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Why the CMHC insured mortgage borrower feels morally superior to the “orphaned” homeowner facing foreclosure because of the credit crunch.

Lenders ask federal government to back special billion-dollar fund

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.

An article in the Globe and Mail last week revealed that the government of Canada is being asked to create a mortgage guarantee that will allow lenders to renew millions of alternative and subprime mortgages coming up for renewal in the next three years. The government is being told that if they don’t step up to provide a fund or guarantee, these homeowners will lose their homes to foreclosure because the lenders involved can no longer source funds from their traditional bond marketplace due to the collapse of the international mortgage backed securities marketplace.

There has been a lot of comment in various mortgage blogs and articles about these alternative and sub-prime mortgages with the following comments being made by various mortgage brokers and mortgage borrowers who either serve the “A” mortgage marketplace, or who are themselves “A” quality borrowers. I have read the following comments –

These “orphaned” borrowers, as they’re called, don’t qualify for a mortgage. They must be doing something wrong. In actuality, they don’t qualify because their loan-to-value is too high, or their income/debt ratios are poor, or their credit is shoddy, etc.

It’s important to remember that, when a subprime borrower gets an 11% mortgage (a rate quoted in the article), it’s supposed to be temporary.

You’d be nuts to pay that rate for long. The idea is to pay it for a year, get your act together (settle up debts, get new credit, establish repayment history, etc.), and then refinance with a prime lender.

Mortgage broker, Vince Gaetano, thinks that much of this really boils down to “a predatory lender who has earned an 11% yield and a mortgage broker who has been paid handsomely” and may have provided “bad advice.”

In the end, the hard truth is that some disasters can be avoided…and not everyone deserves to be a homeowner.

These comments are contained in a blog at Canadian Mortgage Trends, a blog written (usually well written) on December 10th, 2009 following a business story in the Globe and Mail which was written by Greg McArthur and Jacquie McNish in a story about how the sky is falling, again, in the Canadian mortgage and housing business.

The responses to the blog are even more expressive, if that’s possible, given the highly emotive nature of the original blog, but here are some of them –

"Makes you wonder how healthy they are if the borrowers can’t re-qualify."

Some people should be renters for their own good.

Are these lenders the top tier banks, life insurance companies? I thought that Canada was supposed to be the envy of the internation lending community. Why should they need government intervention?

Great job on analyzing this story. I read the story in the paper and wanted to know a real analysis and here it is! Not every person should be homeowner is the key. It is not an inherent right to "OWN" a home and in many case renting is much better financially. The government should NOT be bailing these people out.

In response to Monty's post, these lenders were NOT banks, life insurance or trust companies. They were mortgage companies only in most cases, and not operating under the bank act. They would fund these mortgages and in most cases sell them as asset backed commercial paper. Well, when the bottom fell out of the ABCP Market and there was no investor appetite for these products, most of these lenders folded, left the Canadian market or tried to pass themselves off as Prime lenders (hint ~ starts with an X).

At any rate, because they were not operating under the Bank Act, these mortgages did not have to be insured, so they could take any borrower that they wanted at any LTV and charge handsomely for it. And one of the worst of the bunch is the one lobbying now for government support.

Wendy you're right in the case of GMAC, but that doesn't change things. It's still not the government's job to bail out people who don't qualify for a mortgage.

Hopefully you can get your credit back above 600 by renewal.

What is wrong with these comments? Aren’t they just stating the obvious? Aren’t subprime borrowers basically bad people who made stupid decisions, or people who are just plain “crazy”as suggested by the original blog? Who says that the government should “bail out” these irresponsible people anyway?

What’s wrong with the whole tone of the conversation is that it perpetuates a point of view so common among lenders and brokers, and among high Beacon score individuals, which is that qualifying for an insured mortgage is morally superior. “People who don’t qualify for this insurance shouldn’t be allowed to own houses at all”, according to this perspective.

This point of view is similar to the old Calvanist idea that prosperity is next to Godliness and poverty is evidence of evildoing, and badness. Being unemployed is evidence of inferiority. Even self employment (which disqualifies many from getting insured mortgages) is inferior to wage employment where someone else takes responsibility for providing a wage.

In Victorian England the equivalent statements basically led to children from poor homes being rounded up and put into poor houses, and men and women going to debtor prison for an inability to pay their debts.

Recent changes in bankruptcy laws in Canada may reinstate these old laws, it now being much tougher to go bankrupt.

Middle class Canada, and their bankers are having a field day at the expense of those poor unfortunates who didn’t take good enough care of themselves, and now risk losing their homes and their financial futures.

And this is good?

My next blog will talk about how all those people who don’t have insured mortgages are subsidizing all of those self satisfying people who do, and whose tax dollars support CMHC and the National Housing Act while they themselves gain no benefit from programs that were initially set up for the sole purpose of providing affordable housing to people who otherwise wouldn’t be able to buy a home. Also, how a facility specifically designed to distribute wealth to the less fortunate has actually transferred billions of dollars into the hands of the upper middle class and the wage earners.

Poor people be damned, and self employed, commission based, or otherwise contracted employees as well.