CMHC - The worlds largest Sub Prime Lender

[broken_legs]

I'm sure everything will be just fine...
http://thetyee.ca/Opinion/2009/10/22/BubbleWillBurst/




Why Canada's Housing Bubble Will Burst

'The largest sub-prime lender in the world is now the Canadian government.'

By Murray Dobbin, 22 Oct 2009, TheTyee.ca


What do the mid-recession housing boom and the Harper Conservatives' rise in the polls have in common? Answer: the Canada Mortgage and Housing Corporation's massive sub-prime mortgage scheme that is keeping up the appearance of an economic recovery. Reading the newspapers these days, you have to wonder whether Canada was on another planet when the global credit crisis hit. House prices have actually increased in some provinces and now there is a shortage of houses for sale in southern Ontario. Credit is flowing everywhere.

But what few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world. What's almost as alarming as this reckless policy is that no one in the financial media is talking about it, even though everyone knows the facts. I was alerted to the scandal by David Lepoidevin, a financial advisor with National Bank Financial, in a warning letter to his clients.

The facts are that over 90 per cent of existing mortgages in Canada are "securitized." That is the practice of pooling mortgages (or other assets) and then issuing new securities backed by the pool -- MBSs, or Mortgage Backed Securities. That's what happened with the sub-prime mortgages in the U.S. which (because the whole pool was so diversified) received triple-A ratings by the rating agencies. Losses around the world amounted to hundred of billions of dollars

Credit is still tight in the U.S. because no private investor has the stomach for such risky MBSs. That's because those losses were private and not back-stopped by any government. In Canada, mortgages have been securitized for years. The Canadian-issued securitizations are called National Housing Act, Mortgage-Backed Securities. Unlike the failed U.S. pools, says Lepoidevin, "In order to find buyers for securitized mortgage pools, the Government of Canada has put guarantees on them" by directing CMHC to guarantee all Canadian mortgages.

Propping up the real estate market

So long as borrowing requirements were tight, the percentage of loans that were securitized remained modest. But in 2007 the Harper government allowed the CMHC to dramatically change its rules: it dropped the down payment requirement to zero per cent and extended the amortization period to 40 years. In light of the mortgage meltdown in the U.S., Finance Minister Flaherty moderated those rules in August 2008 (it's now five per cent down and 35 years). But these are still relatively very loose requirements and securitization has taken off.

By the end of 2007 there were $138 billion in NHA securitized pools outstanding and guaranteed by CMHC --17.8 per cent of all outstanding mortgages. By June 30, 2009, that figure was $290 billion, a figure Lepoidevin says, "exceeds the total value of mortgages offered by CMHC in its 57 years of existence!" CMHC's stated goal was to guarantee $340 billion by the end of this year and is on track to reach $500 billion by the end of 2010. Total mortgage credit in Canada will grow by 12-14 per cent of GDP in 2009.

In an effort to prop up the real estate market in 2008 (when affordability nosedived), the Harper government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing. CMHC described these risky loans as "high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities." The approval rate for these risky loans went from 33 per cent in 2007 to 42 per cent in 2008. By mid-2007, average equity as a share of home value was down to six per cent -- from 48 per cent in 2003. At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income; in Canada today that ratio is 7.4:1 -- almost 50 per cent higher.

Putting off the inevitable

This high-risk policy actually prevents the natural playing out of the recession -- that is, the purging of the excesses of the previous boom period. CMHC's easy-money resulted in a 9.3 per cent increase in Canadian household debt between June 2008 and June 2009.

Even bank economists admit to being concerned about a housing bubble. In a September research note, Scotiabank economists Derek Holt and Karen Cordes said, "lenders have been scrambling to get enough product to put into the federal government's Insured Mortgage Purchase Program over the months, and that may have translated into excessively generous financing terms." Holt suggested that in two or three years -- or whenever the Bank of Canada increases interest rates -- many of these mortgages would be at risk.

The banks themselves have taken on virtually no new risk. According to CMHC numbers in the two years from the beginning of 2007 to January 2009, Canadian banks increased their total mortgage credit outstanding by only 0.01 per cent. Fully 90.5 per cent of all growth in total Canadian mortgage credit outstanding since 2007 has been accounted for by Mortgage Backed Securities. Of course, the banks have no interest in saying no if you have qualified for a securitized CMHC loan -- because they bear no risk if you default.
Murray Dobbin's Bloggin' Now


If that sounds like sub-prime mortgages, it should. Sub-prime is any loan below prime. If a bank refuses you a loan, and CMHC gives you one, the loan is sub-prime. As Lepoidevin says in his warning letter, "Every single U.S. lender specializing in sub-prime has gone bankrupt. The largest sub-prime lender in the world is now the Canadian government."

Economic fiction

This is the ticking time bomb Prime Minister Stephen Harper has tossed at the Canadian taxpayer. Why? So that he can maintain the fiction that he is a good economic manager and win a majority in the next election.

The problem is no opposition political party wants to expose the looming disaster and risk being responsible for a dramatic fall in house prices. As Liberal finance critic John McCallum told The Globe and Mail: "I don't think we want the government to be rationing Canadian home-buying."

The price of political cowardice will be very high. And in the end the housing bubble will burst anyway, putting taxpayers on the hook for tens of billions of dollars in defaulted mortgages. [Tyee]

[Supa Dexta]

More gloom then exists I think.. ^

[Isaiah]

This is nothing more than an alarmist "sky is falling" article. The mortgage crisis didn't hit Canada because the lenders are more prudent with respect to who they issue the mortgages to.

CMHC doesn't issue mortgage loans, they insure them. You still need to be approved by a bank or private lender first and the conditions here are a lot more strict than in the US. Canada also hasn't been hit with the large waves of layoffs and unemployment numbers that the US has seen. When interest rates do go up, it will be at a gradual pace once the economy is well into the recovery phase.

[benyl]

Fear mongering.

Canada doesn't have Adjustable rate mortgages that got the US in trouble with increased payments after a couple of years of low payments.

[BigMass]

Originally posted by benyl
Fear mongering.

Canada doesn't have Adjustable rate mortgages that got the US in trouble with increased payments after a couple of years of low payments.

we have ARMs... i think you're referring to the teaser rates.

Anyway, my theory is that we were heading towards a similar but delayed downward move as in the US but the sudden and drastic actions by the Treasury and Fed put a halt to our decline. The propping up of banks and the stock market that has lead to this unsustainable temporary “recovery” in the US is, IMO, only delaying the inevitable in Canada. Once the US is no longer able to monetize it’s debt and the banks are no longer able to sustain the fake values placed on their mortgage backed securities, the crash in the US will continue, this time at a much more drastic pace. But hey, people just want to hear good news. Kind of like how nobody wanted to hear about the housing bubble 3 years ago.

[broken_legs]

Heres what I got from teh article.


CMHC is a peice of shit.

It protects bank profits at the expense of taxpayers money.

The banks continue to loan out money because CMHC will insure the mortgage and thus leave the bak with ZERO risk.

This is why the housing market in Canada is not declining - There is no risk of default - and even if people do default there wont be any losses to the bank - Only the taxpayers.

Yay for taxpayers

[BigMass]

Originally posted by broken_legs
Heres what I got from teh article.


CMHC is a peice of shit.

It protects bank profits at the expense of taxpayers money.

The banks continue to loan out money because CMHC will insure the mortgage and thus leave the bak with ZERO risk.

This is why the housing market in Canada is not declining - There is no risk of default - and even if people do default there wont be any losses to the bank - Only the taxpayers.

Yay for taxpayers

It’s the same deal that went on with Freddy and Fannie in the US. It creates moral hazard in lending. And we all know how well Freddy and Fannie are doing currently heh

[broken_legs]

Speaking of freddy and fannie....

http://www.bloomberg.com/apps/news?pid=20601087&sid=abTVUSp9zbAY&pos=1

Coles Notes:

Freddie and Fanny were each given a 200 billion (400 total) dollar cap so if they lost more money the government (taxpayers) wouldnt be on the hook.

But now the government has voted to remove the cap completely, even though they have only reportedly used 111 of the 400 billion.

huh? They aren't going to use the current provisions so lets give them more?

Or
they've obviously realized losses far greater than the 400 billion dollar cap and are preparing to write down more mrotgages.


Now back to CMHC - this is a fraud on Canadians.

If you buy mortgage insurance and pay for it yourself, it should cover YOU not the BANK. Not to mention that if you do default and CMHC takes a hit and has to pay out the bank, you are still on the hook to CMHC and they will come after you for the difference.

So to sum up:
- CMHC protects Banks by eliminating all default risk
- CMHC artificially supports lending markets
- CMHC pays banks profits with canadians tax dollars.

[broken_legs]

heres another gooder:

I know, I know... more fear mongering.

Everything in Canada is happening exactly like it did in the US, but were different.

I know, I know. :)





CMHC - Canada's Breaking Point
Posted on 11:17 AM by Jonathan


(ALL GRAPHS EXTRACTED FROM CMHC PUBLICATIONS)

Everyone here is probably very well aware of who CMHC is. For any international visitors, CMHC was formed as a crown corporation in Canada after World War II to address the shortage in housing. It's mandate was to make home ownership accessible to all Canadians. CMHC primary deliverables is mortgage insurance and mortgage backed securities. Think Fannie and Freddie.

In 2001 GE Capital was permitted to join CMHC in the Canadian mortgage insurance industry to provide competition in the marketplace. GE Capital began insuring Canadian mortgages and issuing NHA-MBS (Mortgage Backed securities insured by the Government of Canada). In response to competition, CMHC began its trip down a new road.


In 2002 total outstanding mortgage debt in Canada was still a cool $467 billion. This was predominantly issued to good credit and people with proper downpayments. CMHC insured a small portion of this debt.

In 2003 CMHC decided to remove the price ceilings limitations. That is, it would insure any mortgage regardless of the cost of the home.

In 2007, after years of lobbying, the now defunct AIG found new hope with the newly elected Conservative government. AIG was now permitted to insure high risk Canadian mortgages. It was also permitted to issue mortgage backed securities and exchange these on the open market. At the same time, the Conservative government launched a radical policy that allowed CMHC, AIG & GE to insure 35 year ams and 0% down payments. A few months later this was expanded to 40 year amortizations.

Thanks to this stimulus in 2007 the market radically changed. Historically high home prices continued to gain steam. High risk borrowers flooded the real estate market. Throughout 2007, the average home buyer who took out a mortgage had only 6% equity in their homes. That's the national average downpayment for all mortgages including buyers who moved up.
(2006 and prior years reflect a combination of larger downpayments, home price appreciations, payments on mortgages and shorter amortization terms)

In 2008, Canadian home prices started to dip as affordability became the worst on record in many cities. CMHC admits that it was ordered to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing. 42% of all high risk applications were approved, a 33% increase over 2007. (Please see matrix below for more information)



While many banks were flogging that it was a great time to buy a home, not one of them increased their mortgage holdings. Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit oustanding listed on their books by only 0.01% (see CMHC chart below). One has to question if real estate was such a great investment, why didn't they want to touch it?

The only growth has been in the securitization of Canadian mortgages. In Canada this scheme has worked very well despite the credit crisis since the government of Canada insures 100% of any losses (not just the 20% downpayment). This means that the securities are as secure as government bonds, yet pay a higher premium (currently 3.1%).

The banks get to keep the difference between the interest rate charged to consumers and the rate paid to investors. The result of a government backing is cheaper subsidized funds for them to issue mortgages with. It also removes all risk.

The largest market for MBS is 5-year fixed single residential homes. The average term has swelled over the past two years and the majority of issues are for ams over 30 years. Some pools of MBS were issued at 9% but pay investors only 4% - representing how risky and profitable these loans are. CMHC charges 0.2% for the insurance, leaving up to 4.8% profit for the bank.

Securitization has accounted for 90.5% of all growth in total Canadian mortgage credit outstanding since 2007. Its market has grown from 100 billion in 2006, to 130 billion in 2007, to 260 billion by Q1 of 2009 (UPDATE: $295 billion by mid-June 2009). CHMC plans to expand securitization of debt to 370 billion by the end of 2009 as per the conservative government request.

All of these securties are traded on an open exchange and insured by the Government of Canada. Currently TD issued 59 billion in securities outstanding, CIBC 51 billion, BNS 32 billion, RBC 45 billion and BMO 27 billion. This explains why, if you are like so many, your eye balls popped when the bank preapproved your mortgage. Many individuals are being granted 500-800K for their first home purchase if their household income ranges from 110-170K. The banks don't care. You either qualify for securitization or you don't. Their is no emotion or extra thought put into the loan by the bank since it bears zero risk. Investors don't care who you are since the security is backed by the government. In fact the only person who should care is you, the taxpayer. But apparently in Canada no one cares about the risk the taxpayer takes on. It's all about having a lavish political career.

As interest rates edged up about a percent in early 2008, Canadian real estate began to nose dive losing 10% of its value by September 2008. 10% is a significant confidence level in real estate. Surpassing it means that all the buyers in 2007 would move into negative equity. Cranking interest rates down to 0% in October of 2008 along with the expansion of government backed securities allowed mortgage rates to reach an all time low. The resulted in a house boom in the middle of the worst Canadian recession since the Great Depression. Home prices in May 2009 reached an all time high of $326,613 or over 7x the average Canadian income.


On Jan 1 2009 CMHC allowed non regulated financial institutions to issue mortgage backed securities. Furthermore on January 26, 2009 CMHC allowed the securitization of line of credits, non amortizing and amortizing loans and readvanceable loans to also be securitized.

CMHC indicates in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of 2009. Looking at 2008 and 2007, one can clearly see that CMHC has drastically exeeded their planned figures. 812 billion is more than likely a minimum target. At this rate the Government of Canada will be insuring well over $500 billion in securitized mortgages and lines of credit by the end of 2010. It will also have issued over $600 billion in outstanding mortgage insurance.

Even at the zenith of the US housing bubble, prices peaked around $230,000 US while incomes were around $47,000 US. In Canada, incomes are $44,000 and prices are now at $326,613. If I have evidenced to you at this point how risky our lending has been, how are we so different than America? One might even say that we are much worse.

None of this is sustainable. This will all end very badly for our nation and taxpayers in the next couple of years.

References:

All charts, facts and figures were extracted from the CMHC website. CMHC provides free monthly, quarterly and annual publications on their website. Graphs were extracted from these publications.

CMHC Home Page: http://www.cmhc-schl.gc.ca/
CMHC MBS: http://www.cmhc-schl.gc.ca/en/hoficlincl/mobase/index.cfm
CMHC Order Desk (Free Publications): https://www03.cmhc-schl.gc.ca/b2c/b2c/init.do?language=en


Jonathan Tonge
www.americacanada.blogspot.com

[s2k_boi]

^ I believe that article has incorrect info on it. I don't believe CMHC has allowed line's of credit under that program for awhile now... but some correct me if I'm wrong.

But most people has to qualify with a 40%TDSR weather it's CMHC insured or not. But I am not saying that there isn't mortgage brokers out there that would be getting deals approved on say 45% instead of 40% though.

[autosm]

From what I hear its not quite as easy to walk from a house in Canada as it is in the US?

[Supa Dexta]

What do you mean? Them pulling out cabinets, doors, ceiling fans and anything else they think can pawn before walking away? haha that would be a lot of work... :rofl:

[CUG]

I couldn't imagine how impossibly fucked up this situation would be if the liberals were handling it. I suspect they'd make like the american big bank ceo's, secure their take and leave the country.

[broken_legs]

Originally posted by CUG
I couldn't imagine how impossibly fucked up this situation would be if the liberals were handling it. I suspect they'd make like the american big bank ceo's, secure their take and leave the country.

it was teh conservatives that finally gave in to the lobbysts and allowed AIG and GE capital to compete with CMHC.

It was the conservatives that changed the rules and alowed CMHC to start backing 35 yr then 40 yr mortgages.

Conservatives in Canada = Big Business lobby lap dogs.

[Redlyne_mr2]

Whoever wrote this article is an idiot

[Choice]

Would have been more relevant if it was recent, the article was back in October.

[broken_legs]

Originally posted by s2k_boi
^ I believe that article has incorrect info on it. I don't believe CMHC has allowed line's of credit under that program for awhile now... but some correct me if I'm wrong.

But most people has to qualify with a 40%TDSR weather it's CMHC insured or not. But I am not saying that there isn't mortgage brokers out there that would be getting deals approved on say 45% instead of 40% though.


I have a CMHC insured line of credit.

Bank gave me 100,000 dollars without even doing an appraisal.

Knowing that the bank isn't actually putting any capital at risk in this arrangement sure makes a lot of sense as to how easy it was for me to get this line of credit. 95% LT(fictional)value

[Mys73ri0]

Originally posted by autosm
From what I hear its not quite as easy to walk from a house in Canada as it is in the US?

Originally posted by Supa Dexta
What do you mean? Them pulling out cabinets, doors, ceiling fans and anything else they think can pawn before walking away? haha that would be a lot of work... :rofl:

I could be wrong (and probably am) but I believe in the US they can only repossess your house and can't come after any of your personal assets if you walk away from the mortgage. However in Canada, they can come after your personal assets as well if you walk away from the mortgage.

[broken_legs]

Originally posted by Isaiah
This is nothing more than an alarmist "sky is falling" article. The mortgage crisis didn't hit Canada because the lenders are more prudent with respect to who they issue the mortgages to.

CMHC doesn't issue mortgage loans, they insure them. You still need to be approved by a bank or private lender first and the conditions here are a lot more strict than in the US. Canada also hasn't been hit with the large waves of layoffs and unemployment numbers that the US has seen. When interest rates do go up, it will be at a gradual pace once the economy is well into the recovery phase.

http://i274.photobucket.com/albums/jj259/broken_legs/CMHCMBS.jpg

Heres some FACTs from the CMHC website:
http://www.cmhc.ca/en/hoficlincl/in/camobo/upload/Introduction-to-the-CMB-Borrowing-Program.pdf



Canada Mortgage Bonds represent the latest evolution for mortgage funding in Canada. Under the Canada Mortgage Bond Program, investors receive a fixed interest coupon bond with interest payments made semi-annually over the term of
the bond and repayment of principal on a specified maturity date. The timely payment of interest and principal to investors is guaranteed by CMHC and backed by the Government of Canada.

Canada Mortgage Bonds will be issued through a newly created special purpose trust known as the Canada Housing Trust (CHT).

The Trust sells non-amortizing Canada Mortgage Bonds to investors and uses the proceeds to purchase mortgages packaged in newly issued National Housing Act Mortgage- Backed Securities (NHA MBS) from Approved Sellers. Canada Mortgage Bond investors are then paid interest and principal from the proceeds of the underlying mortgages collected by MBS Sellers on behalf of the Trust.


So you are correct in the sense that CMHC doesn't actually issue loans or credit directly.

But in reality the banks aren't loaning any money. They take the risk of the loan for as many days as it takes them to package it into MBS and sell it to the CMHC which then sells it to investors.

Please someone explain to me how this is any different than what happened in the USA.

This, to me, is exactly what happened in the USA. The only source of funding for mortgages is coming at the explicit guarantee of the taxpayers just like it did with Fanny and Freddy. This is not sustainable or safe for the housing market.




Originally posted by Redlyne_mr2
Whoever wrote this article is an idiot

Can you expand on this some more?

I think i have presented some information with factual backing, i would like to expand my knowledge some more. If there is some elephant int he room I am not seeing here, please let me know I would like to learn more.

Thanks

[s2k_boi]

Originally posted by broken_legs



I have a CMHC insured line of credit.

Bank gave me 100,000 dollars without even doing an appraisal.

Knowing that the bank isn't actually putting any capital at risk in this arrangement sure makes a lot of sense as to how easy it was for me to get this line of credit. 95% LT(fictional)value

Was this recent or was it awhile back? cause back in the day it was not an issue doing a loc w/ cmhc (I am guessing up till one or two years ago they axed the loc program... but can not 100% confirm as we speak). Plus CMHC has there own appraissal system so the banks do not have to appraise your house if cmch thinks it's within comparables.

[max_boost]

So what should I do? Sell my house? Re-buy after the crash? :nut: :dunno:

[Supa Dexta]

Sell now, buy 3 after the crash!

[max_boost]

^^

Haha that's easy to say.

1 year ago nothing was selling, everyone was scared shitless. Try catching a falling knife? People like to buy things when they go up, not down, psychologically at least when it comes to homes and stocks. Everything else, if it goes on sale, people buy more.

Anyway, not so much as a crash, but I can't see property value continuously going up without salaries going up or inflation in general. Doesn't make sense to me? People can only afford so much. I would rather it go sideways for awhile.

[broken_legs]

Originally posted by s2k_boi


Was this recent or was it awhile back? cause back in the day it was not an issue doing a loc w/ cmhc (I am guessing up till one or two years ago they axed the loc program... but can not 100% confirm as we speak). Plus CMHC has there own appraissal system so the banks do not have to appraise your house if cmch thinks it's within comparables.

I was not aware that CMHC required their own appraisal system to be used. I'm pretty sure I saw it happen in from of my eyes (January 2008) - Girl at TD types in address of property and asks what i think its worth and I say its worth 245 thinking VERY optimistically. Then BAM she says its good to go and I come back 7 days later and sign the papers.

Done deal......

I'm just worried about the moral hazard here:
We have banks originating loans that get paid no matter what and don't take any risk associated with the loan.

So my question to you guys is:
-What is their interest in making good loans?
-Further more, why haven't banks increased their mortgage holdings in the last 2 years?
-If real estate is so solid, then why don't they take the risk of holding the mortgage themselves for the extra 2-3% return?
-Doesn't it bother anyone that we are doing exactly the same thing they did in the states before the market came crashing down?
- Doesn't it bother you that no one will lend money for a mortgage without the explicit backing of the Canadian Government??
-If the market was going to crash how much more evidence would you need? What exactly would convince you to get out?


Originally posted by Supa Dexta
Sell now, buy 3 after the crash!


Originally posted by max_boost
So what should I do? Sell my house? Re-buy after the crash? :nut: :dunno:

Honestly this is my plan - If I can't move my current mortgage into my RRSP, I'll be selling. I would like to be debt free, rather than house poor.

[Supa Dexta]

I don't think I'm going to let it get to me.. I'm hoping to buy in just over a months time, And I don't think I'll sway from that plan. :dunno:

[broken_legs]

Originally posted by Supa Dexta
I don't think I'm going to let it get to me.. I'm hoping to buy in just over a months time, And I don't think I'll sway from that plan. :dunno:

You're buying out east though. Markets in BC/AB topped already. Sask topped a little after wards, Toronto and Ottawa are just peaking, and the east is still rising.

I'd say the west is slightly ahead in the cycle, theres still money to be made out east.

As far as out west, im sure most real estate professionals will assure you that theres never been a better time to buy ;)

http://www.chpc.biz/images/JapanCompare-9-27-06.jpg

http://www.chpc.biz/images/NOV09-Major_Cities.jpg

[max_boost]

I don't know the details about the Japanese real estate market or their stock market crash but safe to say they probably won't get back to those levels in my life time.

Let me ask you broken_legs, you must read Garth Turner's blog too? Where do you think things will end up?

Right now the average SFH is $400K right? You think we will see $300K? $250K?

[benyl]

Originally posted by broken_legs


http://i274.photobucket.com/albums/jj259/broken_legs/CMHCMBS.jpg

Heres some FACTs from the CMHC website:
http://www.cmhc.ca/en/hoficlincl/in/camobo/upload/Introduction-to-the-CMB-Borrowing-Program.pdf



So you are correct in the sense that CMHC doesn't actually issue loans or credit directly.

But in reality the banks aren't loaning any money. They take the risk of the loan for as many days as it takes them to package it into MBS and sell it to the CMHC which then sells it to investors.

Please someone explain to me how this is any different than what happened in the USA.

This, to me, is exactly what happened in the USA. The only source of funding for mortgages is coming at the explicit guarantee of the taxpayers just like it did with Fanny and Freddy. This is not sustainable or safe for the housing market.





Can you expand on this some more?

I think i have presented some information with factual backing, i would like to expand my knowledge some more. If there is some elephant int he room I am not seeing here, please let me know I would like to learn more.

Thanks

I think that you have to look into Fanny and Freddy more.

Fanny and Freddy were buying the loans from each bank in order to free up reserves so the banks could lend more.

I think the Canadian Banks still hold the loan, only they are guaranteed. The Canadian Banks are not securitizing the loans and selling them to the CMHC. That is the big difference.

Also, the big down fall in the US was derivatives. Basically legalized gambling on those securitized mortgages.

[broken_legs]

Originally posted by benyl


I think that you have to look into Fanny and Freddy more.

Fanny and Freddy were buying the loans from each bank in order to free up reserves so the banks could lend more.

I think the Canadian Banks still hold the loan, only they are guaranteed. The Canadian Banks are not securitizing the loans and selling them to the CMHC. That is the big difference.



Not attacking your opinion here, but I am curious what makes you think that Canadian banks are not selling the mortgages to the NHA MBS pool? Do you have any information about this?

The CMHCs own data says bank have not increased their mortgage holding by any significant amount over the last 2 years and that 90% of the increase in mortgage credit has been MBS.

Read the CMHCs website, they have stats and figures on all of this.

http://www.cmhc-schl.gc.ca/en/hoficlincl/mobase/index.cfm

^^ They list rolling totals each month of how much MBS each Issuer (banks, credit unions, insurance companies) creates.


CMHC FAQ
14. What happens in the default of…

— a mortgage?

In situations where mortgagors haven't made their regular payments, as required under the terms of their respective mortgages, the issuer MUST make these scheduled payments to the CPTA for credit to the NHA MBS investors, as if they had been made. CMHC mortgage insurance protects the lender/issuer against mortgage default, assuring payment of principal and interest in accordance with the terms of the mortgage insurance policy.

— an NHA MBS issuer?

CMHC guarantees full and timely payment of principal and interest to the NHA MBS investor in case of issuer default. The investor is fully protected by this guarantee. CMHC will make the timely payment, if there is a default by the issuer.


^^^ Banks have zero risk.
- They don't hold the bonds of pooled mortgages
- They are protected by insurance on 100% of principle and interest payments

[broken_legs]

I can't find recent publications, but I can find this:

http://dsp-psd.pwgsc.gc.ca/Collection-R/CMHC/NH12-8E/NH12-8-2004-3E.pdf

^^ Shows how MBS started taking a larger and larger share of the issued mortgage debt.

Heres an excel chart i made showing the same from another report they published:

http://i274.photobucket.com/albums/jj259/broken_legs/CMHC_MBS1.jpg
** Note 2009 is YTD as of Nov 30, 2009

edit:



Accounting rules for MBS in Canada revised Oct 2002:

Net Interest Spread
The interest rate spread is the difference between the stated interest rate on the mortgages in the
pool and the stated rate (coupon rate) of interest on the MBS certificates. Under the NHA-MBS
program this interest rate spread cannot be less than 50 basis points for any mortgage in the pool.

The net interest spread is that portion of the estimated interest spread that remains after provision
has been made for the normal servicing fee.
The present value of the net interest spread is carried as a receivable balance on the balance sheet
of the vendor (issuer) (BANK) and drawn down as mortgage payments are received over the life of the
securities.




Mortgage Servicing Rights
Purchase of Mortgage Servicing Rights
When a purchaser acquires the mortgage servicing rights from the issuer-servicer, the purchaser
is to set up as an asset the amount paid for the intangible asset subject to the following limitation:
• the amount recorded is not to exceed the amount by which the present value of the
estimated future normal servicing fee revenue exceeds the present value of the expected
future servicing costs.
The intangible asset is to be amortized over the period of the estimated servicing income.
The intangible asset is to be deducted when determining the capital of the institution for the
purpose of assessing capital adequacy.


Edit:

From the last publication of 'Public Accounts of Canada'
http://www.tpsgc-pwgsc.gc.ca/recgen/pdf/49-eng.pdf



Canada Mortgage and Housing Corporation (CMHC) administers two funds: the Mortgage Insurance Fund (MIF) and theMortgage-Backed Securities Guarantee Fund
(MBSGF). The MIF provides insurance for a fee, to lending institutions to cover mortgage lending on Canadian housing. Besides establishing a framework of
confidence for mortgage lending by lending institutions, the Fund facilitates an adequate supply of mortgage funds by reducing the risk to lenders and by encouraging
the secondary market trading of mortgages, to make housing more accessible for Canadians. An actuarial study of theMIF is produced as of September 30 of each year.
The Corporation determines provisions for claims and unearned premiums at December 31 using valuation factors taking into account new business, claims and interest
for the last quarter. The MBSGF supports two CMHC guarantee products: National Housing Act (NHA) Mortgage-Backed Securities and Canada Mortgage Bonds.
The Mortgage-Backed Securities (MBS) program was implemented in 1987. For a guarantee fee paid by approved financial institutions, CMHC and ultimately the
Government guarantee timely payment of monthly principal and interest to MBS investors who participate in a pool of insured residential mortgages which have been
repackaged by the financial institution into investments which can be sold to investors in denominations as low as $1,000.

The CanadaMortgage Bond (CMB) program
was implemented in 2001.Under this program, bonds are issued by a special purpose trust known as Canada Housing Trust and sold to investors in denominations as low as $1,000. The proceeds of the bonds are used to purchase mortgages packaged into newly issued NHAMBS. Canada Mortgage Bonds of $160,664 million ($127,566 million in 2008) including accrued interest, issued by the Trust carry the full faith and credit of the Government of Canada. The timely payment of semi-annual interest and principal at maturity is guaranteed by the Government of Canada through CMHC.


^^^^ And there you have it ! The smoking gun
CMHC gets money from investors in Canadian Mortgage bonds, then uses that money to buy MBS directly from the banks.

[broken_legs]

Originally posted by max_boost
I don't know the details about the Japanese real estate market or their stock market crash but safe to say they probably won't get back to those levels in my life time.

Let me ask you broken_legs, you must read Garth Turner's blog too? Where do you think things will end up?

Right now the average SFH is $400K right? You think we will see $300K? $250K?

I have an email relationship with Garth :love:

haha

But seriously, i haven't actually read his blog for many months, or maybe even at all this year. I do a lot of reading at these two places:

http://globaleconomicanalysis.blogspot.com/
www.zerohedge.com

[broken_legs]

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2008/11/ottawa-to-buy-more-mortgages.html



The IMPP

As a side note, before the IMPP came to town, most lenders were relying heavily on the Canadian Mortgage Bond (CMB) program. The IMPP has essentially become a supplement to the CMB program. (It's different though because, under the IMPP, mortgages are purchased by CMHC itself and remain on CMHC's books.)

[bspot]

I still raise issue with the thread title. What sub prime loans was the CMHC giving out?

They don't even give out loans, and sub prime mortgages were never legal in Canada.

[Tik-Tok]

I bought a house to live in, not make money on. This is all moot.

[bspot]

Originally posted by Tik-Tok
I bought a house to live in, not make money on. This is all moot.

Tell that to everyone in the US that owned their house to live in and no longer has it.

(Not saying we are on the brink of a collapse, but if we were, it would be far from moot).

[benyl]

You still need to look up derivatives.

The only reason why this came to a grinding halt in the US is because of them.

Derivatives were hedges on the securitized mortgages.

Once people started defaulting, the hedges were called. Pretty soon, the money ran out and the hedges couldn't be paid. Banks collapse.

[broken_legs]

Originally posted by benyl
You still need to look up derivatives.

The only reason why this came to a grinding halt in the US is because of them.

Derivatives were hedges on the securitized mortgages.

Once people started defaulting, the hedges were called. Pretty soon, the money ran out and the hedges couldn't be paid. Banks collapse.

What came first - Teh chicken or teh egg?

Yeah the reason why the financial world almost collapsed was because of derivatives, but thats not why the value of houses went down.

The value of houses went down, then the value of the MBS, which all the derivatives were based on dropped through the floor.

The prices of houses dropped because the bubble popped- Houses got to a place where they were too expensive and the rubber band snapped.

[broken_legs]

Originally posted by Tik-Tok
I bought a house to live in, not make money on. This is all moot.

I'd appreciate it if you kept you didn't participate in the discussion if 30% of your home value means nothing to you.

[broken_legs]

Originally posted by bspot
I still raise issue with the thread title. What sub prime loans was the CMHC giving out?

They don't even give out loans, and sub prime mortgages were never legal in Canada.

As soon as Canada changed the lending rules to 35 years, then 40 years, and 0 down every single one of those loans was Sub Prime.

[broken_legs]

Honestly though

Doesn't any of this BOTHER YOU GUYS???


Do you actually feel comfortable that bond holders and banks are 100% secure in their investments on the backs of Canadian Tax Payers???

Do you guys not see any moral hazard here??


This stuff makes me MAD. I feel like my tax dollars are being handed out to banks and investors all under the table so they can make bigger profits. I feel like my country is being hijakced by banks and special interest.

Doesn't this bother any of you guys?

[BigMass]

lol it bothers me but there is nothing you can do about it but try and protect yourself from it as best you can. Diversify your investments and buy physical precious metals. Lets not forget that housing isnt the only bubble. The bond bubble is going to be massive.


Originally posted by broken_legs
I feel like my country is being hijakced by banks and special interest.

Doesn't this bother any of you guys?

Sorry to tell you but nothing is being hijacked. Banks, corporations and special interests have pretty much run every country since day 1. The world isn’t the way it is today because the masses have had freedom and liberty. Elite have ruled, controlled and used people like you and me as pawns since the dawn of history.

[benyl]

Originally posted by broken_legs


What came first - Teh chicken or teh egg?

Yeah the reason why the financial world almost collapsed was because of derivatives, but thats not why the value of houses went down.

The value of houses went down, then the value of the MBS, which all the derivatives were based on dropped through the floor.

The prices of houses dropped because the bubble popped- Houses got to a place where they were too expensive and the rubber band snapped.

Not necessarily in the correct order, but here is how things happened:

1. Greenspan says that we know better and that the shit that happened in the 20s and 30s with bucket shops won't happen again. He underestimates the greed of man. Government allows unregulated derivatives.
2. US govt start pushing Fred and Fanny to buy up mortgages from banks to increase lending ability.
3. Banks start securitizing mortgages and trade them like stock. Hedge by buying derivatives. Basically, banks started gambling with people's mortgages.
4. More people buy houses and things start to boom. Sub prime lending starts.
5. People's payments double, triple, because the low payment term of their mortgage is over. Defaults start to happen.
6. Derivatives have to pay out on the defaults (insurance / gambling paid out). Derivative payers run out of money and start going bankrupt. Derivative payees don't get paid, mortgages aren't covered and they too start going bankrupt.
7. House prices crash as supply dries up due to lack of credit.

8. Greenspan admits he was wrong.

There is way more to this story, but those are the highlights as I know them. I can send you a 40 page paper I wrote on it if you want... hahaha

The big difference with Canada is that we don't have the ARMs like the US where you first 2 years of payments are say $1000/month and then jump up to $3000/month for the last 3 years of the 5 year lock in.

Interest rates are still low, so payments shouldn't change at renewal. If interest were to climb to the 8-10% range in the next year, then yes, I would be really worried.

[BigMass]

Financial world collapsed because of the moral hazard created by Fanny/ Freddie, the FDIC , low interest rates and the repeal of Glass-Steagall after the fact. SIVs like derivatives were to be expected with all these factors put into place. Don’t blame derivatives, blame the policies that lead to their creation.

[broken_legs]

Originally posted by benyl


Not necessarily in the correct order, but here is how things happened:

1. Greenspan says that we know better and that the shit that happened in the 20s and 30s with bucket shops won't happen again. He underestimates the greed of man. Government allows unregulated derivatives.
2. US govt start pushing Fred and Fanny to buy up mortgages from banks to increase lending ability.
3. Banks start securitizing mortgages and trade them like stock. Hedge by buying derivatives. Basically, banks started gambling with people's mortgages.
4. More people buy houses and things start to boom. Sub prime lending starts.
5. People's payments double, triple, because the low payment term of their mortgage is over. Defaults start to happen.
6. Derivatives have to pay out on the defaults (insurance / gambling paid out). Derivative payers run out of money and start going bankrupt. Derivative payees don't get paid, mortgages aren't covered and they too start going bankrupt.
7. House prices crash as supply dries up due to lack of credit.

8. Greenspan admits he was wrong.

There is way more to this story, but those are the highlights as I know them. I can send you a 40 page paper I wrote on it if you want... hahaha

The big difference with Canada is that we don't have the ARMs like the US where you first 2 years of payments are say $1000/month and then jump up to $3000/month for the last 3 years of the 5 year lock in.

Interest rates are still low, so payments shouldn't change at renewal. If interest were to climb to the 8-10% range in the next year, then yes, I would be really worried.

I don't necessarily disagree with anything you've written, only that I would point out that the massive increase in home prices was driven by 2 things:
- Cheap Credit (check)
- Securitization of Mortgages (Check)

We have exactly those two things in Canada and comparative sized increase in home prices.

I would just like to make the distinction that the destruction of the financial system via derivatives is one thing and the housing bubble is another. Yes the lack of credit exasperbated the housing decline, but it seems to me that housing prices started to decline all on their own in 2006 - *before* the credit markets started to freeze up in 2007 causing the eventual crash in 2008.

http://mysite.verizon.net/vzeqrguz/housingbubble/united_states.png

In Canada, it's the backstop provided by the government to the MBS purchasers that is providing the credit for mortgages right now. Without that guarantee there would be no mortgage credit in Canada right now. If we took that away what would happen?

The definition of a Sub Prime loan is one that that bank won't take due to the risk involved. The banks have not increased their mortgage holdings since 2007 - Every new mortgage which the banks create they immediately get rid of and package it as MBS so they can keep the spread but not have to carry any of the risk. THis is Sub Prime because they aren't willing to take the risk.

That makes CMHC the biggest Sub Prime lender there is.


Now as far as ARMs go, i believe we have something in Canada called 'Teaser Rates' . I don't have any numbers on this, but discussing it in relation to Sub Prime is moot in my mind.

Please correct me if Im wrong, but I do believe that Sub Prime loans, not Option ARMS, were the first loans to fail in the US. Option ARMS will be resetting this year for the next couple, Sub Prime is already done in the US.

Most Sub Prime loans were made in 2002-2005? While option arms were made later.

Canadian Sub Prime lending is peaking right now - What does that tell you?

I would like to get to the bottom of all this, i look forward to learning more. and having a productive discussion on the details.

If you;d like to forward me your paper, i will give it a read. PM me.

Thanks

[autosm]

We have ARMs..... our version is people qualifying on payments based on the lower interest rates from variable rate mortgages.

This according to my broker friend was common practice in the last few years. We are screwed if rates go up more than 3% higher than today as most of these people are variable.

If rates jump 1% then you panic and lock in for 5 years, your rate will easily jump 3% from todays prime minus rates?



He also says zero downs still happen......the broker will give you 5% cash back after closing. Only happens now if you qualify with high income and good credit unlike 2007?

[broken_legs]

I know, I know. We're different here in Canada.

- We don't have sub prime loans, we instead have loans that are too risky for banks so CMHC takes them instead

- We don't have shifty mortgage brokers lending to anyone with a pulse to collect their commission, we have banks that loan money and immediately sell the risk to CMHC and collect the spread

- Our housing market peaks in 2007, the US peaked in 2006

- We don't have ARMs, we just adjustable rates that reset to higher rates when the borrower locks in.

- We don't have a bubble in house prices, we just have a 110% rise in house prices in 5 years

- We don't have easy credit like they did in the US, we just have all time low borrowing rates

- Bank credit started to freeze up in the US in 2007, our banks haven't taken on any new mortgage debt since 2007

- We don't have 10% unemployment like in the US, we only have 8.5%


So many reasons why the US is different. Why worry?

http://www.bloomberg.com/apps/news?pid=20601109&sid=aDo0bV8kOyNM&pos=15



Dec. 28 (Bloomberg) -- Fannie Mae and Freddie Mac, the linchpins of the American housing market, continue to bedevil the U.S. financial system.

In February 2003, their regulator issued a report saying the companies were taking on too much risk by using implicit government backing to plunge deeper into the mortgage market.

The government-sponsored enterprises would pose a systemic threat to the economy in the “remote” chance that either failed, Armando Falcon told the Bond Market Association the same day. The Bush administration, considering his report a potential threat to financial markets, asked him to resign.

Five years later, regulators seized the mortgage-finance companies. Since then, leaders from former Federal Reserve Chairman Alan Greenspan to Warren Buffett have argued the companies can’t be sustained in their dual roles -- a for-profit enterprise beholden to shareholders and a tool of housing policy -- and should be nationalized or sold.


etc...

[topfuelman]

You've seen idiots on this board proclaim that Canadian Banks and our real-estate market is different, not subprime...etc....

To those on the blue pill... JUST STFU, read and learn.

Popular mis-information is that Canadians need to come up with at least a 5% down payment to buy a CMHC backed house with a major Canadian Bank (at least that's what every politician and news feed will tell you).

Follow these links and take the red pill....

http://www.cibc.com/ca/mortgages/flexible-downpayment-mortg.html

http://www.scotiabank.com/cda/content/0,1608,CID10969_LIDen,00.html

Quite Simply...
Canada is in fact, with-out a doubt a Sub-Prime super-cel with the oblivious backing of every Canadian Taxpayer.

Simpleton idiots that spout off remarks that we are different because our banks don't offer ARM's etc. are completely missing the big picture. The Canadian banks are not taking the risk and are just soaking up record loan origination fees

- Notice these major Canadian Banks offering...Borrowing 5% down or even cash-back - up to 35 year terms..with CMHC backstop only of course.
CMHC = Taxpayer of Canada backstop.

"Borrowing 5% down"
"5% Cashback"

"Prudent Canadian banks really are the role-models of the world" [/sarcasm]

[D. Dub]

^^^

Some good points -- however the strongest and most basic counter-argument is that both the Cdn banks and CMHC underwriting is immensely tighter and more stringent than the US ever was.

[chowdog]

Originally posted by D. Dub
^^^

Some good points -- however the strongest and most basic counter-argument is that both the Cdn banks and CMHC underwriting is immensely tighter and more stringent than the US ever was.

THIS

[bg_27]

Originally posted by chowdog


THIS

TRIPLE THIS
WTF is wrong with people, 5% down and 35 year amortization DID NOT cause the mortgage crisis in the states. Part of it was banks approving a $500,000 mortgage for a landscaper that never made more than $12,000 a year. And as stated earlier, selling the derivatives to get the loans off their books so they could loan more.

CMHC and banks has always been stricter than the states, and ever since the mortgage crisis in the states, have definitely tightened their underwriting. They call BS on appraisals, don't accept "stated income" from taxi drivers, etc, require financial statements on stated income.

Also, CMHC did not initiate the 5% down or 35 yr amort, it was AIG and GE Capital. They were finally allowed to operate in Canada a few years ago and started offering competitive products, ex 30 yr amort, then 35 year amort, etc.

Ask people latetly and see how much of mortgage people got approved trying to do 5% down and 35 yr amortization, just becuase the banks offer it, does not mean they approve it.... Its the typical fine print, OAC... and from what I know, these 5% 35 yr amorts are harder to come by.

[bg_27]

Originally posted by autosm



He also says zero downs still happen......the broker will give you 5% cash back after closing. Only happens now if you qualify with high income and good credit unlike 2007?

Maybe banks offers that, but Brokers don't even make 1% commission on a mortgage, how they giving away 5%?

[topfuelman]

Originally posted by D. Dub
^^^

Some good points -- however the strongest and most basic counter-argument is that both the Cdn banks and CMHC underwriting is immensely tighter and more stringent than the US ever was.


Wrong Support your simplistic argument or don't bother posting.

You are mistaking prudent policy with bag-holding.

First off...
The banks and authorized mortgage brokers will gladly originate as much loan volume as possible as long as CMHC guarantees the loan. In fact CMHC has been mandated with increasing their loan portfolio to close to 1T$ CDN.
The loan originators get their fees, the loan gets securitized, rated AAA or better and sold lately to the Central Bank or Pension Funds or the Bond Market at face value with a rated return (due to implicit Canadian Government Guarantee)

Secondly, having zero down is not prudent underwriting by any historical standards. Ask any banker in history how that story ends.

Thirdly, Qualifying loans at today's historically low rates without matching amortization periods is also not prudent. Rates will go up and borrowers will have to renew at higher rates in the future. Many of these loans will end up in default. Why do you think the banks are only offering this program with the CMHC as insurer? They make their money today.

Forthly, the current market valuations are very near an all-time high. Mortgage rates are very near an all time low. Average salary to average mortgage origination amount is at a historically high and unsustainable ratio. This is supported by rent equivalent ratio to prices. They are also at a wide deviation.

These are all quite obvious metrics that the banks and government are aware of. They (Central Bank, CMHC, Federal Government and the Major Banks) are colluding and choosing a reckless path with government sponsored policy. They are all trying to support price inflation to bail-out the problems they are building up. It is an unsustainable path (Mathematically) and it will eventually fail. This is their temporary political solution to necessary asset price correction that needs to occur.

With respect to the intelligent posters on this subject,
Listen, Those who attempt to brush aside comprehensive arguments on a particular subject with simpleton and un-supported statements should go back to watching Sesame Street. On the other hand, if you can contribute rational supporting evidence, feel free to join the adults.

[D. Dub]

Originally posted by topfuelman



Wrong Support your simplistic argument or don't bother posting.


With respect to the intelligent posters on this subject,
Listen, Those who attempt to brush aside comprehensive arguments on a particular subject with simpleton and un-supported statements should go back to watching Sesame Street. On the other hand, if you can contribute rational supporting evidence, feel free to join the adults.


Thank you for the personal attacks -- You do realize that personal attacks like yours, usually point to arguments based in emotion and zealotry -- rather than actual logic.

I have many years of experience in the residential and commercial mortgage industry -- and although technically I left the mortgage industry as a career -- I actually still lend MY OWN hard earned money into hard money loans in the B and C markets -- as I have successfully for over ten years.

So I know a wee bit about underwriting and lending policy in Canada.

One, as I mentioned, the CMHC and Cdn banks, currently and historically, have always been stellar at doing appropriate and robust due diligence -- you can cry as much as you want to that the sky is falling -- but you will not change this initial and crucial simple fact that really undermines almost all of your "sky is falling" arguments.

Two, any "0 down" "cash back", etc, etc, mortgages IN CANADA are only provided to a very, very small number of borrowers WITH substantial equity in the property and triple A credit -- completely different than anything that happened in the US.

Three, CMHC only approved 40 yr amortizations for a very short time and only for borrowers, again with triple A credit history -- low risk IMO.

Four, Freddie Mac and Fannie Mae insured absolute garbage mortgages on highly inflated properties from sleazy mortgage brokers and sleazy mortgage bankers that were given to SUB PRIME borrowers with POOR CREDIT -- totally UNLIKE the Canadian situation.

Five, CMHC has prudently pulled back their amortizations to more safe standards.

Six, and perhaps most importantly

***Canadians are not Americans*** Our financial history and current financial picture are very different.

According to the recent CIBC World Market report:

"The reality is that in the past, interest rates have played only a minor role in driving mortgage default rates," he adds. "Historically, it's clear that mortgage arrears rates are highly correlated with the unemployment rate, with little or no correlation with changes in interest rates. The same goes for the economy in general. Over the past three decades, personal bankruptcies have risen twice as fast in an environment of falling interest rates than in an environment of rising rates.

"The logic here is obvious. Interest rates rise when the economy recovers, and the benefits to employment and incomes of an improving economy easily offset the sting of higher interest rates on debt service costs."

and that

"In its latest "Financial System Review," the Bank of Canada estimated that at present, 5.9 per cent of all Canadian households are vulnerable to rising interest rates since their debt payments account for more than 40 per cent of their household gross income. The Bank also estimated that the share of households would climb to 8.5 per cent by 2012 if interest rates jump three percentage points.

Mr. Tal (CIBC economist) argues that focusing on borrowers' debt service ratio (DSR) with no reference to the underlying asset that they hold can be misleading. "Many households with a DSR greater than 40 per cent have already accumulated a significant amount of equity in their house, and therefore have the option to downsize and reduce their debt overhang if their mortgage payments stop becoming manageable."

and also

"Based on information obtained from CMHC, no less than 80 per cent of households who took a mortgage in 2009 with an LTV greater than 80 per cent and a DSR greater than 40 per cent have a fixed rate mortgage. In general, low income Canadians tend to rely more heavily on fixed rate mortgages - the complete opposite of the situation south of the border where low income Americans were heavy users of variable rate mortgages."

and finally

"Make no mistake: Canada is not doomed to see a U.S.-style housing and mortgage blow-up," says Chief Economist Avery Shenfeld in the bank's latest Economic Insights report. "There are three lines of defense for those with high debt service ratios that the BoC analysis ignored.

"One, some mortgage holders will have substantial home equity, even allowing for a house price slide, and could downsize. Two, others have high debt payments because they are making accelerated pay-downs of principal, which they could stop. Three, history suggests that many will jump into fixed mortgages in time to avoid the full brunt of the variable rate shock. "The result is that the number of Canadians truly at risk could be substantially less than the (Bank of Canada's) estimate."

Quotes taken from http://dcnonl.com/nw/16027/en dated Dec. 18/09.

Here is a link to CIBC World Markets economic report:

http://research.cibcwm.com/economic_public/download/sdec09.pdf

I don't think screaming the sky is falling is really the logical argument here -- given the current and historical information.

[quazimoto]

This is what people aren't grasping is what was actually happening in the US. This might make some people understand a little more clearly.


A single mother of 3 in the united states with an annual salary of $60,000 was able to easily quality for a $500,000 mortgage utilizing the sub prime methology that was being commonly used in the united states. Her payments during the first few years were manageable.

In canada, in retrospect, my fiance and I had extreme difficulties qualifiying for our $440,000 mortgage even though we both make a good living, both have good credit and we had the 10% down.

They do no go around qualifying people for shady mortgage in Canada like they were in the united states. The premise in the united states was they were lending to people who never before had the capabilities of qualifying for a mortgage.

To further that point I would highly doubt the Bank of Canada or Government of Canada would allow interest rates to rise to the point where it would make it nearly impossible for a large percentage of Canadians to keep their homes.

I am quite certain our government is not overly concerned with the value of our dollar and if need be would allow the dollar to de-value itself rather than raising interest rates to the point where 20% of home owners would start defaulting on their mortgages. This happened in the 70's and 80's and if it were to happen again the results would be catastrophic.

There are just too many people online that are putting up these doomsday scenario's in attempt to scare the average individual. The big thing to make sure of is that when you lock your mortgage in for 3 or 5 years at a certain rate to ensure you can afford that same mortgage payment at a higher rate of interest in a 3 or 5 year period of time. Rates are not going to be climbing 5-10% any time soon.

[bg_27]

^^ That CIBC is a good report IMO, read it last week.

Also as an example, Scotia has a $0 down mortgage, the rate is substantially higher than what a normal mortgage would be, therefore (even mentioned in the CIBC article) these customers are buffered from rate increases because their rates are already much higher. They have to have high beacon score, and qualify with their TDS. Sure these people might be in trouble if housing prices were to fall, but another difference between Canada and the US, is you can't just hand in your keys and walk away from your house like you can in the US. You are still financially and legally responsible for the mortgage, penalties, legal costs, etc.

And for quasimoto
1) The bank of canada won't have a choice if inflation were to start rising, they would need to start raising rates, regardless of peoples mortgages.
2) The govt is definetly concerned with the dollar, the Bank of Canada's latest meeting they stated they are concerned about the value of the dollar for the overall economy, we are an exporting economy, a high canadian dollar hurts the economy.

And yes I agree there are many many people online that have been preaching the doomsday scenario and scaring people. I read both sides of the fence greaterfool, roubini, etc.

a bit off topic but related:
One person I followed for a while was Eric Sprott (and still do with a grain of salt), he was convinced 2009 would be a worse year for the equity markets he is very bearish, he had me convinced that this was the case I almost put money in his hedge fund Sprott Hedge Fund L.P. II at the beggining of this year, his 2009 return for that hedge fund was something like 1.1%, meanwhile the TSX (assuming XIU) is up 21%.

[rage2]

Originally posted by quazimoto
This is what people aren't grasping is what was actually happening in the US. This might make some people understand a little more clearly.

A single mother of 3 in the united states with an annual salary of $60,000 was able to easily quality for a $500,000 mortgage utilizing the sub prime methology that was being commonly used in the united states. Her payments during the first few years were manageable.

In canada, in retrospect, my fiance and I had extreme difficulties qualifiying for our $440,000 mortgage even though we both make a good living, both have good credit and we had the 10% down.

They do no go around qualifying people for shady mortgage in Canada like they were in the united states. The premise in the united states was they were lending to people who never before had the capabilities of qualifying for a mortgage.
Bingo.

http://www.virgeweb.com/rage2/mortgage.jpg

They approved Sean Banerjee for a 1.5m loan with fake information in the mortgage application, his assets listed was a hotel room and a house he just got evicted from without paying rent. That's how fucked up the US lending system was. There were no credit or background checks at all. The banks just wanted to give out money so they can make more money.

Try that in Canada. It'll never work.

[BigMass]

Originally posted by bg_27


1) The bank of canada won't have a choice if inflation were to start rising, they would need to start raising rates, regardless of peoples mortgages.
2) The govt is definetly concerned with the dollar, the Bank of Canada's latest meeting they stated they are concerned about the value of the dollar for the overall economy, we are an exporting economy, a high canadian dollar hurts the economy.


I don’t know if it was your intent, but those are two contradicting economic mandates.

The Bank of Canada is mandated to promote a strong dollar to promote the savings and wealth of the average Canadian yet at the same time must devalue the dollar to support Canadian and US corporate profits that require a weak dollar for exports. Who do you think will win that fight? Bottom line is all central banks favor inflation. The only trick is to bring about inflation in a controlled manner.

So to find out the odds of Canada raising rates just look down south. What are the odds of US raising rates. Pretty much zero. At least to any meaningful level. The debt would become unserviceable and the banks that were bailed out would fail again only with much higher debt loads. Everything is tangled in a spiders web. You can’t do one thing without affecting another.

What does that mean for house prices? It’s hard to tell. The only obvious conclusion is GTFO dollars. I rather own any plot of dirt than dollars at this moment in time.

[D. Dub]

Originally posted by quazimoto
This is what people aren't grasping is what was actually happening in the US. This might make some people understand a little more clearly.


A single mother of 3 in the united states with an annual salary of $60,000 was able to easily quality for a $500,000 mortgage utilizing the sub prime methology that was being commonly used in the united states. Her payments during the first few years were manageable.

In canada, in retrospect, my fiance and I had extreme difficulties qualifiying for our $440,000 mortgage even though we both make a good living, both have good credit and we had the 10% down.

They do no go around qualifying people for shady mortgage in Canada like they were in the united states. The premise in the united states was they were lending to people who never before had the capabilities of qualifying for a mortgage.

To further that point I would highly doubt the Bank of Canada or Government of Canada would allow interest rates to rise to the point where it would make it nearly impossible for a large percentage of Canadians to keep their homes.

I am quite certain our government is not overly concerned with the value of our dollar and if need be would allow the dollar to de-value itself rather than raising interest rates to the point where 20% of home owners would start defaulting on their mortgages. This happened in the 70's and 80's and if it were to happen again the results would be catastrophic.

There are just too many people online that are putting up these doomsday scenario's in attempt to scare the average individual. The big thing to make sure of is that when you lock your mortgage in for 3 or 5 years at a certain rate to ensure you can afford that same mortgage payment at a higher rate of interest in a 3 or 5 year period of time. Rates are not going to be climbing 5-10% any time soon.


A brilliant synopsis! I was making the erroneous assumption that people here actually understood the vast basic differences between the US and Canadian mortgage markets.

[quazimoto]

Also don't kid yourself on the strength of the dollar. The Canadian Government and Bank of Canada really don't care whether our dollar is worth 0.95 american or if its 0.65 american. Ironically enough it hasn't made a huge difference on our imports from the United Sattes now that our dollar is higher either. The truth is a stronger american dollar is good for canada in general even if it makes travelling to the united states for holidays more expensive.

So if inflation does start to rise, which it won't by the way, then expect the bank of canada to allow the dollar to devalue rather than pumping up rates since they know doing so will have catastrophic effects on our economy. Right now the Canadian and American economies seriously can not support higher interest rates, it's that simple.

Also just for the record, just so people are clear on this. CMHC is a highly profitable government agency and over the course of the past 2-3 decades have cleared massive profits. So even if there were a down turn I find it hard to see how this is a huge problem for taxpayers when in fact this same organization has profited billions of dollars which has gone right into the Government of Canada coffers.

The united states was a very different scenario as they were underwriting massive amounts of poor mortgages. They invested the money into derivatives. The derivatives devalued, people defaulted on their mortgages, the money which was paid to insure the mortgages were already lost. Repeat that vicious circle a few hundred thousand times and you get a major collapse.

CMHC revenue isn't being purely invested into the derivative markets and the vast majority finds it's way back into the government of canada coffers. Even "IF" the mortgages were to collapse the banking structure in our country is a lot more secure than it is in the united states. One major problem with banking in the United States is the fact they have thousands upon thousands of tiny banks which all have a limited amount of cash flow in comparison to TD, RBC, BMO, CIBC which are all profiting billions each year.

In my opinion the mortgage and banking sectors in the United States and Canada are so different there is no real point in comparing them other than to create chaos theories in attempt to scare the average person into thinking the economy is going to tank.

I own property in both Canada and the United States. I purchased a condo in Maui. The property in Maui is on a 20 year fixed mortgage at 3.75%. Seriously how many people in Canada would jump at the chance to do that with their home? In comparison in Canada we have a mortgage on our current property which is 5 year fixed at 2.90%.

[cmyden]

@ Broken_Legs: be sure to visit the Edmonton Housing Bust blog

http://www.edmontonhousingbust.blogspot.com/

Garth is great at getting a rise out of people, but Kevin over at EHB has (imo) the best analysis out there of the situation we're in. The amount of work he puts into his charts and graphs is incredible.

Most of his posts are relevant for all of Alberta (and the rest of Canada to a degree), especially Calgary.

[Xtrema]

Originally posted by broken_legs
Do you actually feel comfortable that bond holders and banks are 100% secure in their investments on the backs of Canadian Tax Payers???

Are you pissed that we are loaning out $$ to banks @ 0% and they turn around give us our money back @ 4 to 20%?

We already design our society to be controlled by banks and in some way insurance industry.

[topfuelman]

Originally posted by D. Dub



Thank you for the personal attacks -- You do realize that personal attacks like yours, usually point to arguments based in emotion and zealotry -- rather than actual logic.

Response: Okay, well thank you for actually elaborating in your response. I have no particular agenda to "generate fear" I don't stand to benefit from my fellow citizens having a more thorough understanding of the big picture. Just to broadly awaken intelligent people that there are forces at play that are outside their realm of typical news sources. Thus the importance of detailed explanation and debate on public forums. After-all, as Tax payers, the eventual outcome of the "Bubble" (My definition of the Canadian Real Estate Market as a whole at this time, based on historical analysis) is a very real set of circumstances that needs to be understood and hopefully used to their/our advantage. Feel free to contribute actual facts, figures and sources that I will gladly read. I am also interested in inside information on the actual workings of these organizations,and mortgage origination procedures not just publicly stated organizational and political objectives and mandate. The dirt if you will.

Having said that, I am going to challenge your points as follows:

I have many years of experience in the residential and commercial mortgage industry -- and although technically I left the mortgage industry as a career -- I actually still lend MY OWN hard earned money into hard money loans in the B and C markets -- as I have successfully for over ten years.

Response: So how did you do in the 1980/81 fiasco. The last time there was a major credit contraction. Mind you, the credit imbalances were no where near as bad as they are now. Or does your vast experience only span the 20+ years of the latest massive credit bubble?


So I know a wee bit about underwriting and lending policy in Canada.

One, as I mentioned, the CMHC and Cdn banks, currently and historically, have always been stellar at doing appropriate and robust due diligence -- you can cry as much as you want to that the sky is falling -- but you will not change this initial and crucial simple fact that really undermines almost all of your "sky is falling" arguments.

Response: The CMHC went bankrupt and required bailing out by the taxpayers after the last bust. They are now managed by a new generation of even stupider and more politically corrupt managers now, so I have no doubt that they can pull it off again. The banks already have a full backstop in place via the Canadian tax payers insuring all of the risk that they bundle up and sell off. As in America, until the tide goes out, they will not let us know who is swimming naked.
Also,
Have a read of an article by Eric Sprott ton the Canadian Banks
http://www.businessinsider.com/eric-sprott-no-way-should-you-bet-on-the-banks-2009-11

Two, any "0 down" "cash back", etc, etc, mortgages IN CANADA are only provided to a very, very small number of borrowers WITH substantial equity in the property and triple A credit -- completely different than anything that happened in the US.

Response: They were a very small part of the American market until after the bubble popped and then the truth began to be exposed.

These two links are clearly targeted at those who have trouble coming up with 5% of the purchase price (i.e. not wealthy). This is "mainstream" stuff.

http://www.cibc.com/ca/mortgages/flexible-downpayment-mortg.html

http://www.scotiabank.com/cda/content/0,1608,CID10969_LIDen,00.html

Clearly, even though CMHC is now "responsibly" requiring 5% down payments.....major financial institutions are using go arounds to make 0% down fully insurable by CMHC. Flaherty is lying to us through his teeth. Does that make you feel more secure ?

Three, CMHC only approved 40 yr amortizations for a very short time and only for borrowers, again with triple A credit history -- low risk IMO.

Response: 40 years, 35 years, 30 years....who cares.....it's still long enough to be a death sentence for many. Mortgage is French for "death pledge". Listen, A 25 year mortgage has always been proven historically viable given 2.5-4X earnings as an affordable mortgage.
Ask yourself why are these unprecedented longer terms have recently come into play in our market?
It is because prices have recently gone parabolic, and implementing 0, 5 or loaned down-payments, coupled with absurdly low central bank rates is the political and financial powers attempt to keep the ponzi scheme going. (Limitless asset price inflation).
This perceived "affordability" is being attempted through unsustainable, dangerous and reckless policies as will ultimately be shown (IMO).


In America, it turns out that what used to be considered a prime borrower quickly turns out to be an unreliable borrower when they get underwater and lose their ability to pay.

Four, Freddie Mac and Fannie Mae insured absolute garbage mortgages on highly inflated properties from sleazy mortgage brokers and sleazy mortgage bankers that were given to SUB PRIME borrowers with POOR CREDIT -- totally UNLIKE the Canadian situation.

Four, CMHC has prudently pulled back their amortizations to more safe standards.

Response: Drinking the koolaid here.

Fifth, and perhaps most importantly

***Canadians are not Americans*** Our financial history and current financial picture are very different.

Response: You mean the financial history that whenever America suffers a recession, Canada always suffers worse?

According to the recent CIBC World Market report:

Response: Is this the same CIBC that was at the top of the indictment list in the Enron scandal? Is this the same CIBC that never saw the recession coming? Is this the same CIBC that was pushing people to buy stocks and funds straight into the maw of the 2008 crash? Nice source !

"The reality is that in the past, interest rates have played only a minor role in driving mortgage default rates," he adds. "Historically, it's clear that mortgage arrears rates are highly correlated with the unemployment rate, with little or no correlation with changes in interest rates. The same goes for the economy in general. Over the past three decades, personal bankruptcies have risen twice as fast in an environment of falling interest rates than in an environment of rising rates.

Response: Historically, recessions have been inventory led. Rates have followed the economy down into recessions, and housing prices have fallen after the fact. As we have seen in America and several other Western nations, this has been a credit driven recession, similar to the 1930s. Real estate fell first, then dragged the economy down with it. Nothing has been fixed, the debts have grown, and Kondratieff winter has barely gotten started yet.

"The logic here is obvious. Interest rates rise when the economy recovers, and the benefits to employment and incomes of an improving economy easily offset the sting of higher interest rates on debt service costs."

Response: You are confusing cause and effect here.

and that

"In its latest "Financial System Review," the Bank of Canada estimated that at present, 5.9 per cent of all Canadian households are vulnerable to rising interest rates since their debt payments account for more than 40 per cent of their household gross income. The Bank also estimated that the share of households would climb to 8.5 per cent by 2012 if interest rates jump three percentage points.

Response: Is this the same bank of Canada led by Mark Carney of Goldman Sachs? The Goldman Sachs that spawned the likes of Hank Paulson, Robert Rubin, Larry Summers and all the others that set up America for massive failure by blowing the biggest real estate bubble in history? Is this the same Bank of Canada that assured us in August of 2008 that Canada would certainly avoid a recession......just a month or two before the worst post war recession caused them to employ their first ever emergency bank rates of 0.25% ???

Mr. Tal (CIBC economist) argues that focusing on borrowers' debt service ratio (DSR) with no reference to the underlying asset that they hold can be misleading. "Many households with a DSR greater than 40 per cent have already accumulated a significant amount of equity in their house, and therefore have the option to downsize and reduce their debt overhang if their mortgage payments stop becoming manageable."

Response: Unemployment is up. Government debt is rising at a torrid place, making certain of massive future tax hikes, high inflation will certainly follow. Not sure that previous DTI (debt to income) ratios will be sustainable.

and also

"Based on information obtained from CMHC, no less than 80 per cent of households who took a mortgage in 2009 with an LTV greater than 80 per cent and a DSR greater than 40 per cent have a fixed rate mortgage. In general, low income Canadians tend to rely more heavily on fixed rate mortgages - the complete opposite of the situation south of the border where low income Americans were heavy users of variable rate mortgages."

Response: If you believe CMHC, then you probably think the tooth fairy is cute. The Canadian mortgage market is inherently an Alt-A option arm market. Borrowers cannot lock in the present rate for 30 years, or 35 or whatever term they are committed to. Canadian mortgages have resets. Typically 5 years out, but possibly as much as 7 in some cases, the mortgage must be renewed at the new going rate. I guarantee that BoC will not be able to keep rates at 0.25% for the next several years. There is a high chance that today's borrowers could be facing 1980 style rates in 5 years, as ultimately the open market will set the rates......not the government. Many conservative borrowers of the 2005 to 2007 vintage should be faced with resets starting 2010 to 2012. Rates will be forced to start creeping up soon. At some point, they may be forced to rise much faster and further than can be handled.....ala the 1970's period of high inflation as a result of previously loose monetary policies.


and finally

"Make no mistake: Canada is not doomed to see a U.S.-style housing and mortgage blow-up," says Chief Economist Avery Shenfeld in the bank's latest Economic Insights report. "There are three lines of defense for those with high debt service ratios that the BoC analysis ignored.

"One, some mortgage holders will have substantial home equity, even allowing for a house price slide, and could downsize. Two, others have high debt payments because they are making accelerated pay-downs of principal, which they could stop. Three, history suggests that many will jump into fixed mortgages in time to avoid the full brunt of the variable rate shock. "The result is that the number of Canadians truly at risk could be substantially less than the (Bank of Canada's) estimate."

Quotes taken from http://dcnonl.com/nw/16027/en dated Dec. 18/09.

Here is a link to CIBC World Markets economic report:

http://research.cibcwm.com/economic_public/download/sdec09.pdf

I don't think screaming the sky is falling is really the logical argument here -- given the current and historical information.

[autosm]

Originally posted by bg_27


Maybe banks offers that, but Brokers don't even make 1% commission on a mortgage, how they giving away 5%?


I assume it comes from the lender, but he says its still going on.

[autosm]

A large part of the problem in the USA is negative equity, how ever it happens its one of the major reason the house of cards fell.

This may be our largest problem in Canada, that and possible rising rates.

[seadog]

In the last year or so I've really started trying to come to a non-emotional and logical conclusion on the RE situation, and can't help but think that it does show the classic signs of a bubble, as per many traditional metrics. (Price/Rent, Price/Income, Growth of price vs Growth of GDP.

Nonetheless if there are compelling arguments on the other side, I'd love to hear them just so I can come to the best conclusion.

So what I'm looking for is quantitative arguments as to "why it's different here". Immigrants? Post stats showing that the money base in Canada has jumped 20% in the last year on account of it. (I read in another thread that in Sweden 70% of theirs were unemployed?). Did the States not have immigrants to our scale? Better lending practices? Fine, but it isn't enough to say "Nah man Canada's better that the US ever was. 5/35 with a borrowed 5, is hugely different than 0/35 or 0/40. I hear this one time in the states a single mom got a loan for 500k" Anecdotal and one-off stories are hardly useful when trying to draw any sort or useful conclusion. Or in the words of Buffett, maybe we just need to wait till the tide goes out till we see who's swimming naked.

Finally I can only imagine CMHC operates due to the general ignorance of the populous. What a sweet gravy train for the banks, but I guess the banks have always had a fairly hard shake of things so fair is fair. Oh wait a sec... All I can say is that in a situation like that, were I the bank I would be far more inclined to at the very least be making favorable assumptions where I could if it meant more loans would go through.

I'd lend every penny I could to a homeless crack addict i'd just met if I had the taxpayers guaranteeing me the loan at 5%.

[D. Dub]

Originally posted by topfuelman

topfuelman said a whole buncha stuff here



Some interesting points. I am not going to waste my time trying to convince you that the situation is not as dire as you think it is in the Canadian housing market/mortgage market.

I don't disagree that we may experience further down turn -- but not to the extent the US housing market did. The underwriting standards and markets are just too different.

That being said, the US's situation may continue to pull ALL of our markets down, housing included -- that still remains to be seen.

However, I'm not going to lose sleep over it.

[quazimoto]

A) Interest rates are not going to rise catastrophically to the 18%-21% levels we saw in the late 70s to early 80s. The last two decades have shown us rates ranging from 3% to 9% and the median in the 5% to 6% area. There is no major reason for interest rates to rise catastrophically in CANADA.

B) It's not easy to get any mortgages 30+ years with 5% down in Canada, period. We had a royal pain getting ours approved. We have a household salary off 100k+, crystal clear credit and even had a 10% down payment with ZERO debt.

C) Most banks are not approving applicants based on the current situation. They are ensuring applicants can also afford the mortgage given a higher rate.


Seriously, people need to stop worrying about all this chaos theory crap.

[topfuelman]

Originally posted by quazimoto
A) Interest rates are not going to rise catastrophically to the 18%-21% levels we saw in the late 70s to early 80s. The last two decades have shown us rates ranging from 3% to 9% and the median in the 5% to 6% area. There is no major reason for interest rates to rise catastrophically in CANADA.

B) It's not easy to get any mortgages 30+ years with 5% down in Canada, period. We had a royal pain getting ours approved. We have a household salary off 100k+, crystal clear credit and even had a 10% down payment with ZERO debt.

C) Most banks are not approving applicants based on the current situation. They are ensuring applicants can also afford the mortgage given a higher rate.


Seriously, people need to stop worrying about all this chaos theory crap.

Quazimoto:

Since you want to make bold statements as fact on this forum rather than seek new information about the forces at play...

Have you ever studied long term cycles? It is in fact the global bond markets who have the ultimate say on interest rates. As a collective consciousness, they really don't care what one homeowner's financial situation is.

Broad inflation of the 1970's was the result of leaving monetary policies too loose for too long. The normal and correct Bank of Canada response to try to control inflation was to raise interest rates. Once inflation takes off, it takes a lot of policy effort to get it back under control. That is why the real interest rates kept going up for quite a while afterwards. There is no on/off switch to toggle these macro economic forces.

Therein lies the Danger Our Federal Government and Bank of Canada led monetary policies are far looser now that at any time in history. The highly inflationary outcome at some point in the future is assured, the timing is not. This is the type of policy that bring about bond market collapses. The potential exists for 20% interest rates to not only occur, but to look very attractive in very short order. A credit market dislocation can happen very suddenly with explosive results. Given the extreme levels of debt in the much of the world, we are at the mercy of the global bond markets. Therefore, relying on hope may not be a good strategy.

To interested readers:

The real context of this discussion isn't about the price of a few houses. It is about the control mechanisms put in place by our policy makers. It is flawed and you should be concerned that time will show this to be fact. These are not wise leaders making the right calls, this is knee-jerk reactions by political elite with personal agendas. It is the nature of short-term electoral cycles and professional politicians. It is also the nature of wealth and political connections.

For instance, in the face of the ( it's contained") US real-estate bubble bursting (not just sub-prime but every real-estate asset class independent of its loan origination category) the federal government slipped the following outrageous liability onto the Canadian Taxpayer's Balance sheet.

The backstop for the CMHC was silently increased by $250 billion a few months ago to a total of $600 billion. No public debate or complicated vote to pass this liability on to ll of us. This amount alone dwarves the total Federal debt that almost drove Canada to international default forcing severe austerity measures in the 1990s. The Fed and Provinces combined have taken on more than $100 billion in additional debts combined this past year alone. As a ratio of GDP of our nation, this is frightening and should be cause for concern to all Canadians. The figures are rising.

100's of Billions of $$$ like it was nothing to really consider? These are the kinds of numbers that can drive Canada to not only total financial collapse, but possibly political and sovereign collapse as well. History has shown that any democracy that has tried to borrow and spend their way out of debt in the past, has resulted in the end of that democracy. In some cases, the end of sovereignty. This is a real threat to all of us, not fear-mongering as has been thrown out there on this forum. This is an issue of fiscal responsibility.

In addition, If these political and financial institutions are not telling us the truth (and they have all been very wrong during the recent crises), the implications may turn out to be severe.

IMO, A public forum such as this should be about education. Or, at least it should inspire readers to do some research thru their own sources to attempt to clarify the nature of this issue. It would be great for any reader to post any anecdotal or privy information that could help us all paint a clearer picture of what we may be headed for. Simply making statements without backing them up is not the solution to anyones quest for a broader understanding.

For those who choose to be willfully blind to what may be going on, you are not acting responsibly as a citizen. Let's have some integrity and share some real information! Read, and enlighten others that you know to the real danger of the current Federal fiscal policy.

Edit: Great little analysis and reader comments of the latest CMHC released data from 3Q 2009 going on here: http://americacanada.blogspot.com/2010/01/passing-1-trillion-mark.html

[quazimoto]

Once again, "looking at the past to see what is going to happen in the future is not always a good way to interpret economics."

That is a quote taken exactly from a prof at the University of Calgary. One thing that maybe stuck with me from second year econ classes. Part of the problem with your thinking is that you believe every single market condition is going to cycle just because it happened in the past. The truth of the matter is all these people who are thinking hyper inflation is going to occur are the exact kind of people that invest in safe low yield investments because they are constantly fearful that omg the market might just crash on me.

The fact is most economists in our country agree that interest rates will rise however there are only a few chaos theorists who would predict 10% plus interest. That 10% threshold is extremely important when it comes to mortgages.

I would easily state our government would let our dollar devalue over raising our interest rates. As it stands right now we have not seen any substantial benefits with our dollar being as high as it is right now. Less the edmonton oilers which I assume would be the Kansas City oilers by now.

[topfuelman]

If you've studied macro economics, then you do understand that the international bond market determines the "cost of money" depending on factors such as Sovereign integrity, Ratings agency analysis, Political stability, etc. The central banks by design of international monetary flows have to follow this trend, not lead.

My point is that our government can be setting up a dangerous condition for the "debtors" in our country which as the latest CMHC graphs show is growing at a disproportional rate to general inflation and GDP.

Encouraging people thru current low interest rate policy in combination with buying toxic mortgages off the large banks balance sheets is irresponsible given the likely and predictable coming series of factors/events.

We may soon to be facing a near perfect storm of conditions:

- rising interest rates / or deflation... at some point reversing to heavy inflation
- rising taxes
- poor economic performance
- demographic shift
- record high prices
- mortgages set at ultralow interest rates and ultralong ams (incredibly sensitive to interest rate changes)
- withdrawal of economic stimulus
- withdrawal of home economic stimulus
- dismal underwriting of 2009 & 2010 mortgages (high risk loans)
- global credit contraction about to start(we're just reaching the peak)

It is very likely as an investment housing will not perform well over the next two decades.

[quazimoto]

a) 2009 and 2010 loans and mortgages are not high risk. What we had to go through to get approved was not exactly an easy process.

b) interest rates will go up but they will not be hyper inflationary aka 10-20%.

c) I would hope taxes would go up as low taxes are a hinderance in the first place. Not to mention even when taxes go down the average person/family will often save a whole $500.


Were there some bad mortgages written in canada during the past few boom years? Very certainly there was however the vast majority of ordinary people were going into banks to get their mortgages approved and proper due diligence was more than likely done.

The vast majority of these shady mortgages were going through brokers who only care about one thing, that is their commission and nothing else.

More than likely though we can expect 5 year fixed rates to be in the 7-9% bracket in the next 2-3 years. 10-20% is highly unlikely as it would create way more problems. Do you really think the government would allow 10-20% interest rates to happen when they know what the effects would be?

Do you think they want to cripple the economy? In the current market and short term market substantial rate increases would seriously cripple the economy.

So when it comes down to it, which is more likely.

A) 20% interest rates.

B) Devalued Canadian Dollar

[bg_27]

Originally posted by topfuelman

We may soon to be facing a near perfect storm of conditions:

- rising interest rates / or deflation... at some point reversing to heavy inflation
- rising taxes
- poor economic performance
- demographic shift
- record high prices
- mortgages set at ultralow interest rates and ultralong ams (incredibly sensitive to interest rate changes)
- withdrawal of economic stimulus
- withdrawal of home economic stimulus
- dismal underwriting of 2009 & 2010 mortgages (high risk loans)
- global credit contraction about to start(we're just reaching the peak)

It is very likely as an investment housing will not perform well over the next two decades.

I agree with the above:

1) Interest rates are def going up, probably mid year.
2) Taxes have to go up, look at the alberta govt budget, money will come from somewhere, even look at the US with their record spending and canadian budget shortfalls.
3) Just because the stock market has gone up 60% in 2009, doesn't mean the economy is any better, near 10% un-employement based on the govt posted numbers, there is that whole other "real unemployment" numbers which are even higher. Wage freezes, wage decreases, etc.
4) demographic shift - for sure, its all those lazy teenagers lol, jk.
5) the stimulus will be withdrawn, will the party continue? this could cause banks to tighten their credit even more now that they arent getting free government money or the govt buying their "toxic assets" at inflated prices.
6) With the underwriting of 2009/2010 mortgages, I think they have improved over the past couple years, but still think some "sub prime" mtgs are getting approved, I think this is a time will tell situation.
7) credit contraction will be related to withdrawal of economic stimulus money, and people/banks/companies realizing this great economic recovery isn't as strong as everyone thinks. I think this is because when a lot of average people think economy, they immediately think stock market, and everyone has heard how well the stock market has performed in 2009, its a terrible correlation to make.

I know a lot of people that if they were to lose their job for a few months, their financial situation would be bad. I also know a couple people that their house was purchased at the peak prices, they barely qualified at the time, they will be hurt by rising interest rates and/or lost employment.

[seadog]

I think it was Aristotle who toyed with the borderline undemocratic thoughts something along the line of that the average person wasn't intelligent enough to understand whats best for them or society as a whole, so perhaps they shouldn't have a say in how things get done.

I seem to find myself leaning more and more towards that. I have a decent education, and did very well in school, but my understanding of economics, and all its inter-related variables, causes and effects, interdependencies, etc etc, is poor to basic.

The general population I find is even moreso. People I work with of average education and thought process (typical alberta folks making 90k but spending 140) are cursing the gov't for even thinking about raising rates. 'Stupid politicians always helping the banks' Or such short sighted statements as 'all I know is that my house was going down for a while, and since then its gone up 20%, so whatever they're doing they should do more of it'. By extension I guess these folks would vote for the politician who gives them more of what they like. "Everything else be damned, this is whats good for me, today, so I like it."

Same thing when oil was at 140 and Exxon was making $40b/yr. When you're paying 1.50/L for gas its easy to hate the guy making money. But ppl fail to grasp that there's a huge difference between Exxon 'charging' 140 a barrel for oil and reaping a huge profit(as they felt was the case), and letting the market bid 140 for exxon's product, and letting the natural course of huge profits run.

[seadog]

topfuelman, can you recommend any good sites that show good relationships between the main economic forces and outputs of things like prices, interest rates, bond markets, economic growth, inflation etc?

Where does it all start? Bond Market? When ppl bid lower for bonds that drives the rate up? Whats propping it up now? I wouldn't think people would be content bidding prices for bonds where the yield is only a couple percent, so why are they doing it? Is there soooo much cash out there that the demand for bonds and to lend it is so high that they're content with 2% or whatever?.

Lets start here: Guys A, B and C have loads of cash but are fed up with low interest rates. So they do what which in turn does what which in turn takes us to the wonderland of 20% interest and country collapse you described.

[autosm]

Assessed values of homes down a average of 13% in Calgary. Hurts if you bought 2-3 years ago with 0 down and the 3 year mortgage that is coming due late next year?

What are banks going to do with these situations?

[topfuelman]

Originally posted by seadog
topfuelman, can you recommend any good sites that show good relationships between the main economic forces and outputs of things like prices, interest rates, bond markets, economic growth, inflation etc?

Where does it all start? Bond Market? When ppl bid lower for bonds that drives the rate up? Whats propping it up now? I wouldn't think people would be content bidding prices for bonds where the yield is only a couple percent, so why are they doing it? Is there soooo much cash out there that the demand for bonds and to lend it is so high that they're content with 2% or whatever?.

Lets start here: Guys A, B and C have loads of cash but are fed up with low interest rates. So they do what which in turn does what which in turn takes us to the wonderland of 20% interest and country collapse you described.

Hey, I really am no expert, but I have learned a lot by reading the blog and associated website run by Karl Denninger in the US.
tickerforum.org

He is not an economist, which is actually a good thing. He has consistently graphed, predicted and explained much of the forces at play in the US and by association global economy. His analysis of the macro economics at play have been getting more mainstream acknowledgment, and was even interviewed on BNN today regarding the Fed's claim to not be responsible for the dangerous bubbles that have occured in the last 20 years.
He does not work in the financialo industry, does not run a hegefund, is not a banker, but at one time was a republican. I think he's rejected all political parties at this point. He once ran his own private and successful IT company.

Go back and review a huge volume of his daily "Market Ticker" blogs, accessible thru his main "Tickerforum" site.

A lot of resources of information and misinformation are brought up here on the various discussion forums, and are discussed at length. This site has been a required reading of mine daily over the last few years.

From what I can determine, Mainsteam keynsian economics has morphed into a disasterous set of policies based on opening the floodgates of credit if any natural slowdown or reversal in the economy takes place. The problem is that in the good times, reserves are not built up to cover the crazy amounts of debt that are thrown at the economy.

The other major flaw in the current political agenda, is that this is a credit/debt driven recession/depression, not a standard inventory led recession. In our current markets, excess debt and excessive asset price inflation needs to be brought back into check. The parabolic rise in prices and the exponential rise in personal, corporate and state debt is in an unstable and untenable condition. It has to reverse for the system to stabilize. Current policies are making the situation and magnitude of the correction required even worse. They are "kicking the can" and increasing the debt in the system at the expense of all of our future prosperity.

[topfuelman]

Hey, I've Decided to post a wealth of links for those looking to expand their regular "sources" of economic information. Feel Free to share with your family and friends those that you find helpful. Credit for compiling this list goes out to my good friend and "Red pill" advocate, Richard B. P.eng.

In no particular order...

Economic/ Social Cycles Theory (Wave theory)
http://www.longwavegroup.com/index.htm

Understanding Money, debt, credit, banking
This is a recent audio interview with the guy who produced “TheMoneyMasters”. It is a good prelude to viewing the documentary, as it discusses why this documentary was made. (about 30 minutes)
http://twobeerswithsteve.libsyn.com/index.php?post_id=533621

This is a link to the full length documentary called “TheMoneyMasters”.
http://video.google.com/videoplay?docid=-515319560256183936#

The above is long and monotonous, but extremely educational on the history of banking in North America.

In November of 2009, Bill Still, the narrator of the above, released a new DVD called “The Secret of Oz”.

Anyone hardcore enough to order it can do so here:
http://www.secretofoz.com/

Another excellent recent series is “The Ascent of Money” by Niall Ferguson. Apparently the book is excellent and more detailed. I have only seen the DVD set, and it very good, and very interesting. It must be bought or rented.

Here is the site:
http://www.pbs.org/wnet/ascentofmoney/

Getting inside todays headlines and Investment scene.
An awesome site that posts hours of free interview based and analytical discussions via podcasts or online audio clips every week. Political and investment oriented content (US based)
http://www.financialsense.com/

Daily Blog that dissects economic and political mis-information
This guy (Mish Shedlock) is smart and quite thorough in his daily analysis of news highlights and under the radar issues. I get his daily blog emailed to me. Nice to get a different perspective on headline news.
http://globaleconomicanalysis.blogspot.com/

More Information on The credit/debt situation.
“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”
- Ludwig von Mises

I am providing a multitude of links below that you can check into. Some of them have good charts, some have good summaries, some have both.

I focus on US-centric information, as it is the most abundant and detailed available.

As mentioned in my previous post, Karl Denninger writes a regular “Market Ticker” in a way that makes it more understandable to regular folks who don’t have an in-depth understanding of these things. A good way to keep abreast of many of the latest issues and learn this stuff by absorption is to read the Tickers regularly. You can scroll the Tickers with the “next page” button to the upper right of the page.
http://market-ticker.org/

This has some good graphs.
http://www.hoisingtonmgt.com/pdf/HIM2009Q3NP.pdf

Here are some Daily Market Tickers that provide good summaries:

A good illustration of debt levels and trends:
http://market-ticker.org/archives/1453-Find-The-Difference-Why-Ponzi-Finance-Fails.html

The important difference between inventory led recessions and credit led recessions:
http://market-ticker.org/archives/1175-To-Dennis-Kneale-Youre-An-Idiot.html

Why Denninger expects deflation ahead (although this inflationary/deflationary issue is highly debated at this time):
http://market-ticker.org/archives/P19.html

Federal Reserve History
A short history of the Federal Reserve (although you should know all of this by now, as per “The Money Masters” video from above). Something that may be passed on to others for a quick orientation.
http://www.youtube.com/watch?v=lZTm-GaJ36Q&feature=player_embedded#

Derivatives Market Documentary
PBS televised a one hour documentary in October 09, entitled "The Warning". It helps fill in how the derivatives market got carried away.

You can watch the program here by clicking "Watch the full program online" in the upper right. It's quite well done, and pics make Greenscam, Rubin and Summers look like the villains that they are.
http://www.pbs.org/wgbh/pages/frontline/warning/

Canadian Centric Blogs
For those who are more interested in the blogs specific to Canada, here are two….

AmericanCanada is not updated often. If you go back to the older posts, there are some illustrative graphs on October 19th, 2009.
http://americacanada.blogspot.com/

Also, Garth Turner posts regular commentaries, with a leaning on Canadian Real Estate here:
http://www.greaterfool.ca/

Another Canadian blog:
http://whispersfromtheedgeoftherainforest.blogspot.com/

A Fellow Albertan Blogging about Edmonton Real Estate Boom/ Bust
http://edmontonhousingbust.blogspot.com/

[broken_legs]

So back to CMHC

I cruised into the bank the other day and asked one of their
"Mortgage Specialists" what CMHC is, what it does and how it
works. I asked the specialist about MBS and CMB.

Clueless. Not a single person in the bank knew anything about
CMHC or what happens to a mortgage after it is issued.

Info from TD Waterhouse:

http://www.tdcanadatrust.com/invest/fixedinc/icrcipmb.jsp

^^^

I guess you too can own a part of Canada - May as well profit
from your own tax dollars hard at work.



Risk/Return
Fully guaranteed by CMHC, an agency of the Government of Canada.
There is essentially no risk with any investment held to maturity-
-the full and timely payment of principal and interest is guaranteed, regardless of the size of the investment.
Very competitive yields.

Liquidity
May be sold at any time prior to maturity.

Income
Interest and a portion of principal is fixed and paid monthly on the 15th of each month.

Key Benefits

* Safest Canadian investments available in Canada, regardless of the size of the investment.
* Fully guaranteed principal and interest when held to maturity.
* Provides guaranteed regular payments of income.
* Very competitive yields.
* High degree of liquidity.
* Low minimum investment required.
* RSP/RRIF eligible.


Since I am paying for the insurance on these whether I like it or not I think I am going to purchase some and do my part as a patriotic Canadian to help fund some more Canadian Mortgages!

[Supa Dexta]

Canada’s household debt still manageable: CIBC World Markets Inc.

CIBC – usually one of the most accurate of the banks when it comes to economic predictions re-buttes the Bank of Canada’s analysis of Canada’s credit market.

“Make no mistake: Canada is not doomed to see a U.S.-style housing and mortgage blow-up,” says Chief Economist Avery Shenfeld in the bank’s latest Economic Insights report. “There are three lines of defense for those with high debt service ratios that the BoC analysis ignored.

“One, some mortgage holders will have substantial home equity, even allowing for a house price slide, and could downsize. Two, others have high debt payments because they are making accelerated pay-downs of principal, which they could stop. Three, history suggests that many will jump into fixed mortgages in time to avoid the full brunt of the variable rate shock.

“The result is that the number of Canadians truly at risk could be substantially less than the (Bank of Canada’s) estimate.”

I haven’t seen the data, but wondered myself how Carney and Flaherty so quickly acquire a pulse on the Canadian financial markets. Their crystal balls must be exquisite.

[broken_legs]

Nothing against you mr dexta, just deconstructing mr CIBCs comments here:


Originally posted by Supa Dexta
“Make no mistake: Canada is not doomed to see a U.S.-style
housing and mortgage blow-up,” says Chief Economist Avery
Shenfeld in the bank’s latest Economic Insights report. “There
are three lines of defense for those with high debt service
ratios that the BoC analysis ignored.


So the problem is high debt service ratios but CIBC isn't
arguing that, in fact he is acknowledging it. They are saying
we have defenses against high debt service ratios, not a
solution for high debt service ratios.

He's also saying we wont have a mortgage blow up. - Of
course not. The government of Canada backs 90% of the
mortgages in this country. The banks will get all their money.
But notice this doesn't have anything to do with home prices.



“One, some mortgage holders will have substantial home
equity, even allowing for a house price slide, and could
downsize.


I guess no one in the US had any equity when home prices
went down? Huh??



Two, others have high debt payments because they are making
accelerated pay-downs of principal, which they could stop.


So the problem is high debt service ratios, but you are
saying we can make them even higher?? Huh??

by definition someone with a high debt service ratios is
someone who has a high ratio when they are making the
minimum payment, not accelerated or extra payments.



Three, history suggests that many will jump into fixed
mortgages in time to avoid the full brunt of the variable rate
shock.


And if many don't?
What happens when "many" people instantly get a 2-3% raise
in their mortgage rate?


Maybe the guy is right, but that sounds like a bunch of fluff to
me.

[Supa Dexta]

Not gonna hurt my feelings mr. legs, I just thought it was an interesting short read.. With no substance, I can't say I agree with it.

[Supa Dexta]

Actually, while I'm at it.... What do I have to lose here? If I buy in the east, where there isn't an inflated market. I plan to keep the property for years to come.. etc If there is a housing bust to come, rates will remain bottomed out, or bottom back out after a slight rise to onset the bust rather.. Therefore someone like myself who isn't over extended at all, if I got a cheap variable now, could I not expect good rates for years to come? Unless you are wrong on all of this, and we do start to climb out of it, even then it will be a slow climb and I can ride the low variable for a while.. So where would the downside be for me and a variable? Thoughts...? (taking the gamble on scooping up a cheap house in a big bust I would miss out on, but I don't have time to wait and hope for that)

[ExtraSlow]

I don't think you can count on sustained low interest rates or a gradual climb on them. There are a lot of things that could push the Canadian, and world economies into a pretty strong inflationary scenario.
If it was me, and it was just one year ago, I'd go with the locked in rate.

[broken_legs]

The thing that I'm having a hard time grasping right now is how interest rates are actually set for lending in this country

If all of the funding for mortgages comes from 100% government guaranteed Canadian Mortgage Bonds, then why would our interest rates fluctuate at all?

In normal land where banks lend the money do they not follow the 30yr bond?

Are banks setting the interest rate by following the BoC, or based on making money?

this is all so confusing. I need more answers.






As far as buying out east, i believe you'd be buying into a rising market there. It will be the last market to top.