US Subprime Meltdown and its effects on Canada

It may still be too early to tell but so far, the effects of the subprime meltdown in the US has not significantly affected Canada.   To date, only two mortgage lenders (MCAP and GMAC Residential Funding) have indicated that they were putting a hold on their subprime lending programmes.   Many of subprime lenders are still operating with business as usual.  Even the Canadian arm of US-based Accredited Home Lenders continues to look for new business in Canada.  Accredited US has shut down its retail mortgage business and laid off 1600 employees.

It is important to note that the subprime market is very different in Canada.  Subprime loans account for less than 5% of total mortgage originations while in the US, the subprime market accounts for 22% of total mortgage originations.  The US market is also very competitive and this has resulted in lenders lowering their credit standards to increase market share.  Lastly, mortgage brokers in BC are highly regulated and need to comply with higher ethical standards to meet industry association requirements.

Nevertheless, Canadian investors (who buy mortgages issued by subprime lenders) could be spooked.  They may require a higher yield before they invest in the subprime market. This could mean higher interest rates for subprime borrowers or some (more) tightening of credit standards.