Will The Sub Prime Mortgage Fiasco Spread Into Canada Too?

August 15th, 2007

The Canadian dollar dropped more than 1.06 cents today due to uncertainty about whether the sub prime mortgage fiasco in the lending markets will spill over and affect Canada too. Many are expecting some more short-term weakness to continue and the dollar to fall lower. I myself believe it will continue to go down for a short while, but overall (long-term) I’m very bullish on the Canadian dollar due to the financial state of the country (surpluses, growing economy, inflation + interest rate raises) and its massive resources.

In a sign that the Bank of Canada won’t stand by and do nothing, it has already injected over $4.42 billion dollars into the market over the last week; About $1.7 billion on last Thursday and Friday, $670 million on Monday and another $350 million today (Wednesday). In contrast, the US, where these problems began, has only injected $7 billion. I don’t know if that is just what they injected today or whether that is all they have injected (clarification would be nice! Any readers know?). My point is, Canada is taking a fairly aggressive stance on this when you compare how much smaller the Canadian economy is and the fact that the main problems stem from ties with the US financial markets.

Will it get worse? My guess is things will get a whole lot worse before they get any better. The US should have NEVER in a million years got so slack on their lending requirements! That is how this mess began. I do not think Canada will be in as bad of shape as the US though. The main reasoning for this is that the big five banks in Canada are much more heavily regulated and there are basically only five of them that have control over the country. Compare this to the US where there are thousands of bank competing. I love competition and it would probably save us some money, but in order to compete these banks got lazy and started giving money to people who shouldn’t have got any.

The main reason this entire fiasco will still affect Canada is because the banks most likely bought some of these loans from the US and many other companies (investment companies, hedge funds, mutual funds, etc) bought some of these loans from the US. These loans may have to be written off, but many home owners in Canada itself will be fine as our regulations were never relaxed as much.

So my answer to this entire fiasco is this: Canada will be affected by the sub prime mortgage fiasco in the US, but only to the extent that it purchased US loans. Canada itself is still in very good shape and doesn’t have the same mortgage problem. Canada does however have a slightly different problem. As inflation in the west (BC, Alberta, Saskatchewan) continues to force the Bank of Canada to rise interest rates, the mortgages many have are becoming more expensive and this will still cause some damage, however it won’t be as severe in the US…(where people with no jobs were getting $500,000 mortgages by simply stating how much money they earned on a piece of paper with no proof required! I simply can’t believe how lax some of the companies got with handing out loans.)

I am still worried about how turbulent the market is and expect it to continue. Many of these mortgages don’t come due for over a year and we don’t know how many will be write-offs. Expect to hear about this problem for a few years, but perhaps it will calm down. There will be a lot more write-offs if interest rates also rise in this period, which they may have to due to currency issues. We’re in for a turbulent ride ladies and gentlemen. On the bright side, there should be some bargain investments along the way if you keep an eye open for them. Use this period to get into solid investments that can withstand a recession and come back with a vengeance during a bull market. All you can do is use this as an opportunity.

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