Subprime lending in Alberta: Truths and Myths
What is the Subprime Market in Alberta
The Subprime Market made the national news in the US and has continued to be a weekly headline. A subprime market is one in where high lending rates are offered to borrowers with lower credit quality. These lenders borrow from the subprime markets because the main banking institutions will generally not lend to these types of investors. The Alberta Subprime Market does exist but not in the same scope as we have seen in the US. The hot Alberta real estate market, especially in areas such as Edmonton, Calgary, Fort McMurray, and Grand Prairie have led investors to borrow like there is no tomorrow. Everyone just wants to be in the real estate market of Alberta and the prices seem to keep climbing. With the price of oil rising to meteoric heights, the subprime market was also lending at meteoric rates with investors leading the way in borrowing from these non-traditional lenders. While the interest rates given by the main banks such as Royal Bank, CIBC, and TD Canada Trust remains at historic lows of 5% on a 5 year fixed rate mortgage, some subprime lenders were writing new mortgages that ranged from 7% to 20%. There have even been cases where investors who needed bridge financing to close on a deal would borrow from these second tier lenders at rates above 30%.
Foreclosures in Alberta as a result of Subprime Lending
Foreclosures in Alberta have seen a dramatic rise in the last 12 months. The year of 2008 has seen the foreclosure rate jump more than 50% with the lawyers working overtime to handle the workload of Foreclosures in Alberta. How can the rate jump so high? It is a direct result of subprime lending in Alberta and specifically in real estate heated markets such as Edmonton and Calgary. The subprime lending has allowed investors to over leverage their financial position and put themselves in an impossible position to maintain their properties. Once the ability to pay the mortgage is not met, these investors desperately try to liquidate their properties in a falling Edmonton and Calgary real estate market. The result is that many homes do not get sold, mortgages do not get paid and the foreclosures start increasing in the double digits. However, put into perspective, the foreclosure rate in Alberta, especially Edmonton and Calgary have been very low. Even with a tripling of the foreclosures in Alberta due to sub prime lending, the actual amount of Edmonton foreclosures is still small. We do not see a subprime crisis the equivalent of the US in Alberta or Canada. Even our subprime lenders are more careful than their US counterpart in giving out their hard earned cash. However we should expect to see foreclosures in Alberta to remain at historic highs for at least another two years while overly optimistic investors untie themselves from the poor investment decisions they have made.
Predictions for Subprime lending in Alberta
We predict that the subprime lending in Alberta will be reduced to normal levels for 2009 and 2010. Lenders such as HomeTrust, Resmor, and some private money lenders are just going to be careful by reducing their risk in a declining Alberta real estate market. Faced with falling real estate prices, the subprime lending activity in Alberta will become even below average over the next 12 months. You also got to know that the subprime lenders themselves are suddenly short of capital and must be conservative in their own portfolios or else face similar fates as the clients whom they lend to. When the economy is not doing well and jobs are not abundant the ability for investors to pay their mortgages will also decline. In a falling economic climate, sub prime lending is going to be placed at a low priority and it will be back to the basics of borrow what you can afford.