No "ninga" mortgages, but Canada gets more options

It's difficult to imagine what lenders and brokers were thinking when they dreamed up the shaky mortgage products that set off the U.S. housing collapse.

Take the "Ninja" mortgage, for example. That's the catchy phrase one lender used for the "No income, no job, no assets" home loan for which just about anyone could qualify. Other lenders offered "liar loans" that let borrowers merely state their incomes without producing backup documentation.

In Canada, lending standards never deteriorated to the same extent, thanks to a less-fragmented and more-conservative banking sector and different regulatory environment.

But regulators have recently cut lenders in Canada some slack. Combine those changes with the entrance of new players on the mortgage scene and you have more choices for Canadian consumers, but perhaps some hidden risks for the housing market.

"Canada was an anomaly compared to international mortgage markets," said Derek Holt, vice-president of Scotia Capital Economics, part of Scotiabank. "We didn't have as much mortgage product innovation.

"Until recently, it was the 25-year, conventional cookie-cutter mortgage with a fixed or variable rate and a few options."

That changed in 2006 when the federal government liberalized the mortgage insurance market in Canada, Holt explained.

Until then, only Canada Mortgage and Housing Corp., the government-owned housing agency, and one other company offered the mortgage insurance typically required as a guarantee against default when homebuyers put down less than 20 per cent of the purchase price.

The 2006 changes allowed more foreign mortgage insurers to come to Canada.

The arrival of AIG United Guaranty and imminent arrival of other insurers stimulated competition. New products emerged, including 40-year amortizations, 100 per cent financing and interest-only mortgages.

But the proliferation of options has some homebuyers confused.

"There are so many variables in the mortgage market that you really need a road map," said Jim Rawson, a regional manager in Toronto with Invis, which claims to be Canada's largest independent mortgage brokerage. (Brokers are matchmakers between homebuyers and lenders.)

So how do some of the new products work and how risky are they for borrowers and the market generally?

With interest rates dropping, consumers might consider a front-loaded variable- rate mortgage.

This option gives you a larger-than-normal discount from the prime interest rate for an initial period, say six months, before you decide whether to lock into a fixed rate.

Longer amortization periods, now up to 40 years, also are new.

Holt estimates longer-term mortgages now account for three quarters of monthly insured purchase applications in Canada, with 40-year products accounting for half of that.

This will bring more buyers into the market and a longer period to repay also means less risk to credit markets in the short term because it eases cash-flow difficulties for borrowers, he said.

But over the long-haul, 40-year mortgages raise a new set of risks for housing and credit markets.

"The shock risks from interest rate changes and changes in employment become accentuated if you are using higher-leveraged products," Holt said.

(prepared by Sarah Dougherty/Vancouver Province)