By the mid 2000s, this little-used lending practice was transformed into the fastest growing segment of the country's mortgage market. Driving the changes was the migration to Canada of aggressive U.S. mortgage lenders such as Accredited Home Lenders Inc., Wells Fargo, GMAC and GE Money, which were drawn to Canada's frothy real estate market, particularly the commodity-stoked cities in Western Canada.
As long as real estate prices soared, these lending high-rollers were comforted by the belief that losses on defaulted mortgages could be recovered by foreclosing and selling repossessed homes at a profit. Added protection for a small portion of these lenders came from aggressive U.S. mortgage insurers that were approved by the federal government in 2006 to compete in Canada. Other mortgage newcomers such as Vancouver-based Abode Mortgage Corp., a company created out of the remains of a former flush toilet maker, and Toronto-based Xceed Mortgage Corp., minimized their risks by selling mortgages to entities that sold securities backed by mortgages to investors.
One of the first experts to sound the alarm about the proliferation of subprime mortgages was Benjamin Tal, an economist with CIBC World Markets who published a report in late 2006 warning "the genie is out of the bottle." Mr. Tal declined to be interviewed, but his report estimated that subprime loans were growing at a "meteoric" annual pace of 50 per cent by the end of 2006, making it the fastest growing segment of Canada's mortgage market. In 2006, Mr. Tal estimated more than 85,000 Canadian homeowners had subprime loans.
By late 2007, the combination of easy money and soaring real estate prices lulled many borrowers and lenders into viewing houses as virtual cash machines. Some borrowers took out second and third mortgages at high rates of interest to make investments on other properties or fund a lifestyle beyond the means of their paycheques.
Nick Kyprianou, president of Home Trust, one of Canada's first and largest alternative lenders, said his company began to scale back in Western Canada in 2007 because it became uncomfortable with homeowners' soaring debt levels.
"When the values are escalating at that rapid of a rate and you're just allowing people to use their houses as ATM machines and they keep refinancing every year to accommodate their lifestyle, it's just a house of cards," Mr. Kyprianou said. Home Trust's retreat was apparently not fast enough. According to court data, the company initiated foreclosure proceedings on 120 borrowers in Alberta in 2008.
Home Trust is a federally regulated trust company, unlike competitors such as the U.S.-based GE Money and Wells Fargo that jumped into the Canadian market in mid-2000. Mortgage lenders that aren't federally regulated aren't required, like banks and trust companies, to use a government-approved insurer when the borrower has put down less than 20 per cent of the value of the home.
