When a particular asset class delivers outstand-

ing returns over an extended period, investors

become convinced that there are solid funda-

mental reasons for the trend. Theories are

developed to justify participation and disregard

valuation considerations. In the early ’70s, the

“Nifty Fifty” stocks like Polaroid and Xerox were

going to make money forever. At the beginning

of the decade, the Internet was going to render

traditional industries irrelevant. Today, growth

in China and India is expected to translate into

a permanent shortage of commodities.

Remember when people said tech stock could never lose money because the internet was never going away?

Also

During the technology mania, valuation consider-

ations were dismissed due to fear of missing out

and underperforming “hot” investment man-

agers committed to the new era

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"I was having cocktails at Opus Bar and I told my friends about this blog. We all had a good laugh"

Please leave me with a little more hope in the human race …..

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I agree it's within the government's mandate to tell CMHC how to spend money. I personally think what will happen is the crap will hit the fan and CMHC's first reaction will be to sieze payments wherever possible to preserve their balance sheet — they are viewed as successful in their owners' eyes if they don't cost anything. The banks will fight tooth and nail, pull strings in the government and eventually CMHC could start flood the lenders with government money. But this will not happen overnight and could take many months before anything happens. The fear is, by the time lenders realise CMHC is relaxing its payments, lenders will have already clammed up.

Maybe we're both cynical for different reasons. My view is CMHC is a business. My cynisism rises from the idea that the government's bailout will be a window-dress at best, not actually spending much money in the process. I use the example of the recent US bailout package that few could actually access as what could happen in Canada.

I still think it's silly to think lenders will continue to lend to those who are at a high risk of foreclosure in the face of falling prices unless CMHC also covers their foreclosure and administrative costs too.

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I don't think you understand the political relationship banks have in high places. If that were to happen (not likely) the banks would lean on the government and the government would lean on the CMHC to loosen the purse strings.

I think your idealism is great but it's just unrealistic, the CMHC has shown ever intent to help the banks out of the housing jam while screwing over common folk, why would they change?

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Having worked at a large company I can say that individual claims are rarely pooled. Each loan is different and there will always be enough exceptional cases to warrant more than just filling a checkbox on a computer screen. My point is that, if CMHC wants to, they can nickel and dime each payout and delay payment in the process, the sole purpose being to shore up their balance sheet.

"if the average person with a high risk loan pays only one year the bank has still made money on the deal, even if it’s not quite as much money as they’d like."

This is true however the foreclosure process is not free. It costs many thousands of dollars, likely pretty close to and likely more than the spread that the bank gets on this loan for a 5 year term. Remember the bank does not pocket the full interest rate but the spread compared to an MBS or whatever other vehicle they are using for financing. To compensate for higher expected foreclosures the bank's spread will increase, even with CMHC insurance. It is a vicious circle if MBSs require higher rates too.

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I disagree with point # 2

The CMHC has acted very poorly up until now, they likely will never prove any wrongdoing on the side of the banks in cases of mortgage fraud so they'll get the money. Banks are large institutions with ways of twisting arms that your average home owner with an insurance claim cannot match, the CMHC will be prompt in their repayments. Your first few years of paying off a 40 year mortgage is almost all interest, which is money that goes straight to the bank, so if the average person with a high risk loan pays only one year the bank has still made money on the deal, even if it's not quite as much money as they'd like.

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There are arguments for Canada's situation being better AND worse than the US. IMO "subprime" is merely a symptom and we will see plenty of "prime" issues as well. The subprime stuff was just the first in line to hit the fan. Canada has subprime and lots more prime. There will be fallout but it may not be as explosive as the US.

It's silly to think that CMHC MI is going to save the market. MI is merely a stop against outright default but BANKS LOSE MONEY WHEN THEY INVOKE CMHC POLICIES. I love the logic:

1) CMHC underwrites loans

2) Therefore I can issue loans to anyone without any risk

Wrong. Banks need to make money on loans. CMHC may prevent them from writing off billions but I would be surprised if, when under pressure to shore up balance sheets, they keep lending to those they are certain will default. Also I have said before that getting money out of an insurer is often more difficult than it looks, especially if there is any inkling of fraud. The CMHC executives need to show self-sufficiency and this is not done by making good on all claims.

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