From the ramshackle, plywood deck on Brad Goodyear's rural Vancouver Island home, most people see piles of trash, a mattress, abandoned appliances and heaps of salmon fishing nets.
Mortgage lenders, however, have looked at the same property and, until recently, seen nothing but cash.
But after two decades of continually borrowing up - plowing through mortgages from Royal Bank, private lenders and credit unions, until settling on two subprime lenders - the 46-year-old fisherman has landed in a foreclosure proceeding.
Records show that at least nine different lenders have given mortgages to Mr. Goodyear and his wife Tracy since they bought the Ladysmith property in 1986, producing a constant flow of new loans, which were sometimes paid off with newer loans, until financial institutions shut the window a few months ago.
"I didn't really have to show anything to borrow," Mr. Goodyear said of his two remaining mortgages, both in default and totalling about $340,000. "I didn't have to show them my tax returns. I just said 'This is how much I make.' I think I made 11,000 bucks."
Mr. Goodyear is not alone. A Globe and Mail investigation into more than 10,000 foreclosure proceedings has uncovered a burgeoning subprime mortgage problem that many, including Prime Minister Stephen Harper, have insisted does not exist in Canada.
Data obtained from both the governments of British Columbia and Alberta, as well as from two private companies that specialize in tracking foreclosure proceedings, show that lenders are foreclosing on the homes of overextended borrowers at an alarming pace. Even more startling is that more than half the foreclosures in 2008 were initiated by a mish-mash of subprime lenders who targeted riskier borrowers with tarnished credit histories. The numbers tell a story of thousands of homeowners who borrowed more than they could afford from lenders who lent too readily.
Inventories of unsold homes are building in Canadian cities - and the ripple effect hits everyone, depressing the value of houses owned by people who haven't overextended themselves.
Unlike the United States, where foreclosure statistics are routinely published because they are a key barometer of economic health, detailed numbers in Canada are hard to come by. Alberta and British Columbia are two provinces where private companies collect the data from the courts, where it costs about $10 to view a single file. In Ontario, mortgages in default are usually resolved through a process known as power-of-sale, which has effectively removed the issue from the courts and shielded the scope of the problem.
Since the subprime mortgage meltdown in the United States, Canadian leaders have assured the public that a similar tidal wave of foreclosures can't hit here. They have cited the prudence and market dominance of Canada's five most prominent banks, the conservatism of Canadian consumers and the tiny, 7-per-cent market share of subprime lenders, which is much lower than their 22-per-cent market share in the United States. Just four days ago in a speech, Prime Minister Harper said: "We have avoided the extreme of the unregulated, or barely regulated, financial and mortgage industries that has caused such grief around the world."
However, The Globe's investigation shows that while Canada's real estate sector hasn't suffered as much as its counterpart in the United States, the Prime Minister and others have grossly underestimated the impact of that small portion of subprime lenders. Until recently, companies who touted their low standards with slogans such as "We Say Yes When The Banks Say No!" and "No Income Verification" proliferated here.
"We have a subprime problem in Canada. Lenders dramatically reduced their lending standards in the past five years," said Andrew Bury, British Columbia's foremost expert in foreclosure law, who has been practising for 29 years. Mr. Bury, who practises with Gowling Lafleur Henderson LLP, said that since August he has had to extend his work day to 15 hours to cope with a caseload that has tripled. Vancouver courts are so overwhelmed with the flood of foreclosure applications that it now takes six weeks to process a written order compared with one day six months ago, he said.
"The subprime lenders trashed the market. They were doing loans that no one else would do and people were shaking their heads saying, 'What are these guys doing?' " The data also revealed that scores of wealthy individuals dabbled in subprime lending at a time when many believed the real estate market was on a never-ending ride. Doctors, lawyers, stockbrokers and former bankers offered high-interest-rate mortgages to debt-laden homeowners, many of whom are now facing foreclosure proceedings. In one instance, a holding company for a Vancouver entrepreneur and philanthropist, Abdul Ladha, issued a $150,000 mortgage to a couple at an interest rate of 40 per cent. The mortgage agreement included a clause to ensure that additional fees and commissions should never add up to an effective interest rate of 60 per cent - the "Criminal Rate," as defined in the Criminal Code of Canada. (One of the borrowers, Vid Wadhwani, said in a brief interview that it was "a rate that I was willing to accept, given that it was supposed to be short-term in nature." He also said the 2007 foreclosure application did not proceed and that the matter was resolved.) Last year, private investors gave a Vancouver businessman and former lawyer $4.5-million in adjustable rate mortgages that resulted in payments of $89,000 a month, or an interest rate of more than 25 per cent. The investors have initiated foreclosure proceedings against his West Vancouver home.
The number of subprime lenders who have initiated foreclosure proceedings isn't a surprise to anyone in the business, said Kap Hiroti, the owner of Foreclosurelist.ca, one of the companies that tracks foreclosures and supplied data for this story. "It was almost as if the lenders didn't see the big picture," Mr. Hiroti said.
The spread of subprime mortgages to Canada is one of the country's most poorly researched and misunderstood economic afflictions. Government agencies don't publish numbers on the scope of high-risk lending. Banks and other mortgage lenders do not disclose details about such loans, known in industry parlance as "non-conforming" loans.
Until the early 2000s, subprime mortgage lending was the tiny domain of adventurous private investors or mortgage lenders who were comfortable gambling that they could profit by charging exorbitant interest rates to home buyers who didn't meet the conservative lending criteria of banks and trust companies that dominated the Canadian market.
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.
The lack of government supervision of these companies increased risk in the system, Mr. Kyprianou said. The unregulated lenders, however, vigorously dispute that charge.
"There was nothing wrong with what people were doing. It was a sign of the times," said a former official with Accredited Home Lenders. "We were all doing the same thing - all of us. We were all making money.... It was a whirlwind of cash and every once in a while you'd stick your arm out into the whirlwind and try to gobble up as much of the cash as you could."
Brad Goodyear could use some of that cash right now, but the whirlwind blew out of town long ago.
Recently, he received an offer of $280,000 for the two-storey home, which would leave him $60,000 short of what he owes his creditors.
For the past few weeks, he has been calling every mortgage broker he can find. Despite his past success at repeatedly refinancing, no one is biting. Most of the subprime lenders who might have pounced two years ago have either changed their business model to less risky lending, or - in the case of Accredited Home Lenders and GE Money - have exited the country altogether.
His largest outstanding mortgage with ResMor Trust, a $304,000 loan at 8-per-cent interest, is what landed him in court. Mr. Goodyear took the loan out when he got behind on his previous mortgage, he said. The ResMor money staved off that foreclosure, but his monthly payments jumped to $2,300 from $1,000. When he was late on his ResMor mortgage, he took out a second mortgage last year with Jack James, a private lender from Vancouver. Mr. James gave him $28,000 at an initial interest rate of 17 per cent, which jumped to 22 per cent a few weeks ago.
Both ResMor Trust and Mr. James declined to comment about their loans to Mr. Goodyear.
Asked what he was thinking when he took out another loan to pay off a smaller loan that he already couldn't afford, Mr. Goodyear replied: "Well, that's what runs what I do, but I shouldn't have borrowed more money. It was so easy to borrow money. You get in a bind."
He continued: "Well, I'm sitting there, 'Jeez, if everything works out'... I might have been able to do it. Just squeak by maybe.
"I thought maybe I'd have to sell, but I didn't think the market would take a tumble."
The word subprime has created much confusion because many mistakenly believe that it refers to an interest rate that is below the prime rate - which would obviously be a less risky and more affordable mortgage.
That is not what the word means. Rather, subprime refers to the credit-worthiness of the borrower.
There is no standardized definition of the word, but many mortgage experts interviewed agree that subprime mortgages are best described as loans that include at least two of the following characteristics: a borrower with a bad credit history, an interest rate that is significantly higher than prime lending rates and mortgage values that amount to more than 80 per cent of the market value of the house.
In the United States, there was a proliferation of subprime lenders coinciding with the boom in the real estate market. In 2007, when thousands of homeowners started defaulting on their mortgages, dozens of subprime lenders, including one of the largest, New Century Financial, filed for bankruptcy protection, which ultimately sent the economy into a tailspin.
Greg McArthur and Jacquie McNish
WHO LENDS SUBPRIME?
By Greg McArthur and Jacquie McNish
The databases of foreclosure filings that The Globe originally received did not classify who was a subprime lender, and who was a traditional, prime lender. Rather, the reporters researched each company's public filings to determine what kind of lending they do. For some lenders, their classification was obvious because they promoted themselves in literature as a subprime lender. Anyone who had both higher than normal interest rates, and who promoted their lower standards for income verification and credit history, was also classified by The Globe as subprime. Examples of such advertisements included, "Can't verify your income or personal capital? No problem, we can help!" Often, mortgage lenders will reach out on their websites to "imperfect credit applicants" and "discharged bankrupts." In other cases, where the type of lender was less obvious, the reporters consulted with mortgage and industry experts. In order to classify the scores of private lenders who have initiated foreclosure proceedings, the reporters compared the interest rate on the mortgage to the prime rate. There were also a few hundred foreclosures that couldn't be classified because of incomplete information.
A handful of industry insiders will likely dispute being classified as a subprime lender, preferring to classify themselves as an alternative or "Alt-A" lender - a grey area that they believe is somewhere between prime and subprime. Other mortgage experts dismiss such a category altogether, arguing that you're either a prime lender, or you're not. Greg McArthur and Jacquie McNish
IN ALBERTA AND B.C.
Foreclosure proceedings in Alberta have more than doubled in two years, according to data provided by the Alberta Justice Department - from 2,510 in 2006-2007 to 5,300 in the first 11 months of 2008-2009. According to statistics provided by the British Columbia government, the province has seen a similar surge, with nearly 2,100 foreclosures filed between April and December of 2008 - more than the 1,900 that were filed in the entire previous fiscal year.
Despite having just a share of about 7 per cent of the national market, subprime lenders in Alberta accounted for 56 per cent of the foreclosures in 2008. In British Columbia, the tiny subprime market laid claim to 42 per cent of the province's 2008 foreclosures. In comparison, Canada's five largest banks accounted for 33 per cent of the foreclosures in Alberta in 2008, even though the country's chartered banks account for about two-thirds of Canada's total outstanding mortgages. (The bulk of the remaining lenders in the mortgage market are made up of credit unions, trust companies and insurance firms.)
The Globe and Mail's analysis shows that several cities have an extremely disproportionate share of subprime lenders who have started foreclosure proceedings, compared with traditional, prime lenders. Edmonton had 330 foreclosures in the calendar year 2008 -- 60 per cent of which were initiated by subprime lenders. "Oh, it's here. For sure it's here," said Larry McTaggart, an Edmonton realtor who is often enlisted to sell homes for lenders who have foreclosed on properties. "I don't know where it came from... it's not the Bank of Montreal or the Bank of Nova Scotia or Toronto-Dominion" Mr. McTaggart said. "It's the 'B' lenders." The 90,000-person city of Red Deer only had 36 foreclosures in 2008, but 32 of them were launched by subprime lenders such as Accredited Home Lenders, Wells Fargo and the subprime lending division of HSBC.
(The findings are based on data provided by two private companies, British Columbia's Foreclosurelist.ca and Alberta's Foreclosurescanada.com. Both companies track foreclosure filings from each province's respective court systems and sell them to potential investors. They also advise homeowners who find themselves in default. Both companies acknowledge that their data collection isn't perfect. Some proceedings slip through the cracks, and they don't have access to foreclosures that might have been sealed by the court, but their records are the best available sample. The most accurate numbers reside in the databases of the Alberta Justice Ministry and B.C. Ministry of the Attorney General, but both departments turned down The Globe's request for the data. They did provide, however, basic statistics on the number of foreclosure applications.)
Greg McArthur and Jacquie McNish
A look at Canada's westernmost provinces shows subprime foreclosures are not as rare as many claimed.
SUBPRIME FORECLOSURES, BY CITY IN 2008
|Sub-prime loans||Prime loans|
KATHRYN TAM/THE GLOBE AND MAIL // SOURCES: FORECLOSURELIST.CA; FORECLOSURESCANADA.COM // NOTE: THE DATA THAT WAS SORTED BY THE GLOBE INCLUDED THE CITIES AND TOWNS OF THE BORROWERS WHO HAD FORECLOSURE PROCEEDINGS INITIATED AGAINST THEM BY A LENDER. IN MOST INSTANCES, THIS IS THE SAME CITY OR TOWN WHERE THE HOME THAT IS BEING FORECLOSED ON IS LOCATED. HOWEVER, IT ISN'T ALWAYS THE CASE. FOR INSTANCE, A BORROWER MIGHT OWN A COTTAGE PROPERTY IN THE B.C. INTERIOR THAT IS THE SUBJECT OF A FORECLOSURE PROCEEDING, BUT THE ADDRESS LIST IN THE DATABASE IS THEIR HOME ADDRESS IN VANCOUVER. AS A RESULT, THE CHART ABOVE IS NOT 100 PER CENT ACCURATE.