MORTGAGE: Thousands risk losing their homes

As many as 25,000 Canadian homeowners who consistently met their mortgage payments could lose their homes unless Ottawa or other financial players help supply capital to the struggling subprime lending market.

A loose network of about 12 alternative mortgage lenders began lobbying the Prime Minister's Office and the Department of Finance in January about what they say is a looming problem: An estimated $3-billion to $5-billion worth of subprime mortgages are coming up for renewal over the next four years, and the lenders say they can't renew them because capital has dried up for higher risk borrowers.

"These are hard-working Canadians who could face foreclosure on their homes if they are unable to renew or find mortgage financing," said Paul McGill, the CEO of the N-B Group, an alternative mortgage lender that has been spearheading the campaign.

These mortgages were arranged in the headier times of the early 2000s, when investors easily bet money on complex securities backed by mortgages. Many investors were comfortable investing in securities with subprime mortgages because of the higher returns these investments offered. The torrent of money flowing into securitized investments, such as asset-backed commercial paper, allowed a new generation of lenders such as Toronto-based Xceed Mortgage Corp. and U.S.-based Accredited Home Lenders Inc. to offer mortgages to people with credit score blemishes.

When the global credit crisis struck in August, 2007, investors fled mortgage-backed securities, forcing subprime lenders to turn to more conventional securities such as Canada Mortgage Bonds, which the Canada Mortgage and Housing Corporation administers. Because Canada Mortgage Bonds require borrowers to meet higher credit standards to qualify for their investment program, subprime homeowners who got mortgages a few years ago are on the verge of being orphaned.

Executives with subprime lenders said that they have been unable to tap alternative sources of financing for the stranded borrowers.

Unless Ottawa steps in to help to support the homeowners, for example by buying or backstopping the loans, they warn that thousands of homeowners will lose their homes through foreclosure or power-of-sale proceedings

"The bottom line is, these people made their payments," Mr. McGill said in an interview, repeatedly stressing that the number of affected homeowners in Canada – tens of thousands – pales in comparison to the subprime lending crisis in the United States. "It's not dismal. It's a problem that needs to be addressed."

Ottawa has put forward no formal proposal, Mr. McGill said, adding that he couldn't specify what kind of solution the lenders have in mind because the process is at such a preliminary stage.

Some subprime lenders, such as Xceed Mortgage Corp., say they have been forced to start foreclosure proceedings on customers who were current with their payments for this very reason. Ivan Wahl, chief executive officer of Xceed, said the company has initiated foreclosure proceedings against 200 homeowners, mainly in Ontario and Quebec, because the company was unable to find new money to lend to them.

He said another 1,200 of his company's mortgage customers will be in a similar predicament over the next four years.

"They upheld their end of the bargain by making their payments. It would be fantastic if Ottawa stepped in, even temporarily, to help provide capital. The initial indications are that [federal government officials] are receptive."

Two weeks ago, The Globe and Mail reported that foreclosures in Alberta and British Columbia have spiked, with Alberta's foreclosures on pace to double from two years previous – to 5,300 in the first 11 months of 2008-2009 from 2,510 in 2006-2007. Subprime lenders initiated about half of the foreclosures in Western Canada in 2008, although they held, at peak, only about 5 to 7 per cent of the market share. It's not known how many of these foreclosures were launched against homeowners who were up-to-date on their payments.

("Lenders seek Ottawa's aid as thousands risk losing their homes" prepared by Greg McArthur and Jacquie McNish/Globe & Mail)

In the current depressed housing market, foreclosures can be devastating to lenders because they can be forced to sell homes for less than the value of the mortgage debt.