Monday, April 23, 2012

Big Banks Exit Nonprime Market

Nonprime (isn't that a nice word? so much less scary than "subprime") is a $200 billion market, making it 18% of the total mortgage market. Canada’s big banks flee nonprime market amid signs of housing downturn
Canada’s banks have been exercising more caution on higher- risk mortgages after Bank of Canada Governor Mark Carney warned that record household debt remains the biggest domestic risk to the economy. Carney this week signalled the potential for interest rate increases that would cool off a housing market that has seen prices almost triple in some Canadian cities over the past decade.
“We see opportunities with people that are really high- caliber borrowers with good proof of income, but their circumstances are a little different,” said Chairman and Chief Executive Officer Gerald Soloway, who was interviewed with Reid. “We haven’t had to go down the credit scale; we’ve been able to go up the credit scale, which is an unusual phenomenon.” (bold mine)
This is interesting. Is this a fully risk off effect sending quality borrowers into nonprime credit issuers, or is the market itself also sending them there?

Above is the Economists Clicks and Mortar chart showing rents versus price. You have a choice in the Canadian market, rent and accept the subsidy the market provides when the landlord is banking on ethereal future price gains, or buy and accept paying more for shelter. In the past when prices were in line with rents, high quality, non-traditional borrowers could afford to purchase using their own means (cash, loans from relatives, posting other collateral). Given the elevation in prices, high leverage is now the only way into the market.

Toronto-Dominion Bank, the country’s second-largest lender, stopped originating non-prime residential mortgages as of March 31, spokesman Mohammed Nakhooda said. The loans, offered through TD Financing Services Home Inc., represented about 0.2% of the bank’s mortgage portfolio.
“This decision was based on a number of factors, including a regular review of our secured lending risk management strategies,” Nakhooda said. “To remain competitive in the business in the current environment would require us to increase our risk profile, something we concluded was no longer in our risk appetite.”
Interesting counter opinion on these borrowers. The nonprime lenders are looking at ability to repay (look at these great customers they are sending our way!) and the banks are looking at collateral (any decline in prices and this mortgage is underwater so we aren't writing this unless the taxpayer backs it). They can both be correct and 180° differing in opinion.
Home Capital had record profit of $190.1 million last year and adjusted return on equity of 27%. It was the 14th- straight year the company had a return on equity of 20% or higher.
“I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble,” said Soloway. Economists predicting a collapse in Canada “have been wrong for years; my prediction is that they’re going to be permanently wrong.”
Future footnote: It was great while it lasted.

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