A guilty plea entered by a former Credit Suisse Group AG trader relating to the alleged inflation of U.S. subprime mortgage bond prices only reinforces reluctance among Canadian lenders, and that is unwarranted, says one broker.
A guilty plea entered by a former Credit Suisse Group AG trader relating to the alleged inflation of U.S. subprime mortgage bond prices only reinforces reluctance among Canadian lenders, and that is unwarranted, says one broker.
“The more the media circulates these stories, or any articles related to those facing charges in the mortgage bond market, it reinforces the reticence to invest among future investors,” says Kelly Wardle, a broker with Pro Link Mortgages. “Most Canadians don’t know the difference between what happened in the U.S. and here.”
The disappearance of several major subprime lenders between 2007 and 2009 contributed to the decline of available options, adds Wardle.
“Since 2007 we have seen a huge number of lenders in Canada leave the lending marketplace completely, or cease to offer mortgage products that specialized in subprime and stated income mortgages,” he says. “As information started becoming available as a result of the lending inconsistencies in the U.S. – which was a result of inappropriate underwriting due diligence and misstated property valuations – Canadian lenders and investors took immediate notice.”
Wardle cites the disappearance of Wells Fargo from the Canadian market, and how Xceed, First National, ResMor Trust and GE Capital each extricated backed away from subprime lending.
“Lenders are very careful now in their underwriting – they want to ensure that the customer can succeed,” says Wardle. “That is a good thing – but the silly policies that were coming from the U.S. in 2007 simply made the border disappear in the minds of most people – and didn’t reflect the Canadian market. We lost two-thirds of the subprime lenders from 2007-2009, and that hurt people with bad credit and the self-employed who were looking to obtain a first mortgage.”
Kareem Serageldin, the Swiss bank's former global head of structured credit, pleaded guilty to conspiracy to falsify books and records at a hearing in Manhattan federal court recently. He faces up to five years in prison, according to the U.S. Justice Department.
"I made a terrible mistake and I deeply regret my conduct," Serageldin, 39, told the court.
Prosecutors had accused the British citizen of artificially boosting the prices of subprime mortgage-backed bonds between August 2007 and February 2008, when housing and credit conditions were rapidly deteriorating.
Overall, the price manipulation by Serageldin and others contributed to Credit Suisse's taking a $2.65 billion write-down in its 2007 year-end results, according to prosecutors. Credit Suisse has not been accused of wrongdoing.
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Wardle credits the Canadian lending community for spotting the potential danger five years ago.
“Lenders and investors no longer wanted this type of mortgage product as part of their investment portfolio, other than the traditional self-employed programs insured by CMHC, Genworth, and Canada Guaranty,” Wardle told MortgageBrokerNews.ca.
In a statement, Serageldin portrayed a period of intense pressure as the housing crisis spooked financial markets in 2007 and 2008. In late 2007, Serageldin said he discovered that a portfolio of securities he oversaw was marked much higher than it could have been sold at the time.
Wardle doesn’t see the guilty plea as a signal for the return of subprime offerings here in Canada, but does see it reassuring those who are renewing existing subprime mortgages.
“The only part of the general public that would take notice (of the guilty plea) would be the ones that are trying to qualify for a subprime mortgage and more importantly that are trying to complete a mortgage renewal for a previously issued mortgage of this type,” he says.
Credit Suisse awarded Serageldin a bonus of $7 million in cash and stock in 2007, before it discovered the scheme, according to the Manhattan U.S. Attorney's Office. The bank later took back the bonus.
Under the plea agreement Serageldin agreed to forfeit about $1 million, which represents the after-tax cash portion of his 2007 bonus.
Wardle doesn’t see the U.S. financial meltdown of 2007 affecting the Canadian lending community.
“We just don’t want to go down the same road,” he says. “Our lenders in Canada who are in the subprime market do an excellent job of doing proper due diligence; and with the new underwriting guidelines (B20), lenders are making sure people are capable of making the payments through their due diligence.”
