Www.primewest.ca. Demystifying Subprime What is a “Subprime” Mortgage? Granted to anyone who...

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Demystifying Subprime Demystifying Subprime

What is a “Subprime” Mortgage?

• Granted to anyone who does not qualify for a mortgage with a conventional lender

New to the job Recent graduate Credit problems Immigration status

Why did the U.S. Subprime Industry Why did the U.S. Subprime Industry Collapse?Collapse?

Greedy Lenders

Lazy Portfolio Mangers

Poor Bond Rating

Federal Reserve

Other

Greedy Lenders

51%Poor Bond Rating

25%

Mgr’s

10%

Other

9%5%Fed

Canada vs U.S.Canada vs U.S.United States Canada

Industry Size $2.7 Trillion $50-60 Billion**

Current Default Rate 20% Below 0.5%

% of Total Mortgage Industry 35% 10%

Average Loan to Value Above 90% 78.3%

Business Cycle Declining Improving

% of 2006 “Liar Loan” or “no doc” Loans in 2006

47% N/A

% of Interest Only or ARMs (Adjustable Rate Mortgages)

66% N/A

Bankruptcies per 1000 People 7.7 2.7

Capital Market Performance TSX/DJIA YTD (SEP30)

10.2% 11.3%

Prime Rate 7.50% 6.25%

Industry SizeIndustry Size

US: $2.7 Trillion or $8,940 per person

CDN: $60 Billion or $1,818 per person

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Canada U.S

Subprime Mortgage Industry (billions)

Canada

U.S

Current Default RatesCurrent Default Rates

CANADA

Default Rate

Performing

United States

Default Rate

Performing

0.50% 20%

Loan to ValueLoan to Value

U.S: Debt to Equity = 9.0:1

CDN: Debt to Equity = 3.6:1

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

CDN U.S.

Equity

Debt

Based on a $200,000 Mortgage

““Liars” and ARM’sLiars” and ARM’s

U.S: Almost half of all subprime mortgages in 2006 had either no down payment and/or no income

confirmation.

66% of all subprime mortgages since 2006 were Adjustable Rate Mortgages, (ARM’s).

CDN: N/A

In Closing…In Closing…

Analysts predict Canada will have:

• Industry growth of 200% in the next 10 years

• Above average ROE

• Stable interest rates

• Strong real estate trends

25 year Comparison25 year Comparison

Source: Saskatoon Real Estate Board

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