You are redefining the definitions. Prime loans != conventional loans.
Show me a definition of prime lending practices in Canada that states you must have a conventional mortgage? (i.e 20% down).
The loans can not be bought by banks without being insured because of law. I know many people who take out CMHC insured mortgages, but don't have to. They are not subprime borrowers. They just opt to have a high ratio mortgage.
It's not a direct relationship. There are many wealthy individuals that take out CMHC insured mortgages. Is it a little more risky? Sure it is. That is why you are required to purchase insurance. Is this person as risky as say a subprime borrower south of the boarder? Not at all, they have large sums of assets and a good income stream.
Subprime borrowers by DEFINITION have poor credit and have no where else to go. CMHC insured borrowers come from a wide range of backgrounds. That and most if not all CMHC products require you to have a 680 score or higher.
By and large they only backed prime loans (some of their portfolio was subprime). They are not innocent though. Their purchasing of billions of subprime backed securities.pitz wrote: ↑Aug 26th, 2009 3:11 pmOne thing to keep in mind is that there is no CMHC in the United States; high-ratio loans require PMI, which is basically the private-sector's version of CMHC mortgage insurance. Fannie Mae/Freddie Mac only deal in prime, 'conforming' mortgages, and facilitate securitization of those mortgages with the assistance of their implicit government guarantee and backing.
I agree that risk is risk. That is why you pay a premium.pitz wrote: ↑Aug 26th, 2009 3:11 pmOne can either buy mortgage insurance, and pay an explicit premium, or take out a subprime loan, and pay an implicit premium (ie: a higher interest rate). Both the user of mortgage insurance (PMI, CMHC, etc.), and the implicit borrower are 'subprime', and both have similar effective interest rates.
There's no difference between a front-loaded mortgage insurance premium (ala CMHC, PMI, etc.), and a amortized premium.
I have not redefined anything. I'm just showing you that CMHC insured borrowers are the same thing as subprime borrowers, for all practical purposes.
Ummm. But the CMHC premium itself is a front-loaded fee, which, if you amortize it over the loan, would give you exactly the same interest rate as you would be paying if you went to a 'subprime' borrower. Why? Because the risk profile is identical.
Don't delude yourself into thinking otherwise.
If you'd like some mathematical examples, I'd be more than willing to post them. A CMHC-insured borrower is paying, in most cases, effective interest rates in excess of 10%/annum, once the mortgage insurance premium is properly amortized over its effective life.
Subprime borrowers pay it because their credit rating is poor. They are less likely to pay it back.
High ratio borrowers can have a very good credit rating. They pay because there is less equity in the house. The premium is guarding against the risk the loan goes upside down.
Just because TD offers a 5% cash back product doesn't mean CMHC will insure it @ 95% LTV. Lending standards have tightened up considerably. I can safely assume you have never gone through the process of getting a CMHC mortgage before. Everything you say is based on assumption not fact.pitz wrote: ↑Aug 26th, 2009 3:11 pmHappens all the time. Why do you think outfits like TD have those "5% cash back" mortgages? Someone gets qualified for one of those, and then immediately uses the 5% cash back, to cover the downpayment, thus circumventing the CMHC 5% downpayment requirement. I only bank with TD, but I imagine all Canadian banks have some form of this.
"No money came out of your pocket" = no equity. And the interest rate, is obviously jacked higher, so the bank still gets its money. It really doesn't matter if you have 5% equity in anything, if the debt service costs are commensurately higher.
It doesn't matter if "no money" came out of your pocket.
100,000 mortgage @ 5% cash back = 5k cashback
You take out a 95% LTV mortgage for 95,000, the cash back is used as down payment.
If the bank forecloses on you there is still 5K of equity in the property. Originally it wasn't your money but in the banks point of view 5K is still there.
100% LTV is when the bank forecloses on you and there is absolutely no equity.