06 October 2006

Scotiabank Hikes Risk with Total Mortgage Financing

Financial Post, Barbara Shecter, 6 October 2006

Bank of Nova Scotia became the first Canadian bank to offer no-money-down mortgages yesterday, entering a market previously occupied by riskier lenders like Xceed Mortgage Corp.

The program lets people with solid credit histories buy homes even if they don't have enough cash to make the standard 5% minimum down payment. Scotia is teaming up with Genworth Financial Canada to offer the program. Genworth will insure the loans and take on the additional risk.

Tanya Azarchs, who oversees the credit rating of North American banks at Standard & Poor's in New York, said there is a reputational risk for Scotia.

"Can a Canadian bank do the kinds of things you need to do without getting named in the headlines as the bad guy? Like kicking some guy out of his house, those sort of techniques. You've really got to be willing to manage a different way from your ordinary loans," she said.

Offering a mortgage with no down payment is inherently risky, because it leaves the issuer vulnerable to declines in housing prices or the economy. If home prices drop or unemployment rises, consumers could choose to walk away from mortgages without paying more than the monthly interest fee.

Charles Lambert, managing director of mortgages at Scotiabank, said the company is confident enough about the economy and housing market that this isn't a major concern.

"The economy is going well and we work very closely with our customers. If there are any issues or financial difficulties, I go back to our basic principle: We're in the business of keeping our customers in their homes once they get them and managing through that," he said.

According to analysts, Scotia's entry into no-money-down mortgages gives it a unique product in the ultra-competitive mortgage market -- although the other banks could quickly follow its lead. For Genworth, this is a chance to seize market share on the insurance side, which for years was dominated by a single player: the government-owned Canada Mortgage and Housing Corporation.

By adding Scotia's name and large cross-country branch network, Genworth will have more heft against CMHC, said one Toronto-based analyst who spoke on condition that he not be named. "CMHC's profitability is going to go down, there's no question about that," the analyst said.

Xceed Mortgage could also be affected if homebuyers opt for Scotia's new mortgage, he said. Xceed, a Toronto-based sub-prime lender, has billed itself as an alternative to the banks for homebuyers seeking 100% financing.

Scotia and Genworth first experimented with no-money-down mortgages in 2003, when they offered a free down payment mortgage. The bank provided the 5% down and Genworth charged a higher insurance rate. Under the current 100% mortgage program, Genworth's insurance rate on a standard 25-year amortization mortgage is 3.75%, compared with 2.75% on a 95% mortgage.

"There's no question about it. This is a higher-risk product than what's currently being offered, hence the higher price," said Peter Vukanovich, president of Genworth Financial Canada. "[But] We're very comfortable given the price we're charging, with the risk we're taking."