she had to get over the hurdle of her low credit score. An unpaid student loan had caught up with her. She had no down payment, and paid a 9.15-per-cent interest rate with Xceed.

"I just thought they were my foot in the door," she said.

Ivan Wahl, Xceed's CEO, said his company has identified 1,100 borrowers that his company will maroon over the next three years. For those people "it is an absolute disaster," he said. Despite his sympathy, he says he is contractually obligated to pay Xceed's investors, which means demanding full payment at renewal time. "The government certainly should step up to the plate to provide some facilities for people who got caught in the crunch."

Ms. Matthews said she doesn't expect the government to do anything for her, and is reserving her frustration for Xceed. She said the companies involved should be giving their customers more warning about their inability to renew. She received a warning letter 31/2 months before her mortgage matured.

"If I knew it was going to end like this, I never would have done it."