In the first half of this year, as the subprime mortgage crisis was exploding in the United States, a contagion of U.S.-style lending practices quietly crossed the border and infected Canada's previously prudent mortgage regime.
New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.
The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened.
Just yesterday, Finance Minister Jim Flaherty repeated the mantra that the government acted early to get rid of risky mortgages. What he and Prime Minister Stephen Harper do not explain, however, is that the expansion of zero-down, 40-year mortgages began with measures contained in the first Conservative budget in May of 2006.
At the time, Mr. Flaherty announced that the government was opening up the market to more private insurers.
"These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership," Mr. Flaherty said.
The new rules encouraged the entry of such U.S. players as American International Group - the world's largest insurance company - and Triad Guarantee Inc. of Winston-Salem, N.C. Former Triad chief executive officer Mark Tonnesen, who spearheaded his company's aborted push into Canada, said the proliferation of high-risk mortgages could have been mitigated if Ottawa had been more watchful.
"There was a lack of regulation around the expansion of increased risk," he said.
Virtually unavailable in Canada two years ago, high-risk mortgages proliferated in 2007 and early 2008 and must now be shouldered by thousands of consumers at a time when the economy is sinking quickly and real-estate prices are swooning. Long-term mortgages - designed to help newcomers get into the housing market sooner - are the most expensive in terms of interest costs, and least flexible when mortgage-holders cannot meet their payments and need extensions.
The Bank of Canada this week warned that the perilous economy could lead to a doubling of so-called "vulnerable households" - those unable to meet their debts - and perhaps cost thousands of Canadians their homes. The central bank, which is always cautious with its words, said in a report that there is the potential for "a substantial increase in default rates on household debt."
The federal government waited until June of this year to slam the regulatory door on 40-year mortgages. In October, as the global financial crisis erupted, Mr. Harper lauded his government for its "early" response to the mortgage dangers.
"In the U.S., they are still responding to the fallout of the subprime mortgage mess. In Canada, we acted early over the past year," Mr. Harper said in a speech to the Empire Club in Toronto.
He didn't say that, not only did his own government open the sheltered Canadian mortgage market to U.S. insurers, but it also doubled to $200-billion the pool of federal money it would commit to guarantee their business. The foreigners unleashed what one U.S. insurance executive described as a fierce "dogfight for market share" that prompted rivals, including the giant federal agency Canada Mortgage and Housing Corporation, to aggressively push such risky U.S.-style lending.
An investigation by The Globe and Mail found:
- AIG's Greensboro, N.C., mortgage subsidiary launched a quiet lobbying campaign in 2004 with senior U.S. executives and a former CMHC official to push open the doors to Canada's mortgage insurance market, where some of the world's highest insurance rates are charged. Two years later, on May 1, 2006, AIG's mortgage insurance division registered with the lobbying commissioner's office. It was the day before the federal budget revealed new players would be allowed into Canada.
- Banking and insurance officials were so concerned about the alarming rush to 40-year mortgages at the beginning of 2008 that one bank executive warned the Bank of Canada's chief financial stability officer, Mark Zelmer, in a meeting that "the government has got to put an end to this."