Investor Watch: Subprime mortgage crisis

 

February 14, 2008

The reasons for this crisis are varied and complex, posing a critical challenge for governments, businesses, and investors.  The crisis originated in the US over subprime loans or mortgages that began in the fall of 2006 and became a global financial crisis during 2007 and 2008. These loans are risky for creditors because borrowers have been defaulting on loan payments at historic rates and with falling property values, some loans may exceed the market price of the assets lenders have access to.

The subprime mortgage resale business was created when the lenders figured out they could bundle higher-risk mortgages together and spread the risk to different buyers, some taking a higher-risk equity position while others taking lower returns for a safer investment.

Canada

In Canada, we have not had the same problem with subprime mortgages because lending practices were stricter in Canada and housing prices have not declined.  However, because of the widespread dispersion of credit risk through collateralized debt obligations and asset-backed commercial paper, it has had a large, negative impact on some Canadian banks and financial institutions.

How does it affect you?

Tight credit conditions have implications for investors in the stock market, who are facing greater uncertainty, greater volatility, and lower earnings than in the recent past. Mortgage lenders and home builders have been hit very hard, but so have other companies such as metals and mining companies.

Non-bank asset-backed commercial paper could be held as part of your investments if you have a pension fund or own a mutual fund. Here is some research you should do to understand your personal exposure:

  1. Check to see if your pension fund invested in ABCP by contacting your plan administrator. (Pensions run through BC Investment Management Corp. have no ABCP exposure.)
     
  2. Check to see if any bank stocks or mutual funds you hold have ABCP exposure. This information will be disclosed in quarterly financial statements.

Get some advice from a financial advisor before you decide to make changes to your investments based on the current uncertainty in financial markets.  

The BCSC is the independent provincial government agency responsible for regulating trading in securities within the province. If you have questions, contact Ken Gracey, Media Relations, 604-899-6577.