Oddball mortgages make their own fundamentals.
Things aren’t quite looking up state-side yet: Countrywide Financial is starting to layoff employees and Capitol One is closing its mortgage unit, but things are certainly different up here.
The Canadian Real Estate Association has just announced that its product will sell very well this year predicting record home sales for 2007.
Klump said the home-financing market in the U.S. and in Canada are completely different.
“(Canadians) have to pass tighter credit standards in order to get home-mortgage financing,” Klump said. “So, there’s no unwinding in Canada as there has been in the States.”
Its good to know that here in Canada we’ve got higher standards for our No-Doc zero-down Neg-am 40 year specu-vestor mortgages.
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August 21st, 2007 at 5:31 am
I don’t know how these products are structured, but smell Other People’s Money.
August 21st, 2007 at 6:06 am
actually the only downside is trying to figure out just how much the upside will be…….
good definition for: fools paradise
August 21st, 2007 at 6:12 am
got some BS from RE agent about “another offer”.
from price history of said apartment
listed 1992 for $161K
sold for $156K 123 DOM
listed 2001 for $165K
sold for $155K 206 DOM
rather sordid history no?
August 21st, 2007 at 6:35 am
August 21st, 2007 at 7:38 am
Scotia 100% crap
August 21st, 2007 at 7:41 am
Given that the bulk of the RE purchases are from local residents, given the prices and the sizes of the mortgages required (and given out), and given the incomes, a lot of people are one or two percentage points of interest rates away from losing their residences-we won’t even talk about people who hang on with negative equity when prices drop.
August 21st, 2007 at 7:43 am
No doc home mortgage loans do not exist in Canada. Neg am 40 year mortgage loans do no exist in combination with each other in Canada. Remember it was the Clinton Administration that passed legislation to allow the sub prime frenzy to begin.”Its the economy stupid” was the democrats campaign slogan.
August 21st, 2007 at 8:00 am
Also I have found out that the banks can an will lend a lot more than 32 percent of your gross income (CMHC standard for maximum mortgage payment + property taxes + heating). Once you edge past 40 percent payments start to get punishing.
And anyway if the clamp comes down on credit because of what’s happening in the states I’m not sure we’ll be completely isolated from that. Once you take away the credit people aren’t gonna be able to pay the current prices.
August 21st, 2007 at 8:21 am
My sister got 2 mortgages, one in ‘05 and one in ‘06, each with no documented income. She had a 1/3 downpayment, so I assume the bank calculated they’d get their money out if she defaulted.
She’s applying for another one this week, also no doc income. I’ll interested to see how it works out; if she gets it again, then credit requirements obviously haven’t tightened up in Canada yet.
August 21st, 2007 at 8:23 am
Used to be; isn’t any more.
August 21st, 2007 at 8:48 am
“Go see my guy at this bank, get a LOC for $35k pay ours off first. Once that is done we will give you a mortgage, oh and by the way, tell him that you live at home and don’t pay rent or else you won’t have the ratio to qualify”
Yup no bad lending practices going on here…
August 21st, 2007 at 8:52 am
If you read Ben Jones blog he quotes sob stories of people losing their home. The loans amounts are surprisingly small.
Yesterday I mentioned one situation where a $198,000 mortgage caused a default for a family with a household income of $70,000. What gives?
Mohican just explained to me that CMHC insures 100% of approved mortages. If this thing blows up and there the taxpayer is on the hook for the bulk of it, I will be really pissed.
August 21st, 2007 at 8:54 am
I only have anecdotal evidence, but I think rules are bent and manipulated to the point that we will have our own scandal and eventual melt down. There is no way that sales should be these high at current prices.
August 21st, 2007 at 9:00 am
However, I had friends who bought before that announcement, and they were offered a no-doc neg-am for a mortgage a good deal more than they could afford. They actually went to the BBB because they thought it was a scam. It wasn’t, according to the BBB.
Putting those two points together, I wonder if sub-prime was grey-market and not underwritten previous to CMHC’s announcement, but still legal.
August 21st, 2007 at 9:06 am
I think that these creative mortgages may spell trouble for those who used them speculatively because there was no intent on carrying the mortgage payments on a long term basis.
August 21st, 2007 at 9:07 am
August 21st, 2007 at 9:24 am
That isn’t entirely true but close enough. If a financial institution wants to keep their lending ratios in line and peddle their mortgages under the NHA - National Housing Act / Canada Housing Trust financing program the mortgage must comply with CMHC’s guidelines and the mortgage will receive the full gaurantee of the federal government. As I explained before, mortgage brokers regularly fudge the numbers so they comply with CMHC guidelines to get clients/suckers the funding they want.
There are other mortgage funding scenarios out there. Genworth offers their mortgage insurance products (some of which fall into the same categories as CMHC insured mortgages) and there are other, smaller mortgage outfits that do their own financing through private placement. Although the number is small compared to the NHA backed mortgages. Some mortgages make it out into the Asset Backed Commercial Paper market and into the GIC market.
August 21st, 2007 at 9:30 am
As for the strength of the market, I went to an open house yesterday for a DT unit in the 300k range with no parking in an older office building conversion, and there were lots of punters there. The listing agent had four strong offers by the end of the night. The numbers actually worked because the place was rented long-term at a breathtaking $2500/month.
BTW it sold WAY over list.
Anecdotal to be sure, but a good indication of where the market is now.
August 21st, 2007 at 9:31 am
I am looking beyond the official definition of our lending practices, and looking the result of it.
I am not as concerned about the mount of the downpayment or the term as I am about whether the income exists to cover the payments.
1. Are loans allowed that push the given income too far?
2. Is the given income accurate?
If there are problems with the above, then who is at fault? Aggressive lenders or lying borrowers?
And more importantly, if there was fraud in the mortgage application, whether initiated by broker or borrower, will the loan still be insured/covered by CMHC?
August 21st, 2007 at 9:39 am
August 21st, 2007 at 9:47 am
http://tinyurl.com/2o45sn
August 21st, 2007 at 10:38 am
Sounds like an insane bargain @ 300,000 if you could rent the place for $2500/month. It must have been HUGE or had a view to rent for that price. Not surprised that it sold over list - it was probably listed below market to entice buyers/start a bidding war.
August 21st, 2007 at 11:09 am
The record foreclosure is the culprit of “no skin in the game”. For example, statistics show that Americans are now paying credit cards before mortgages. I guess keeping credit cards is more important than keeping an up-side-down house.
August 21st, 2007 at 11:12 am
August 21st, 2007 at 1:49 pm
Ok, next question. What percent of mortgages originating in Vancouver fall into this category.
As I explained before, mortgage brokers regularly fudge the numbers so they comply with CMHC guidelines to get clients/suckers the funding they want.
I don’t want to put you into a tough spot here, but if you are anybody else could elaborate on what “fudging” entails, I’d appreciate it. Is this essentially fraud, and if so can it be proven?
What are the eligibility requirements, and are they that grey enough that brokers can finagle approval without compromising themselves?
Interesting stuff. I don’t think it suffices to simply assume our lending practices to be A-OK when our prices are top 5 in North America. We need to look deeper.
August 21st, 2007 at 2:21 pm
I have no idea if this was a bank offering this load or another company. Does anyone else know what ratio they lend to these days? Do you have to have 25 percent or more down to open up the floodgates?
August 21st, 2007 at 2:32 pm
http://tinyurl.com/2ut3xm
(it’s on page
Briefly:
$425 billion is held by the banks
$99 billion is held by credit unions.
$125 billion has been securitized and packaged as NHA MBS’s.
$25 billion is in “Special Purpose Vehicles.” I believe this is that ABCP business (and it’s relatives)
What surprised me about this is how much of the debt the banks are keeping themselves. I’d sort of gotten the impression that they were securitizing and re-selling most of it. But it turns out Mortage Backed Securities (NHA & private) represent no more than 1/5 the total of Canada’s outstanding mortgage debt.
Hmm.
August 21st, 2007 at 2:47 pm
It was 500 sq ft, but a terrific location. Apparently leases in the DT are all over the map. Lots of ESL students and visiting professionals, etc.
I suspect the property got snapped up by an investor/owner.
August 21st, 2007 at 2:48 pm
August 21st, 2007 at 3:11 pm
The message, from the charlatans, is that US bubble has popped because of subprime lending. Then they guide us through the next step of the false argument, and suggest to the public, that we have no subprime or very little and therefore no bubble and therefore nothing to pop.
The truth of course is the industry is knowingly misleading the public by intentionally confusing cause and effect.
The sub prime borrowers are in trouble because the fundamentals such as supply and demand have finally overtaken hype, and prices have dropped to levels below what they debtors owe.
If prices had not already dropped the subprime borrowers who cannot make the new payment, would simply sell and make of with the loot.
Tick Tock, Tick Tock
August 21st, 2007 at 5:59 pm
Good point, but it’s hard to separate cause from effect in a feedback loop. It’s probably fair to say poor lending practices both contributed to the bubble and were fed by it. Easy money allowed prices to escalate, and asset growth allowed lenders to increase risk exposure for a time. Once prices start stalling and falling (for whatever reason) the risk models break down, then foreclosures begin and add fuel to the fire.
August 21st, 2007 at 7:53 pm
August 21st, 2007 at 8:08 pm
this is how high-ratio mortgage work.with the new guide line based on amount $300,000 borrower can save atleast $3,000.
based on the borrowing amount $300,000 this is how insurance premium will be charge.
80-85 % @1.75%=$5,250
85-90 % @2.0%=$6,000
90-95 % @2.75%=$8,250
5% down @2.9%=$8,700
100% @3.1%=$9,300
While the insurance premium is a one-time charge, it is typically added to the mortgage amount and subject to compounding interest.
August 21st, 2007 at 8:22 pm
August 21st, 2007 at 8:31 pm
August 21st, 2007 at 8:41 pm
We almost need some kind of short term event to set off the downtown in housing in Canada. Recession, liquidity crunch in Canada, Chinese recession, don’t know what it will be but i want it to hurry up.
Sink Vancouver housing, SINK!
August 21st, 2007 at 8:41 pm
We got a mortgage through a mortgage broker in ‘93, and at that time, he asked us if we could get my employer to write a salary letter for me, stating that my income was higher than it actually was.
I’m not a smart man, but that sure seemed like “fudging” to me. Would it have been fraud? Of course it would have been. Would it have been caught? Probably not.
I know that nobody in Vancouver would ever do that. Only honest employers operate in Vancouver. They don’t pay their employees under the table to avoid taxes, or commit EI fraud. Nope. Nobody around here would ever do that.
Another instance I’ve heard of, is a broker filling out a credit application, leaving a recent loan off of the application because it hadn’t shown up on the credit bureau report yet.
Mortgage brokers have zero risk because, in the end, you have to sign the application. You would be held accountable, not them.
August 21st, 2007 at 9:48 pm
Sink Vancouver housing, SINK!
Michael,
friends does not mean to tell you all the sec,and tech.
lets say one of his property is free of mortgage,that qualify him for up to 90% of equal value of personal line of credit.
you can divide that 90% into 4 part to pay 20% for each units,and he can pay rental income to pay mortgage for the 4 properties and his personal income+left over profit from rental income to pay personal line of credit,line of credit is very similar to other credit card when you pay back to bank,but different on interest rate right now that is 6.25% not like credit card.
then every year he can pick up the paid amount to inject that money equal to 15% of the left over mortgage.
your friend is more smart than you thats why CANADIAN banks are successful than AMERICAN.
August 21st, 2007 at 10:33 pm
Here are factors drawn from this thread that might lead us to think otherwise:
- zero-down mortgages
- 40-year mortgages
- mortgage brokers fudging applications
- more agressive lending practices by banks
- significant amount of leveraging
- a CMHC “put”, taxpayers are the greatest fool of last resort.
To this list I’ll add:
- Governments, politicians and bureaucrats who fail to provide proper oversight.
- a mainstream media that has failed in its watchdog role
Just as we saw in the U.S., when the vested interests were lined up squarely behind the bubble, it was virtually impossible to expose the underlying lies, except on blogs like this. When it finally broke, the true depth of the rot was revealed.
I think we have a similar situation in Canada, and certainly in a region like Vancouver. Let’s see what crawls out when the cracks finally open up on this conspiracy of hype.
August 21st, 2007 at 10:43 pm
I just talked to an old friend today who was renting an apartment, and it turns out he has five apartments he is renting out plus his home. WTF. How in the world can he possibly be getting loans for all these apartments. He’s putting 5% down and financing the rest with the rent. He’s not a wealthy guy, he’s a retired school teacher who just got into the housing market five years ago.
Michael, 5/6 years ago one bedrooms off Commercial & 3/4/5/6/7/8th were selling for $75-95k. With 5% down your friend could have covered mortgage, strata and taxes just with the rent, which at that time was $600-700/month and is probably even more now, making his apartments cashflow positive.
You’re just 5 years too late to the party i’m afraid.
August 21st, 2007 at 10:48 pm
The down payment hurdle isn’t so high any more when buying your first home.
Because your mortgage payments may not be any higher than your rent payments, it may be an ideal opportunity to buy your home now. The Scotia® 100% Mortgage Program can help you with your home purchase.
Anyone know ANYONE whose 100% mortgage, strata and taxes would be less than renting their current place?
Maybe i hacked into Scotia Bank’s Halifax page???
August 21st, 2007 at 11:48 pm
As mortgage lenders tighten underwriting standards and home prices fall, Bank of America analysts estimated that 40% of home buyers who got a mortgage in 2006 probably wouldn’t qualify for a home loan now.
Wow! Can you imagine the market if 40% of the demand just hadn’t been there in 2006?
August 22nd, 2007 at 7:47 am
August 22nd, 2007 at 9:06 am
Furnished. Sure its high, but like I said rents are all over the place. You can get a foreign student to pay double market rent, because they think the rents are the same as in major Asian cities, plus short-term renters will pay more for the convenience. There are sites on the ‘net like citymax where you see rents for these places at $3800/month.
Typical of these buildings are Conference Plaza where it is almost exclusively short-term ESL renters.
No way a local will pay that kind of cabbage. They simply don’t have the money.
August 22nd, 2007 at 9:20 am
Until prices flatten or dip (probably for at least a year) in Canada, we probably won’t see any conclusive evidence to support these anecdotes of ‘mortgage qualification fudging.’
August 22nd, 2007 at 9:22 am
If there is a meltdown in the Asian markets in 2008 you will see for yourself. Remember the last Asian recession? BTW, I read a study that said more than 50% of newcomers from HK and TW were unable to find employment here in jobs comparable to what they left behind. That’s one reason why there are so many owners living and working overseas.
August 22nd, 2007 at 9:41 am
Vancouver will sputter upwards until “buyer exhaustion” kicks in. Then any one who has to sell will be under duress, then if we have shady lending it will become visible,then a downward spiral may ensue. I am banking on further modest appreciation for another 24 months with some minor downward correctin this fall. The sell list ratio is still too high, mortgage rates are heading down and inventory is still low.
August 22nd, 2007 at 9:51 am
well said jim!well said ultersman.
August 22nd, 2007 at 12:37 pm
First isn’t the market rent what you can get for the place?
Second we can all agree the math says $2500 a month justifies a 300k+ price correct?
Basically we can’t all sit here and say “hey look at those idiots buying property well above fundamentals†then in the next breath complain about the idiots paying above market rent to the first idiots. At some point you have to acknowledge that in a competitive economic system prices are set by the biggest idiots or to put it more politely those who value the item the most.
August 22nd, 2007 at 12:50 pm
Yes, but it represents an average. The rents paid by wealthy foreigners are not (I hope) the norm.
Luckily for those renting in the DT, there are enough idiots.