DBRS CanadianMortgageStudy

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Industry Study
Residential Mortgages and Securitization in Canada: Overview of the Mortgage Market

may 2007
CONTACT INFORMATION
Kevin Chiang, CFA, CPA Vice President Canadian Structured Finance Tel. +1 416 597 7583 kchiang@dbrs.com Jerry Marriott Senior Vice President Canadian Structured Finance Tel. +1 416 597 7358 jmarriott@dbrs.com
DBRS is a full-service credit rating agency established in 1976. Privately owned and operated without afliation to any nancial institution, DBRS is respected for its independent, third-party evaluations of corporate and government issues, spanning North America, Europe and Asia. DBRSs extensive coverage of securitizations and structured nance transactions solidies our standing as a leading provider of comprehensive, in-depth credit analysis. All DBRS ratings and research are available in hard-copy format and electronically on Bloomberg and at DBRS.com, our lead delivery tool for organized, Web-based, up-to-the-minute information. We remain committed to continuously rening our expertise in the analysis of credit quality and are dedicated to maintaining objective and credible opinions within the global nancial marketplace.
Residential Mortgages and Securitization in Canada: Overview of the Mortgage Market May 2007
Residential Mortgages and Securitization in Canada: Overview of the Mortgage Market

TABLE OF CONTENTS
Introduction Overview of the Canadian Residential Property Market Characteristics of the Canadian Residential Mortgage Market Dynamics of the Canadian Residential Mortgage Market Overview of the Canadian Residential Property Market Nationwide Overview Regional Overview Introduction Ontario Quebec British Columbia Alberta Summary Characteristics of the Canadian Residential Mortgage Market Mortgage Terms and Renewal Type of Mortgages (i) Insured (ii) Non-Insured Dynamics of the Canadian Residential Mortgage Market Market Review Lending Insured Mortgage Market Overview Recent Developments Non-Insured Mortgage Market (a) Conventional (b) Non-Conventional Conclusion 5 5 5 5 6 6 7 7 7 9 11 13 15 16 16 16 16 16 18 18 20 21 21 22 23 23 23 28
3
CHARTS AND TABLES

Chart 1: Historical Sales Volumes and Values of Canadian Residential Properties Chart 2: Historical Mortgage Default Rate vs. Property Price Appreciation Chart 3: Average Resale Price and Default Rates in Ontario Chart 4: Average Resale Price in Greater Toronto Area Chart 5: Average Resale Price of GTA vs. Central Toronto Chart 6: Average Resale Price and Default Rates in Quebec Chart 7: Average Resale Price in Greater Montreal Area Chart 8: Average Resale Price of Greater Montreal Area vs. Island of Montreal Chart 9: Average Resale Price and Default Rates in British Columbia Chart 10: Average Resale Price in Greater Vancouver Regional District Chart 11: Average Resale Price and Default Rates in Alberta Chart 12: Average Resale Price in Calgary Chart 13: Residential Mortgage Market in Canada Chart 14: Mortgage Market Growth and Interest Rates Chart 15: Residential Mortgage Lenders in Canada, 19972006 Chart 16: Market Shares of Residential Mortgage Lenders in Canada, 2006 Chart 17: Market Shares of Residential Mortgage Lenders in Canada, 19972006 Table 1: Mortgage Insurance Premium Percentages Table 2: Market Segmentation of Non-Insured Mortgages 6 6 7 8 8 9 10 10 11 12 13 14 18 19 20 21 21 22 26
Introduction
Characteristics of the Canadian Residential Mortgage Market Mortgages in Canada are usually underwritten with three- or ve-year terms based on a 25year amortization period. Recently, mortgage products of 30-, 35- and 40-year amortization periods have been offered by some lenders. Mortgages can generally be categorized as follows: (1) insured mortgages with a loan-to-value ratio (LTV) of more than 75% (80%, effective April 20, 2007); (2) conventional mortgages with an LTV equal to or lower than 75% (80%, effective April 20, 2007), underwritten by traditional nancial institutions and (3) non-conventional mortgages with an LTV of more than 75% (80%, effecMajor sections of this study are: tive April 20, 2007), underwritten by alternative Overview of the Canadian Residential Property Market lenders without mortgage insurance. Characteristics of the Canadian Residential Mortgage Market Dynamics of the Canadian Residential Mortgage Market Dynamics of the Canadian Residential Mortgage Market The outstanding balance of Canadian mortgages has doubled from $360 billion ten years ago to Overview of the Canadian $724 billion at the end of 2006. Residential Property Market Chartered banks continue to dominate residen As of December 31, 2006, outstanding residential mortgage lending in Canada, accounting for tial mortgage debt in Canada was approximately approximately 60% of total outstanding mortgages. $724 billion, according to the Bank of Canada. NHA Mortgage-Backed Securities, as a source of This represents approximately two-thirds of the mortgage lending, have increased their presence by total Canadian household debt of $1.06 trillion, approximately 10% over the past decade. with the rest being consumer debt. The insured mortgage market continues to be Resale prices of residential properties have dominated by two insurers, Canada Mortgage and increased by approximately 10% per year from Housing Corp. (CMHC) and Genworth Financial 2001 to 2006. Canada (Genworth, formerly GE Mortgage Transaction volumes have experienced similar Insurance Canada), which accounts for approxigrowth, with more seasonality (usually lower mately 44% of outstanding mortgages. Competition activity in the winter and higher activity in the is intensifying with new mortgage-insurance spring and fall) than with resale prices. companies and new product offerings, such as no Overall mortgage default rates across Canada payment-down or interest-only insured mortgages. declined gradually from a high of 0.65% in 1997 The non-conventional mortgage market has grown to the current level of less than 0.30%. rapidly over the past few years to an estimated Both Toronto and Montreal have experienced outstanding mortgage amount of $16 billion at the similar, but slightly higher, rates of housing end of 2006. This growth has been concurrent with price appreciation than the national average the increasing presence of mortgage brokers in resisince 2001, while Vancouver and Calgary dential lending and the proliferation of alternative have enjoyed a much faster rate of housing mortgage products such as sub-prime mortgages, appreciation due to those cities respective high-ratio mortgages, second-lien mortgages and economic fundamentals. interest-only mortgages.
This study, the rst part of a three-part mortgage study by DBRS, will discuss DBRSs view on the general residential mortgage market in Canada over the ten-year period from 1997 to 2006. It will also discuss DBRSs view on several major housing markets over the past 35 years. Parts two and three of the mortgage study will continue to discuss the development and performance of residential mortgage securitization in Canada, DBRSs approach to analyzing residential mortgages in securitization transactions, and the appropriateness of enhancement levels and structural considerations for those transactions, along with a discussion of DBRSs methodologies.
5
Overview of the Canadian Residential Property Market

NATIONWIDE OVERVIEW
After a relatively stable period of resale prices in the late 1990s, the average resale price of residential properties in Canada has appreciated at an annual rate of approximately 10% (with an aggregate appreciation of 70%) from 2001 to 2006, according to the Multiple Listing Service (MLS) and the Canadian Real Estate Association (CREA) as shown on Chart 1. Over the same period, the monthly sales volume has experienced similar, though more volatile, growth. While the average resale price of residential properties in Canada has enjoyed a steady increase since 1997 (except for a small correction in 1998) as shown on Chart 2, the default rates on mortgages have experienced a gradual decline over the same period. According to the Canadian Bankers Association (CBA), the default rate on mortgages fell from a historical high of 0.65% in January 1997, to the current level of 0.24%.
Chart 1: Historical Sales Volumes and Values of Canadian Residential Properties

Monthly Sales Volume (units)
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

7 9 0 1 3 2 4 5 9 6 9 8 9 9 0 0 0 0 0 0 . . . . . . D ec . D ec . . . ec ec ec ec ec ec ec ec ec . 0 6
300,000
Average Property Value ($)
250,000 200,000 150,000 100,000 50,000 0
Monthly Sales Volume

Source: MLS, CREA.
Average Property Value
Chart 2: Historical Mortgage Default Rate vs. Property Price Appreciation

20% 15% 10% 5% 0% -5%
9 6 9 8 9 9 0 0 0 1 2 5 3 9 7 4 0 0 0 0 . . . ec . D ec . ec . . . . . ec ec ec ec ec ec ec ec . 0 6
0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% Default Rate
Annual Appreciation
Annual Price Appreciation
Mortgage Default Rate
Source: MLS, CREA and CBA. Default rate is based on numbers of mortgages using data from the seven largest banks.
REGIONAL OVERVIEW
Introduction Residential property values have appreciated across most of Canada, particularly in major urban areas. DBRS will review the average resale-price and default-rate experiences of the four most populous provinces in Canada (Ontario, Quebec, British Columbia and Alberta) and the largest urban centres within each of those provinces (Toronto, Montreal, Vancouver and Calgary). This study will examine the period from 1997 to 2006 for the four provinces, and 1990 to 2006 for the four urban centres.
Ontario After experiencing a decline of approximately 18% from 1990 until the low point in February, 1996 (according to MLS data), the average resale price of residential properties in Ontario has enjoyed an annual appreciation rate of approximately 6%. Concurrent with an increase in housing resale prices, the default rates on mortgages reported by the CBA fell from relatively high levels of 0.65% experienced in early 1996 to the current level of 0.27%, less than half the default level experienced a decade ago (see Chart 3).
Chart 3: Average Resale Price and Default Rates in Ontario

300,000 250,000
Resale Price $
1.2% 1.0%
Default Rate
200,000 150,000 100,000 50,000 0

6 7 8 9 0 2 3 0 1 9 9 9 9 0 4 5 0 0 0 0 . . . . . . . D ec . . . . D ec 0 6
0.8% 0.6% 0.4% 0.2% 0.0%
ec
ec
ec
ec
ec
ec
ec
ec
Average Resale Price

Source: MLS, CREA and CBA.
ec
Greater Toronto Area (GTA) Since the 1970s, the Toronto market has been characterized by rapidly increasing housing prices, particularly since the mid-1980s. A signicant boom in economic activity and speculation in property markets has resulted in a dramatic surge in property ownership. The inux of immigrants to the Toronto region and the effects of population growth at the same time have led to a higher demand for housing and rising prices. Like the province of Ontario, the Toronto market has experienced a price correction and ensuing appreciation pattern, although with a higher average price and greater price volatility. During the recession of the early 1990s, Toronto was hit particularly hard, with larger and custom-built homes experiencing more severe property declines than for average homes. From 1989 to 1996, the average residential
property value in Toronto declined by approximately 28%, while the average for Ontario fell by only 17%. An increase in resale periods, at times exceeding 12 months, was associated with this declining market (see Chart 4). Since the late 1990s, demand for housing in the Toronto area has remained robust, driven by the continuation of low mortgage rates, steady employment growth and a large net inux of immigrants. An increase in housing resale prices followed at a rate of approximately 6% per year. In the central area of Toronto where a consistent property premium over the rest of the GTA exists (see Chart 5), such rapidly rising housing prices have made single-family homes less affordable, resulting in record construction of more affordable condominium and townhouse properties.
Chart 4: Average Resale Price in Greater Toronto Area

400,000 350,000
Resale Price $
300,000 250,000 200,000 150,000 100,000 50,000 0

7 19 1 7 19 2 7 19 3 7 19 4 7 19 5 7 19 6 77 19 7 19 8 7 19 9 8 19 0 81 19 8 19 2 83 19 8 19 4 8 19 5 8 19 6 87 19 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 93 19 9 19 4 9 19 5 9 19 6 9 19 7 98 19 9 20 9 0 20 0 0 20 1 02 20 0 20 3 0 20 4 0 20 5 06 19
Source: Toronto Real Estate Board. GTA includes Brampton, Durham Region, Mississauga, Orangeville and York Region.
Chart 5: Average Resale Price of GTA vs. Central Toronto

500,000 450,000 400,000 Resale Price $ 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0
01 05 20 00 96 97 98 99 02 03 20 04 20 20 19 19 19 19 20 20 20 06
GTA
8
Toronto (central district)
Source: Toronto Real Estate Board. Central district as defined by the MLS.
Quebec According to the MLS, the average resale price in Quebec remained at during the 1990s with a meager 5% aggregate appreciation rate during the decade. Compared to the other provinces in Canada, mortgage default rates in Quebec during that same period were relatively high. The high default rate can be attributed, among other factors, to the low increase in housing resale prices. As housing prices increase, home owners are normally able to access and utilize the
increased equity in their homes on a sale of the property, thereby avoiding any potential mortgage defaults. With stagnant property values, home owners are not able to take advantage of any increase in their home equity to avoid defaulting on their mortgages. Since 2002, the average resale price in Quebec has increased by approximately 11% a year (see Chart 6). As in Ontario, the default rates on mortgages have also declined, from the historical high of 1.04% a decade ago to the current 0.19%.
Chart 6: Average Resale Price and Default Rates in Quebec

250,000 200,000 Resale Price $ 150,000 0.6% 100,000 0.4% 50,000 0
6 7 9 0 3 9 8 0 1 9 9 9 0 2 4 5 0 0 0 0 . . . . . D ec . . D ec . . . ec ec ec ec ec ec ec ec ec . 0 6
1.2% 1.0% Default Rate 0.8%
0.2% 0.0%

Greater Montreal Area Montreals housing market did not enjoy the same degree of price appreciation as Toronto did during the late 1980s. This was primarily due to the ongoing sovereignty debate, the ensuing lack of condence in the Quebec market and a slower population growth than in Canada as a whole. Inationary pressures in the housing market did not exist. As a result, Quebec experienced a less-signicant housing price correction (in the range of 5%) during the recessionary period of the early 1990s than did Ontario. In fact, housing prices remained relatively stable. Any decrease in value over the previous 35 years has been slight and temporary. From 2002 to 2004, because of
the improved economic momentum, Montreal experienced a period of rapid housing price appreciation (in the range of 13% to 16% a year). However, the rapid growth slowed to 8% and 6% in 2005 and 2006, respectively, possibly due to reduced demand for single-family dwellings and the accumulation of housing inventory. (see Chart 7.) As with the province of Quebec in total, the Greater Montreal area experienced housing price stagnation during the 1990s with subsequent price appreciation of a larger magnitude. Montreal Island experienced a slightly faster resale price appreciation compared to the Greater Montreal area, with an average premium in the range of $80,000 per property, as shown in Chart 8.
Chart 7: Average Resale Price in Greater Montreal Area

250,000 200,000 Resale Price $ 150,000 100,000 50,000 0
Source: Greater Montreal Real Estate Board, CMHC, MLS.
Chart 8: Average Resale Price of Greater Montreal Area vs. Island of Montreal
350,000 300,000 Resale Price $ 250,000 200,000 150,000 100,000 50,000 0
20 03 20 04 20 00 20 01 20 02 20 05 20 06
Source: Greater Montreal Real Estate Board, CMHC. Greater Montreal area includes Saint-Jrme, Gore, Saint-Colomban, L'Assomption, St.-Grard-Majella and Lavaltrie. The Island of Montreal price is the simple average of reported resale values of three property types.
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19 7 19 1 7 19 2 7 19 3 7 19 4 7 19 5 7 19 6 7 19 7 78 19 7 19 9 80 19 8 19 1 8 19 2 83 19 8 19 4 8 19 5 8 19 6 8 19 7 88 19 8 19 9 90 19 9 19 1 92 19 9 19 3 94 19 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 00 20 0 20 1 0 20 2 03 20 0 20 4 0 20 5 06
Greater Montreal Area Island of Montreal
British Columbia MLS data shows that average housing resale prices in British Columbia rose rapidly, by about 50% between 1990 and 1994, with a subsequent price correction of 16% over the next four years. It was not until 2002 that the average monthly resale
price returned to the high recorded in August, 1994 (see Chart 9). Housing prices have risen by 11% annually on average since 2002; concurrently, the high mortgage default rate of the late 1990s and early 2000s started to decrease in 2002, to the current historical low of 0.13%.
Chart 9: Average Resale Price and Default Rates in British Columbia

450,000 400,000 350,000 Resale Price $ 300,000 250,000 200,000 150,000 100,000 50,000 0
6 7 8 9 0 2 3 4 5 0 1 9 9 9 9 0 0 0 0 0 0 6
1.2% 1.0% Default Rate 0.8% 0.6% 0.4% 0.2% 0.0%
D ec .
ec
ec
ec
ec
ec
ec
ec
ec
ec

ec
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Greater Vancouver Regional District (GVRD) The Greater Vancouver market experienced a rapid run-up in average property values 45% per year between 1980 and 1981, with a decline of 28% in the subsequent year. Cyclical downturns in the natural resource sector exacerbated the situation. Similar to Calgary, the Greater Vancouver area and the Lower Mainland area of British Columbia have a less diversied economy than other urban centres in Canada. There were three periods of rapid price increases in the Greater Vancouver area over the past 35 years, followed by corrections of varying magnitude (28%, 3% and 10%). The rst and second of these price corrections, in the early 1980s and early 1990s, were related to recessions, while the correction in the late 1990s was likely
the outcome of the softened housing market after a large pent-up demand for housing leading to the handover of Hong Kong to China in 1997. Currently, strong economic fundamentals, high commodity prices, domestic spending for the 2010 Winter Olympic Games, robust housing demand, low housing-inventory levels, scarce land supply and the cost of labour have pushed property prices upward in the Greater Vancouver region, the most expensive area in Canada with the least affordability. By the end of 2006, the average housing resale price had increased by approximately 79% from 2001, an annual appreciation rate of 12%, as shown in Chart 10.
Chart 10: Average Resale Price in Greater Vancouver Regional District

600,000 500,000 Resale Price $ 400,000 300,000 200,000 100,000 0
7 19 1 7 19 2 7 19 3 7 19 4 7 19 5 7 19 6 77 19 7 19 8 7 19 9 8 19 0 8 19 1 82 19 8 19 3 8 19 4 8 19 5 8 19 6 87 19 8 19 8 8 19 9 90 19 9 19 1 92 19 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 99 20 0 20 0 0 20 1 0 20 2 03 20 0 20 4 0 20 5 06 19
Source: MLS. GVRD includes New Westminster, Port Coquitlam, Port Moody, Burnaby, Coquille, North Shore, Sunshine Coast, Richmond, South Delta, Maple Ridge and Pitt Meadows.
12
Alberta According to MLS data, the average resale price in the province of Alberta remained relatively stable in the early part of the 1990s. From 1997 until 2005, property values in Alberta experienced an average annual growth rate of 7%, with declining mortgage default rates. In 2006, housing resale prices experienced an explosive
growth of approximately 31%. By the end of 2006, Alberta had surpassed Ontario as the province with the second highest average resale price, with British Columbia still having the highest average resale price in Canada. Mortgage default rates declined further in 2006, to its current level, less than one third of a decade ago. (see Chart 11.)
Chart 11: Average Resale Price and Default Rates in Alberta

350,000 300,000 250,000 Resale Price $ 200,000 0.6% 150,000 100,000 50,000 0
7 9 6 8 0 2 5 0 1 9 9 9 9 0 3 4 0 0 0 0 . . . . . . . D ec . . . ec ec ec ec ec ec ec ec ec ec . 0 6
1.2% 1.0% Default Rate 0.8%
0.4% 0.2% 0.0%

13
Calgary Calgary, along with Toronto and Vancouver, has been one of the most volatile markets in Canada over the last 35 years. Calgarys reliance on oil and gas production and related services has been the primary reason for the volatility. A boom in the residential marketplace occurred when oil prices increased rapidly as a result of the oil crisis in the 1970s. With the subsequent collapse of oil prices, the Calgary economy suffered a severe correction. In the early 1980s, housing prices dropped signicantly and, in some instances, properties did not sell at all. While Chart 12 might suggest that the volatility of the Calgary market is no higher than for Toronto, averages can conceal some of the underlying dynamics of this particular marketplace. DBRS estimates that at the depth of the economic downturn in the early 1980s, the average housing price in Calgary may have
dropped close to the 40% range, rather than the 25% decline, as suggested by the graph below. Such a drop in house prices is consistent with a similar drop in prices in Texas during the same period, another economy that is highly reliant on oil and gas production. Currently, Calgary is experiencing another oil boom. The rise in housing prices is signicantly higher than for the rest of Canada, with a whopping 39% increase in 2006. The red-hot economy had been fuelled by high oil prices, an inux of migrant workers and a shortage of housing inventory, factors that will continue to push housing prices higher. The rapid price growth seen in Calgary is similar to that of the rest of the province, since the Albertan economy relies heavily on the oil and gas sector.
Chart 12: Average Resale Price in Calgary

400,000 350,000 300,000 Resale Price $ 250,000 200,000 150,000 100,000 50,000 0
19 7 19 1 7 19 2 7 19 3 7 19 4 7 19 5 7 19 6 7 19 7 7 19 8 7 19 9 8 19 0 8 19 1 82 19 8 19 3 8 19 4 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 94 19 9 19 5 9 19 6 9 19 7 9 19 8 99 20 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 06
Source: Calgary Real Estate Board, MLS.
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Summary Several observations can be made from the historical data presented in this section. First, the largest losses in property values typically occur when rapid price increases are followed by a recessionary period. Second, it is possible for property-value declines to be in the range of 20% to 30%. Over the last 35 years, three of the four largest urban markets in Canada have experienced one value drop in that range (Vancouver price fell by 28%, Calgary by 25% and Toronto by 28%). Third, negative factors impacting one real estate market do not necessarily impact other markets to the same degree, if at all. Therefore, geographic diversication of mortgages can be benecial to a
lenders mortgage portfolio. For example, Toronto and Montreal were not adversely affected in the early 1980s when Calgary and Vancouver were experiencing property-value declines. In addition, in the early 1990s, Toronto experienced a severe downturn in the value of residential properties whereas the price correction in Vancouver was relatively modest and non-existent in Calgary and Montreal. Finally, there is an inverse relationship between housing price appreciation rates and mortgage default rates. An increasing property value allows home owners in nancial difculty to sell their property or obtain an equity takeout, thereby cashing in on their increased equity and avoiding a mortgage default.
15
Characteristics of the Canadian Residential Mortgage Market

MORTGAGE TERMS AND RENEWAL
Mortgages in Canada are underwritten with borrowing terms shorter than their amortization terms, a major difference compared with U.S. mortgages. For example, a three- or ve-year mortgage loan is typically underwritten with a 25-year amortization term (or recently, 30-, 35and 40-year terms), while in the United States, it is popular to get a 30-year loan with an amortization term of 30 years. Although the amortization periods are similar, mortgages in Canada will typically come up for renewal much earlier. A ve-year mortgage loan amortized over 25 years is usually called a ve-year balloon because the borrower is contractually obligated to pay off the outstanding mortgage amount (the balloon payment) at the end of ve years. In reality, virtually every borrower will take another balloon loan and another until the total outstanding amount is repaid. A balloon loan has certain advantages for the lender since, at the end of mortgage term, the lender has no obligation to renance or roll over the loan. Therefore, at the end of the mortgage term, the lender can determine that the borrower is no longer credit worthy or the pricing of the mortgage can no longer compensate for the credit risk associated with the borrower. Another advantage for the lender is that a mortgage term of three or ve years is well matched with the offering of three- or ve-year Guaranteed Investment Certicates (GIC) products, creating a good asset-liability match. payment required (5% and, in certain instances, 0%). Mortgage insurance premiums are added to the principal amount of the loan and amortized over the same term of the loan, in addition to the monthly mortgage payments.
(ii) Non-insured The non-insured mortgage market can be further segmented into conventional and non-conventional mortgages.
(a) Conventional (prime) Conventional mortgages are rst-lien residential mortgages on owner-occupied, single-family dwellings or condominium units with an LTV of 75% (80%, effective April 20, 2007) or less at the time of origination. Conventional mortgages represent the largest single class of all residential mortgages originated in Canada and are the primary type of mortgage underwritten by the major nancial institutions (i.e., chartered banks and credit unions) in Canada.
(b) Non-conventional A fairly recent development in the Canadian non-insured mortgage market is the appearance of institutions providing non-conventional or alternative mortgage solutions to customers. Typical nomenclature for all mortgage credits is A, B, C and D, with A being the best credit quality. Standard underwriting criteria of banks and credit unions in Canada is usually called A or prime lending and DBRS considers any loan originated outside of such criteria as non-conTYPE OF MORTGAGES ventional. DBRS understands that each mortgage (i) Insured lender, particularly a non-conventional lender, Under the Bank Act, mortgage insurance is manda- interprets the categorization of individual morttory for mortgage loans provided by a Canadian gages into A, B, C or D differently. One of the bank where the mortgage has an LTV over 75% most objective criteria for mortgage evaluation (80%, effective April 20, 2007). The insurance is the credit score. Credit-score organizations premiums paid by borrowers protect the lender in Canada (Beacon from Equifax Canada from losses if the borrower defaults because the or Empirica from Trans Union Canada) use insurer will be required to pay any difference comprehensive characteristics (such as payment between the proceeds realized from the sale of the history, outstanding debts, credit-account history, mortgaged property and the remaining mortgage recent inquiries, the types of credit and leverage) loan amount and accrued interest owing to the to determine individual credit scores. Unlike in lender. Mortgage insurance also helps home buyers the United States, the mortgage payment history enjoy homeownership earlier, given the low down is not reported to credit bureaus in Canada.
16
The terms sub-prime and non-conventional are occasionally used interchangeably. However, it is more prudent to view sub-prime loans as loans made to less creditworthy borrowers categorized as B, C or D. Alt-A, another form of non-conventional mortgage,
is the term used for loans that may have lower documentation requirements or higher LTV ratios, but the borrowers are generally of a higher credit quality (see pages 25 and 26 for further details).
17
Dynamics of the Canadian Residential Mortgage Market

MARKET REVIEW
According to the Bank of Canada, as of December 31, 2006, the total outstanding value of residential mortgages in Canada was approximately $724 billion. From 1997 to 2001, the year-over-year mortgage growth rate was stable between 4% and 6%, close to the 5% average growth rate of the Canadian economy (see Chart 13). Since 2002, the growth of residential mortgage lending in Canada has outpaced the general economy, accelerating at an annual rate of between 6% and 11.5%. This growth has occurred in tandem with the increase in the average property value. The expansion was particularly strong in 2005 and 2006, with an average annual growth of $63 billion in outstanding mortgages (after taking volume run-off into consideration), equivalent to an approximate annual growth rate of 10.6%. Another perspective on the growth of the mortgage market is in the volume of new approvals, including not only new mortgages, but also transfers between lenders and the renancing of existing mortgages. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), the volume of approvals (including new mortgages, transfers between lenders and renances of exiting mortgages) in 2006 was estimated at approximately $200 billion, more than two and a half times the approval amount of $75 billion in 2000.
Chart 13: Residential Mortgage Market in Canada

800 700 600 ($ Billion) 500 400 300 200 100 0
6 7 9 8 9 9 0 0 1 2 3 4 5 . . . . ec . ec . ec . ec ec ec ec . . . . ec ec ec ec 0 6 9 9 0 0 0 0 0
14% 12% Growth Rate 10% 8% 6% 4% 2% 0%
Outstanding Resdential Mortgage Credit

Source: Bank of Canada (Financial Statistics).
Annual Growth Rate
18
The growth of mortgage lending can be attributed to a number of factors: (1) A benign interest rate environment with low inationary pressure. Lower interest rates increase housing affordability, in turn increasing the demand and price of residential properties. With steady increases in sales volumes and property values, the total outstanding value of mortgages in Canada has consequently grown. Except for Greater Vancouver, the affordability of housing has remained generally favourable across Canada even with the interest rate hikes experienced since 2005. Interest rates are still near historical lows compared with the high rates experienced in the past decade. In addition, only about one quarter of all residential mortgages in Canada have variable interest rates, exposing borrowers to rising interest rate risk, while the ve-year xed rate on conventional mortgages has remained relatively low (compared with a high of 21.75% in late 1981) and stable as shown in Chart 14.
(2) Canadian households generally have healthy debt-to-asset ratios, solid wealth gains and increased consumer condence, given the strength of the economy and high employment rates. Strong job creation, income growth and net migration continue to stimulate housing demand. (3) The growth in available capital, funding sources and new originators (especially smaller non-bank originators), as securitization, warehousing facilities and whole-loan purchases have become more prominent. (4) The expanding selection of mortgage products that increase affordability for borrowers or allow borrowers to tap into home equity for renancing, debt consolidation or other purposes. (5) Technological advances that make the mortgage application and underwriting process more efcient and effective. 6) The increasing signicance of mortgage brokers as intermediaries, bringing borrowers and lenders together to obtain a mortgage loan.
Chart 14: Mortgage Market Growth and Interest Rates

14 12 10 % 8 6 4 2 0
0 4 9 9 0 2 0 0 9 8 0 1 9 6 9 7 0 3 D ec . 0 5 D ec . D ec . D ec . D ec . D ec . D ec . D ec . D ec . D ec . D ec . 0 6
Mortgage Growth Rate
Bank of Canada Rate
5-Year Conventional Mortgage Rate
Source: MLS, Bank of Canada (Rates and Statistics).
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LENDING
The mortgage lending market has been dominated by the Chartered Banks for the past decade, with approximately 58% of total outstanding mortgages in Canada underwritten by them at the end of 2006, according to the Bank of Canada (see Charts 15, 16 and 17). The dominant position of Chartered Banks has remained fairly stable over the past decade. The
only noticeable change during that period was the increased presence of mortgage funding through NHA Mortgage-Backed Securities (the majority of which are Canada Mortgage Bond issuance), an increase of approximately 10%. The Trust and Mortgage Loan companies and to a lesser degree, Life Insurance and Other Finance Companies, have seen declining market shares. Market positions for other types of lenders such as Credit Unions, Pension Funds and Securitizations have remained stable over that period.
Chart 15: Residential Mortgage Lenders in Canada, 19972006

800 700 600 $ Billions 500 400 300 200 100 0
02
04
98
99
03
05
97
00
01
20
19
20
19
20
20
19
20
Chartered Banks Credit Unions and Caisse Populaires Pension Funds NHA Mortgage Backed Securities
20
Trust & Mortgage Loan Companies Life Insurance Companies Other Financial Institutions Special Purpose Corporations (Securitization)
Source: Bank of Canada (Financial Statistics). Securitization excludes securitized loans that are consolidated on the banks balance sheets as loans.
20
20
06
Chart 16: Market Shares of Residential Mortgage Lenders in Canada, 2006
Other Financial Institutions 4% Pension Funds 2% Life Insurance Companies 2%
NHA MBS 17% Special Purpose Corporations (Securitization) 3%
Chartered Banks 58%
Credit Unions & Caisse Populaires 13% Trust & Mortgage Loan Companies 1%
Chart 17: Market Shares of Residential Mortgage Lenders in Canada, 19972006

100% 80% 60% 40% 20% 0%
00 02 03 04 05 97 99 98 01 20 20 20 20 20 19 19 19 20 20 06
Chartered Banks Credit Unions and Caisse Populaires Pension Funds NHA Mortgage Backed Securities
Trust & Mortgage Loan Companies Life Insurance Companies Other Financial Institutions Special Purpose Corporations (Securitization)
21
INSURED MORTGAGE MARKET
Overview (a) Individual insurance According to the Ofce of the Superintendent of Financial Institutions (OSFI), the Bank of Canada and estimates by DBRS, approximately 44% of residential mortgages were insured as of December 31, 2006. Most mortgages in Canada are insured either by CMHC or Genworth (rated AA by DBRS as of June 1, 2006) under the National Housing Act (NHA). The NHA was enacted in 1944 to promote affordable housing for Canadians. The latest industry estimates indicate that CMHC commands about 70% of the market share of insured mortgages and Genworth holds the rest of the market. CMHC (nicknamed Cannie Mae, based on the similarity of its guarantee to that of Ginnie Mae in the United States) is a Crown Corporation wholly owned by the Government of Canada and governed by the Canada Mortgage and Housing Act, the Financial Administration Act and the NHA. CMHC has the same credit rating as the Government of Canada (rated AAA by DBRS as of July 31, 2006). Genworth entered the Canadian mortgage insurance market in 1995 as GE Mortgage Insurance Canada.
Mortgage insurance premiums in Canada are levied on the original mortgage amount. The premiums are paid upfront at the inception of the mortgage and the mortgage insurance is purchased for the entire amortization period of 25, 30, 35 or 40 years, rather than the term of the mortgage. Unlike the United States, partial mortgage insurance is not available. In addition, in the United States, premiums are generally paid in monthly instalments and adjustable based on the outstanding loan amount. Mortgage insurance is valid and transferable between lenders and a new insurance policy is not required if a mortgage is transferred to a different lender on renewal as long as the loan amount has not increased. Table 1 illustrates, both CMHC and Genworth, along with AIG United Guaranty, a new entrant in the mortgage insurance market, charge the same premiums for similar mortgage products. However, the underwriting standards of the insurers for similar products are different, with Genworth being considered to have less stringent standards than CMHC. For example, Genworth requires a maximum total debt service ratio
22
(TDS) of 44% with no limit on the gross debt service ratio (GDS) for standard borrowers with beacon scores of 680, while CMHC requires a maximum TDS of 40% and GDS of 32% for similar borrowers. Although insurance premiumshave been reduced by 15% since 2003 for rst time homebuyers making a 5% down-payment, insurance companies have experienced continued protability as the payout ratio was approximately 10% (based on $1.2 billion of insurance premiums collected on CMHC policies in 2005).
Table 1: Mortgage Insurance Premium Percentages
Amortization Years LTV Ratio 25 30 35 40
Up to 65% 65.01% - 75% 75.01% - 80% 80.01% - 85% 85.01% - 90% 90.01% - 95% 95.01%-100%
0.50% 0.65% 1.00% 1.75% 2.00% 2.75% 3.10%
0.70% 0.85% 1.20% 1.95% 2.20% 2.95% 3.30%
0.90% 1.05% 1.40% 2.15% 2.40% 3.15% 3.50%
1.10% 1.25% 1.60% 2.35% 2.60% 3.35% 3.70%
(b) Bulk Insurance In addition to mortgage insurance purchased and paid for by individual borrowers, mortgage lenders also insure pools of mortgages that have LTVs lower than 75% (80%, effective April 20, 2007). As previously noted, it is not mandatory to obtain mortgage insurance for mortgages with LTVs lower than 75% (80%, effective April 20, 2007). The primary incentive for a mortgage lender to purchase bulk insurance is to obtain capital relief. Capital risk weighting for uninsured mortgages is 50% (further reduced to 35% when the Basel II banking regulations are implemented) while insured mortgages do not attract any capital requirements. Therefore, bulk insurance is a quick and easy way to improve the capital ratios of lenders. Mortgage insurers are generally able to accommodate these requests since the risk associated with the underlying assets is less than the risk associated with mortgages having higher LTVs. Bulk insurance can also be seen as levelling the playing eld for smaller lenders with less available capital, such as credit unions and loan companies, as long as those smaller lenders remain approved lenders of mortgage insurers.
Recent Developments Over the past few years, several U.S. mortgage insurers have either expressed an interest or have begun operating in Canada because this country is regarded as the second largest mortgage insurance market in the world. In late 2006, AIG United Guaranty, a subsidiary of AIG, received approval from the Ministry of Finance to conduct a mortgage insurance business in Canada. The company has since started to work with a number of mortgage lenders. PMI Mortgage Insurance Canada (rated AA by DBRS as of May 10, 2007), a subsidiary of The PMI Group, Inc., headquartered in California, has received its Order to Commence and Carry On Business from OSFI on April 26, 2007, which enables it to begin actively marketing its products, pending receipt of provincial licences. The Triad Guaranty Insurance Corporation also announced its intention to enter
the Canadian market, and could potentially start operations in 2007. Over the same period, both CMHC and Genworth rolled out several new mortgage insurance products in order to remain competitive and to accommodate the booming housing market. For example, CMHC, which historically only insured prime credit mortgages, has begun accepting borrowers with credit scores as low as 580 or with less stringent income verication requirements than in the past. Genworth is also now accepting borrowers with credit scores as low as 540 in certain circumstances. In 2006, both insurers announced their acceptance of mortgages with amortization terms longer than the typical 25 years (up to 40 years). CMHC also began accepting mortgage loans with interestonly periods of up to 10 years.
23
(a) Conventional According to the CBA, a GDS of 32% and a TDS of 40% are prescribed maximum ratios for the loans to qualify under these requirements. They are generally referred as A, conventional or prime loans. The prime mortgage market has become commoditized and banks and credit unions compete intensively on pricing to generate economic origination volumes. Most mortgages underwritten by Canadian bank and credit unions are secured by a rst lien on an owner-occupied property with an LTV at or below 75% (80%, effective April 20, 2007) (i.e., with a down payment of at least 20% or 25%) to customers who meet the GDS and TDS requirements. This, in part, is attributable to the general conservative prole of Canadian banks and credit unions and the requirement of the Bank Act for mortgage insurance on loans with an LTV greater than 75% (80%, effective April 20, 2007).
Home Equity Lines of Credit (HELOC) HELOC in Canada are generally rst-lien mortgages underwritten as a substitute for regular amortizing mortgages to borrowers with high credit scores with a maximum allowable LTV of 75% (80%, effective April 20, 2007) and an interest rate based on a benchmark oating rate (usually the Prime rate). Some lenders also provide insured HELOC products with LTVs up to 95%. With the HELOC product, borrowers have the exibility to make payments as low as the interest amount (negative amortization is allowed in limited circumstances) and the ability to make frequent draws upon the equity of the property, up to the LTV limit. The current low interest rate environment has made mortgages with interest rates that oat in line with the prime rate an attractive option for buyers looking to minimize monthly payments and increase affordability. The payment and drawing exibility makes HELOCs an appealing alternative to the conventional mortgage lending offered by traditional nancial institutions, as these lenders have increased their focus on the borrowers choices in the face of growing competition. Due to the usual 75% (80%, effective April 20, 2007) LTV limit, the nature of rst-lien borrowing, the exibility of payments and the oating-rate based interests, HELOC loans in Canada are more comparable to payment-option
24
NON-INSURED MORTGAGE MARKET
adjustable-rate mortgage (Option ARM) products in the United States where they were initially created and marketed to well-heeled home buyers than the home-equity loan products commonly offered in the United States, which are underwritten as second-lien loans (Piggybacks) with amortizing features and higher interest rates than rst-lien mortgages or underwritten as a renancing substitute for a rst-lien mortgage.
(b) Non-conventional Overview Before the emergence of specialized, alternative mortgage lenders, some banks and credit unions in Canada had some exposure to the so-called sub-prime market as their loan portfolios included mortgage loans with an LTV below or equal to 75%, made to less-creditworthy clients. The focus of lenders in these cases was on the property (and embedded equity, leading to the term hard-equity lending) rather than the borrowers credit score. The rationale was that the loss on the mortgage, if any, would be minimal given the equity buffer of at least 25% should the mortgage default and the property be foreclosed. Only a minimal percentage of bank and credit union portfolios reect this type of lending because a major consideration for any bank or credit union contemplating sub-prime lending is the potential headline risk when dealing with borrowers of non-prime credit. Generally, sub-prime mortgages require proactive and aggressive collections and management of arrears and defaults, leading to a greater risk of negative public exposure for banks and credit unions.
Since the banks and credit unions historically excluded or under-served the non-prime market, they left an opportunity for alternative lenders to focus on this area. Generally, these alternative lenders offer a greater variety of mortgage products and have more sophisticated technology for credit scoring to assess the perceived higher risks, with compensating pricing. Some of these lenders follow strict rules of lending determined by credit scores, LTV, documentation, property type, and location et cetera, to mitigate their risk exposure and price mortgages accordingly. Others take a more holistic approach and only make loans that make sense or have the right feel. These alternative lenders also provide credit to borrowers who cannot meet the GDS/TDS ratios
prescribed by the banks or who cannot or are not willing to put down a 25% down payment. With mortgage products such as loans with amortization terms of 30, 35 or 40 years or interest-only loans combined with higher GDS/TDS maximums, housing affordability for borrowers improves. Products Sub-prime mortgage Sub-prime mortgages are mortgages that are underwritten to borrowers with less-than-perfect and sometimes no credit histories. While the experience of the U.S. marketplace can provide certain useful insights, it is important to remember that the U.S. sub-prime mortgage market is fundamentally different from Canadas. The U.S. sub-prime market is much larger than Canada and U.S. lenders are more aggressive and willing to underwrite further down the credit scale. The more conservative nature of Canadians and the lack of interest deductibility for taxes also suggest that the mortgage loans are paid down (prepaid) faster than in the United States, potentially resulting in lower defaults and better portfolio performance. High-ratio mortgage High-ratio mortgage loans are fairly common in the United States (up to 125% LTV) because the tax incentives associated with mortgage-interest deductibility encourages the shift from more-expensive unsecured borrowing to cheaper, real estate related secured borrowing. The tax savings from the interest deductibility can be used to invest in assets with potentially higher returns than the mortgage interest rates or can be used to pay down high interest-bearing borrowings such as credit cards (for example, debt consolidation). No such tax incentives exist in Canada and the current maximum LTV generally available in the market is 107%. Second Mortgage Second mortgages are similar to rst mortgages except that the claim against the property mortgaged is subordinate to another mortgage (the rst lien). The loss experienced on second mortgages is higher because of the subordinated nature of the loan. Interest-only (I/O) Mortgage The I/O product offers a lower payment to borrowers since no principal payments are due for a period of usually three or ve years. In Canada, this product is structured as an I/O balloon and has thus far only been offered to borrowers with high credit scores. Because of the non-amortizing nature
of loan principal during the I/O period, borrowers are required to pay the full principal amount at the end of the I/O period. Borrowers with I/O products essentially rely on rising home values (equity buildup) over the outstanding loan amount to assist in the repayment of the principal amount of the loan at the end of the mortgage term. Mortgage Brokers Lenders in the non-conventional mortgage market typically use mortgage brokers as the primary source of business origination. This is primarily a function of the lack of (or the decision not to have) a brick-and-mortar branch presence similar to banks and credit unions. The increasing reliance on brokers has occurred concurrently with the increasing acceptance of brokers by the general public, enhancing the ability of alternative lenders to originate loans without any physical nationwide presence. Mortgage brokers have long been utilized to source residential mortgages for various originators in Canada. However, the more-recent appearance of super brokers (larger regional or national rms), the development of web-based sourcing products and changes in consumer behaviour have all contributed to brokers having a far greater impact on mortgage origination than in previous years. According to a CAAMP survey, 31% of mortgage holders consulted a mortgage broker in 2006, an increase of 6% from 2005. Other industry estimates indicate that mortgage lending through brokers has grown from 3% of total mortgage originations a decade ago to the range of 25% and 30% in 2006. The growing broker presence is an extension of the same trend in the United States, where mortgage brokers handled 68% of the home loans originated in 2004, worth US$1.8 trillion, according to the National Association of Mortgage Brokers. The effect has been widely felt as more mortgage borrowers, not just non-conventional borrowers, take advantage of the expanded options available to search for the most cost-effective mortgage, rather than solely dealing with traditional institutions. Traditional nancial institutions are responding to these new entrants by offering lower rates and more tailor-made products. The brokerage industry has started to play a more signicant role in the mortgage lending process by
25
increasing competition and driving costs down. The expansive mortgage broker network allows mortgage lenders of all sizes to immediately gain a national presence at lower initial or set-up costs without incurring national advertising expenses or the expense of maintaining branch ofces. Given such developments in both Canada and the United States, mortgage brokers are expected to have an increasing impact on the residential mortgage market in Canada. Current Market With the proliferation of non-conventional mortgage lenders and products, DBRS now denes the residential mortgage lending sector from both a credit and LTV perspective as depicted in Table 2. Using A/prime mortgage loans as a starting point, loans made to good credit customers with
an LTV higher than 75% (80%, effective April 20, 2007) are considered Alternative-A or Alt-A and loans made to customers with weaker credit (below 680), who would not qualify under bank underwriting standards, are considered Near-prime or A (640-679) or Sub-prime (below 640). The Alt-A category also includes mortgage loans made to prime individuals without a well-documented credit history or thorough documentation, secondor third-lien type loans with a combined LTV over 75% (80%, effective April 20, 2007) or interestonly loans. Both Alt-A loans and sub-prime loans are considered Non-conventional. Near-prime loans generally meet banks underwriting standards as long as full documentation is available or the LTV is below 75% (80%, effective April 20, 2007), depending on the risk appetite of the individual banks.
Table 2: Market Segmentation of Non-Insured Mortgages
107%
Subprime
Alt -A
Alt -A
Mortgage LTV Ratio
75%
Conventional
Subprime (limited bank underwriting)
Near Prime (bank underwriting)
Prime (bank underwriting)
580
640
A -
680
Borrower Credit Score
26
Based on public information and other resources, DBRS estimates that by the end of 2006, the value of outstanding non-conventional mortgages in Canada was approximately $16 billion, representing slightly more than 2% of the total market. Based on U.S. experience, some industry sources estimate the potential size of the total non-conventional market in Canada to be as large as $50 billion to $100 billion. The following non-conventional mortgage lenders currently operate in Canada: Accredited Home Lenders Canada Abode Mortgages AGF Trust Canadian Western Bank Citi Financial Concentra Financial
Effort Trust Equitable Trust Company Firm Capital Income Trust FirstLine Mortgages First National Financial LP HSBC Finance Canada Home Trust Company GE Money Canada GMAC Residential Funding of Canada MCAP Mortgage Corporation Money Connect myNext Mortgage N-Brook Mortgage Group ResMor Trust Company Spectrum-Canada Mortgage Services Inc. Wells Fargo Financial Canada Xceed Mortgage Corporation
27
Conclusion
This study concludes DBRSs review of the Canadian residential mortgage market, which is Part 1 of a three-part mortgage study. Parts 2 and 3 of the mortgage study will continue to discuss the development and performance of residential mortgage securitization in Canada, DBRSs approach to analyzing residential mortgages in securitization transactions and the appropriateness of enhancement levels and structural considerations for those transactions, along with a discussion of DBRSs methodologies.
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Copyright 2007, DBRS Limited, DBRS, Inc. and DBRS (Europe) Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources believed by DBRS to be accurate and reliable. DBRS does not perform any audit and does not independently verify the accuracy of the information provided to it. DBRS ratings, reports and any other information provided by DBRS are provided as is and without warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, tness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, ofcers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, interruption in service, error or omission or for any resulting damages or (2) for any direct, indirect, incidental, special, compensatory or consequential damages with respect to any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representatives in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. DBRS receives compensation, ranging from US$1,000 to US$750,000 (or the applicable currency equivalent) from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS.
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Residential Mortgages and Securitization in Canada: Overview of the Mortgage Market

Residential Mortgages and Securitization in Canada: Overview of the Mortgage Market

CHARTS AND TABLES

Overview of the Canadian Residential Property Market

Chart 1: Historical Sales Volumes and Values of Canadian Residential Properties

45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

250,000 200,000 150,000 100,000 50,000 0

Monthly Sales Volume

Average Property Value

Chart 2: Historical Mortgage Default Rate vs. Property Price Appreciation

Annual Price Appreciation

Mortgage Default Rate

Chart 3: Average Resale Price and Default Rates in Ontario

200,000 150,000 100,000 50,000 0

0.8% 0.6% 0.4% 0.2% 0.0%

Average Resale Price

Mortgage Default Rate

Chart 4: Average Resale Price in Greater Toronto Area

300,000 250,000 200,000 150,000 100,000 50,000 0

Chart 5: Average Resale Price of GTA vs. Central Toronto

Toronto (central district)

Chart 6: Average Resale Price and Default Rates in Quebec

1.2% 1.0% Default Rate 0.8%

Average Resale Price

Mortgage Default Rate

Chart 7: Average Resale Price in Greater Montreal Area

Source: Greater Montreal Real Estate Board, CMHC, MLS.

Chart 9: Average Resale Price and Default Rates in British Columbia

1.2% 1.0% Default Rate 0.8% 0.6% 0.4% 0.2% 0.0%

Average Resale Price

Mortgage Default Rate

Chart 10: Average Resale Price in Greater Vancouver Regional District

Chart 11: Average Resale Price and Default Rates in Alberta

1.2% 1.0% Default Rate 0.8%

0.4% 0.2% 0.0%

Average Resale Price

Mortgage Default Rate

Chart 12: Average Resale Price in Calgary

Characteristics of the Canadian Residential Mortgage Market

Dynamics of the Canadian Residential Mortgage Market

Chart 13: Residential Mortgage Market in Canada

14% 12% Growth Rate 10% 8% 6% 4% 2% 0%

Outstanding Resdential Mortgage Credit

Annual Growth Rate

Chart 14: Mortgage Market Growth and Interest Rates

Mortgage Growth Rate

Bank of Canada Rate

5-Year Conventional Mortgage Rate

Source: MLS, Bank of Canada (Rates and Statistics).

Chart 15: Residential Mortgage Lenders in Canada, 19972006

Chart 16: Market Shares of Residential Mortgage Lenders in Canada, 2006

Other Financial Institutions 4% Pension Funds 2% Life Insurance Companies 2%

NHA MBS 17% Special Purpose Corporations (Securitization) 3%

Chartered Banks 58%

Chart 17: Market Shares of Residential Mortgage Lenders in Canada, 19972006

INSURED MORTGAGE MARKET

0.50% 0.65% 1.00% 1.75% 2.00% 2.75% 3.10%

0.70% 0.85% 1.20% 1.95% 2.20% 2.95% 3.30%

0.90% 1.05% 1.40% 2.15% 2.40% 3.15% 3.50%

1.10% 1.25% 1.60% 2.35% 2.60% 3.35% 3.70%

NON-INSURED MORTGAGE MARKET