Final answer:
An early symptom of the U.S. subprime mortgage market problem in Canada was a significant impact on financial institutions, experiencing the effects of the U.S. housing market downturn and subsequent banking crisis. As homeowners defaulted on mortgages, banks faced huge losses on securities backed by subprime loans, leading to a credit crunch and widespread bank failures.
Step-by-step explanation:
In Canada, an early symptom of the U.S. subprime mortgage market problem was a noticeable impact on financial institutions, primarily due to the contagion effect from the U.S. housing market decline. The housing bubble in the U.S. showed signs of bursting as early as 2005, with increasing delinquencies and late payments on mortgages, and an oversupply of homes on the market leading to falling home values. This decreased the wealth of the household sector and led to homeowners reducing their spending. A significant number of mortgage lenders started to file for bankruptcy as a consequence of homeowners defaulting on their mortgages.
The situation escalated by 2008, spreading throughout the financial markets, resulting in a credit crunch where lenders became hesitant or unable to extend credit even to credible borrowers. The banking crisis was exacerbated as banks faced the reality of holding assets backed by these risky subprime loans that had lost significant value, leading to widespread bank failures.
Changes in finance and banking laws during the 1990s and early 2000s had allowed lenders to securitize mortgage loans and sell them as bonds. This process detached the financial interest of the lender from the borrower's ability to repay, thereby increasing the allure of granting high-risk loans. When the housing market collapsed, banks found their mortgage-backed securities to be worth much less than anticipated, resulting in a dire situation for financial institutions.