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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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