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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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61 Responses to “Oddball mortgages make their own fundamentals.”

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  1. 1
    freako Says:
    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.

    I don’t know how these products are structured, but smell Other People’s Money.

  2. 2
    blueskies Says:
    upside all the way….
    actually the only downside is trying to figure out just how much the upside will be…….

    good definition for: fools paradise

  3. 3
    blueskies Says:
    went to an open house on Sunday, 2 bed apartment Westside asking $425K
    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?

  4. 4
    HADENOUGH Says:
    I would be very curious how people are getting their money. This is going to explode. The young guy who serves coffee in the local cafe just bought a $350,000 condo.
  5. 5
    El Vince Says:
    Real banks offer those craps now too:
    Scotia 100% crap
  6. 6
    Clarke Says:
    Yeah, but here in Canada it is different…..

    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.

  7. 7
    Jim Says:
    Getting a mortgage from one of Canada’s banks is very, very difficult by comparison to in the U.S.-unless you are borrowing either a small multiple of your household income, have other mortgagable assets, or a healthy downpayment.
    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.
  8. 8
    RentingSucks Says:
    We do have mortgages that “reset” their interest rate after some period of time usually 5 years. Of course if someone took a variable rate it would be almost instantaneous.

    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.

  9. 9
    beta Says:
    No doc home mortgage loans do not exist in Canada.

    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.

  10. 10
    beta Says:
    Getting a mortgage from one of Canada’s banks is very, very difficult

    Used to be; isn’t any more.

  11. 11
    DaMann Says:
    I was talking to someone the other day, he sold his condo due to divorce and bought another one. He had trouble with financing on the second one because he had a $35k LOC. Bank said it had to be paid first. Now here is what the banker said.

    “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…

  12. 12
    freako Says:
    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.

    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.

  13. 13
    freako Says:
    Bank said it had to be paid first. Now here is what the banker said.

    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.

  14. 14
    aetakeo Says:
    I remember when CMHC decided to underwrite Canadian sub-prime. That was only a year or two ago; there was a discussion at VHB. I thought at the time it’d probably bump our bubble aloft, possibly to 5 years out, because affordability is SO low that brokers and banks might have to jump at sub-prime to find any customers at all.
    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.
  15. 15
    clkung Says:
    We do have a sub-prime market to a lesser degree than in the States. As a former lender/mortgage specialist, I have seen many mortgages which were creatively put together and approved. With the current crop of no down payment, 100% financing and stated income mortgage products available you can be sure that a portion of them will be questionable from a credit risk point of view.

    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.

  16. 16
    RentingSucks Says:
    I think it is almost predatory by the banks. They are willing to give you rope to hang yourself if you have 25 percent or more down because they think that a drop of 25 percent is unlikely. Even if it is more than that with the current run up your window might be 2 years of people that are underwater with their current loans and only some of them will default. What does the bank have to lose?
  17. 17
    mohican Says:
    “Mohican just explained to me that CMHC insures 100% of approved mortages.”

    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.

  18. 18
    si fu Says:
    I’m not sure that it is too difficult to get a loan with a mortgage broker. Mine offered lots of ways to ‘finesse’ my application to get a better rate and quick approval.

    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.

  19. 19
    freako Says:
    Again, how is our how can we have a healthy active market at our affordability situation if we don’t have aggressive lending?

    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?

  20. 20
    Drachen Says:
    Well all I can say is that if it DOES blow up I certainly hope CMHC puts a lot of money into investigation of fudged paperwork to put the onus back on the banks. They never should have accepted this many shaky loans to begin with but I certainly hope they make it the bank’s problem for fraudulent documentation rather than just shrugging their shoulders and passing things along to taxpayers.
  21. 21
    mohican Says:
    A good explanation of the Canadian mortgage market:

    http://tinyurl.com/2o45sn

  22. 22
    Gursk Says:
    si fu said… I went to an open house yesterday for a DT unit in the 300k range … the place was rented long-term at a breathtaking $2500/month … BTW it sold WAY over list.

    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.

  23. 23
    markx Says:
    My feeling is that low downpayment, rather than high debt to income ratio, is the fundamental flaw. In essence, high leverage encourages aggressive gambling. If my total net worth is 10k, and someone offer me one millon with the 10k as collateral for investment. I for sure would put all one million on some derivative that has 50% change of doubling or blowing up. Head I start life with a million, tail I declare bankruptcy and life goes on.

    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.

  24. 24
    markx Says:
    By the way, on the fundamental side, the Forestry sector is truly dead in the water. A couple pulp mills are shutting down due to Forestry strike, and commodity prices had no impact at all. But of course, we have Olympics, rich asians, and the mountains. No need for old-fashioned forestry.
  25. 25
    freako Says:
    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.

    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.

  26. 26
    RentingSucks Says:
    I crunched some rough numbers and based on the one situation I know of where friends went to a mortgage broker they were offered a loan that would be about 50 percent gross income not including property tax and heating. This was a standard 25 year loan and they had existing equity of about 1/3 the total size of the loan.

    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?

  27. 27
    Robotman Says:
    Here’s a CMHC report with an outline of where all the outstanding mortgage debt in Canada is eventually held:

    http://tinyurl.com/2ut3xm

    (it’s on page 8)

    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.

  28. 28
    si fu Says:
    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.

    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.

  29. 29
    si fu Says:
    No view BTW.
  30. 30
    tulip-Mania2 Says:
    It’s quite fascinating how the usual suspects have managed to muddy the waters so well around the subprime issue.

    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

  31. 31
    scoop Says:
    tulip,

    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.

  32. 32
    markx Says:
    si fu: I smell something fishy in the long term $2500 rent. If the place is actually 500 sqft, that would be $5/sqft. I know for a fact that even good apartments are only for 2-2.5/sqft, and they tend to be brand new.
  33. 33
    satv Says:
    high-ratio

    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.

  34. 34
    J Says:
    markx where are you getting 2-2.5/sqft rent in DT. 3/sqft is more accurate and 3.5ish is common if the place takes short term or is furnished. I agree however that 5 is very high.
  35. 35
    markx Says:
    Ok, I just checked craigslist, and 3-3.5/sqft seem pretty common. I based the 2-2.5/sqft on anecdotal experience. Either there are a lot of wish rent, or the rental market is finally adjusting to the supply/demand imbalance.
  36. 36
    Michael Says:
    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.

    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!

  37. 37
    casual observer Says:
    “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?”

    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.

  38. 38
    satv Says:
    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!

    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.

  39. 39
    wizardofozziejurock Says:
    I think this thread is doing some excellent work toward undoing what may turn out to be one of the great myths of the housing bubble - that Canada’s mortgage industry is immune to US-style problems.

    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.

  40. 40
    Ulsterman Says:
    Michael said…
    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.

  41. 41
    Ulsterman Says:
    Disingenuous Headline of the Week from the Scotia Bank website:

    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???

  42. 42
    Ulsterman Says:
    from calculatedrisk.blogspot.com:


    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?

  43. 43
    markx Says:
    I’ll be officially out of this crazy market by Saturday. Going to Montreal for a two year stint. Gotta put some pressure on rent first.
  44. 44
    si fu Says:
    3.5ish is common if the place takes short term or is furnished. I agree however that 5 is very high.

    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.

  45. 45
    Robotman Says:
    Another observation is that many of the problems in the American mortgage market didn’t become apparent until prices had flatlined and gone down for a year or so. Any borrower in trouble with their mortgage payments was able to refinance or sell their house while prices were still going up.

    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.’

  46. 46
    si fu Says:
    Wow! Can you imagine the market if 40% of the demand just hadn’t been there in 2006?

    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.

  47. 47
    Jim Says:
    Its not a subprime like melt down that will cause housing prices to fall in Vancouver. Nor was it in the US initially. It was hi risk borrowers defaulting on their loans and being unable to sell their homes, which kicked off the sub prime mess. First the RE market slowed, then the subprime fiasco manifested itself.
    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.
  48. 48
    satv Says:
    Family dog protects kids from hungry bear.

    well said jim!well said ultersman.

  49. 49
    J Says:
    You can get a foreign student to pay double market rent

    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.

  50. 50
    si fu Says:
    First isn’t the market rent what you can get for the place?

    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.

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