Perhaps though there’s enough competition out there, not just from big traditional lenders, that IO should be way more prevalent than it currently is. HELOCs are common to be interest only so it appears there is provision for the investor out there. Interest only products in the form of HELOCs do exist but for whatever reason IO hasn’t been able to push into the primary mortgage market. Is it a legal requirement that primaries have amortization?

BTW I found True North Mortgage’s reference to Genworth’s insurance premiums and they increase with longer amortizations. Whether this is because longer ams is a relatively new concept so carry more uncertainty or there is indeed additional risk with longer ams. I’m sure an actuary at Genworth could explain better. It appears, on the surface anyways, that longer amortization does increase risk.

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I’m not convinced at all. Dressing up some bear shit and calling it facts is hardly proof of impending real estate decline.

Facts. Cited. Now go call the papers and tell them they’re dressing up “bear shit” as “facts”.

1) Canada’s housing market continues it’s apreciation. There is not a market in Canada which has had a median price decline. Prices are still affordable and demand continues to remain stable. Supply has increased but sales volume remains steady.

Calgary median price declines:
http://www.canada.com/calgaryh.....85bf18748f

2) Interest rates are stable

Fairly so, yes, but on average rising since 2006. And really, they have very little room to move down.

http://www.mississauga4sale.com/rates.jpg

3) Unemployment is at record lows

True, but it appears to have bottomed out, much like mortgage rates.

http://www.statcan.ca/english/.....lfs-en.htm

4) There is no possibility of a recession now

Maybe, but Canada already had negative growth in the first quarter of 2008.

http://fe70.news.sp1.yahoo.com.....my_gdp_col

5) Summer is finally here

True. Unless by “summer” you mean sunshine and warm weather. It felt a lot like early November out there today.

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If I was the bank, I would care less as long as received a sufficient downpayment and was reasonably assured that the borrower could make interest payments. I mean, do you really think banks want you to pay off your credit cards.

Based on your logic a well-disciplined borrower would want longer ams and pay back principal as they deem appropriate, whether it be 10, 25, 40, or whatever is best at the time.

If I was an investor, I’d want interst only. What is my incentive to pay down the debt if I have an revenue generating asset. I would just use the cash flows to fund other investments. I mean, what is the point of using leverage to my advantage, and then slowly removing that leverage. I see no logic in making payments at all. I think age old RE cliches are nudging both borrowers and lenders towards the traditional terms.

In the big scheme of things, amortizations are almost meaningless. If I bought the median SFH 25 years ago for $165K, I’d have borrowed $125K( 25% down). If I had a 25 year term, the equity would be $770K. If I had interest only, the equity would be $645K. Father Time eventually shrinks the 75% debt to miniscule levels. The present $2000+ monthly rental income dwarfs the $520 monthly interest payment.

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I am sure many save to give themselves equity, not necessarily in their properties. The problem I’m trying to resolve is if amortizations are a requirement by the bank or a requirement by the borrower. Does the bank want to see amortization to reduce its risk or could it care less? Again, this goes back to why we haven’t seen multi-generational, option am, or 0 am stuff prevalent yet. I can’t figure out why, other than banks are loth to offer them or borrowers don’t want them. Based on your logic a well-disciplined borrower would want longer ams and pay back principal as they deem appropriate, whether it be 10, 25, 40, or whatever is best at the time.

“If it wasn’t for them, our market would already have gone illiquid (and rightly so) and prices would have been well on the way to correcting.”

If it’s any consolation, I think the government is going to leash these guys big time when they start losing money. I think the government is smart enough to see the writing on the wall and I’m pretty sure there are already changes planned. The fact Carney and Flaherty are both coming out sounding warning bells should be a MASSIVE hint things are afoot.

It’s also worth noting that every CMHC loan predicates 2-3 other loans that are not CMHC insured. I will be interested to see what sort of credit innovations can withstand life without an unchained CMHC.

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Perhaps now they do, but long long ago there existed a time when people didn’t buy the most home possible using the largest mortage they qualify for. One day those days will return.

People have no disicple. Most people i know maxed out the house they buy and use any mortgage trick to make the monthly payment.

Well some do and some don’t. As long as the bag holder (lender) is playing with his/her own money, I don’t understand why we limitindividual choice based on the follies of others. If lenders are rational they will decide who qualify for which loan. Again, I point the finger straight at CMHC. They have removed discretion. If it wasn’t for them, our market would already have gone illiquid (and rightly so) and prices would have been well on the way to correcting.

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People have no disicple. Most people i know maxed out the house they buy and use any mortgage trick to make the monthly payment.

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How relevant is that? Second, with the 40 they have more money to spend on other things, and perhaps they won’t need refi. Or even better, perhaps they invest and receive a good return.

The essence of longer am periods are fine by themselves but require more borrower discipline to be a wash with the traditional mortgages. Fine for many of us but that is not how I am seeing these products being used.

IMHO opinion, if we have rational lenders, not rational borrowers. I think the main problem has been that the mortgage originators/insurers are playing with other people’s money. In the case of subprime it was the packaging and reselling of crappy mortages to unwitting investors. In Canada it is CMHC putting tax payers on the hook. If you are going to lend to people with crappy FICO scores they MUST put down a sizeable downpayment.

Again, I find it interesting that in the states, the government backed Fannie Mae lends conservatively and the private sector provides risky subprime loans, but in Canada the private sector provides high downpayment loans and the government backed entity takes on the super risky stuff (Yes I know that Genworth is an exception. Why they want to commit harikari in Canada beats me).

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Yes but some in financial difficulty will use this cushion up with second liens.

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The other consideration is that subsequent home equity refis are more difficult with 40 year ams for much longer. The hazard is a long enough amortization, if used only to improve affordability by allowing a larger principal, will lead to a longer period of no equity cushion if markets flatline or fall.

The essence of longer am periods are fine by themselves but require more borrower discipline to be a wash with the traditional mortgages. Fine for many of us but that is not how I am seeing these products being used. These days lenders either take on faith that everyone taking a longer am has this required discipline or they somehow think the longer ams justify higher prices. The former requires a higher risk spread, the latter…

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Perhaps in the aggregate. But for an individual contemplating which mortgage to go with for a given purchase, that is not the case. The default risk is definitely lower for the 40 in that case. The consequences of default will be slighlty higher, however.

Again I reiterate that “skin in the game” (downpayment) is what banks should be demanding.

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All else the same being the important part - I’d argue that what remains the same after the introduction of 40 year mortgages is the monthly payment, NOT the price of the house or condo - that makes people more vulnerable to downturn if the market is driven by speculation instead of fundamentals.

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More specifically, no. You forget about the downpayment.

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Is it really that hard.

All else the same a 40 year term has lower payments, thus lower chance of default.

The amount of principal paid back for a 40 year loan is in the first five years is negligible.

Is that what you’re trying to say in your convoluted way?

What’s your problem?

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By discount rate I meant whatever rate you choose to discount future cash flows for risk and loss of purchasing power. I did not mean the interest rate charged to banks for borrowing short-term funds directly from the Federal Reserve.

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Dunno, but skin in the game in the form of downpayment is much more important in terms of reducing risk. Think about it. The greatest risk is in the first few years. How much does 25 year mortgage amortize in the first 5 or so years?

As for improving affordability, the difference between 25 year and IO really isn’t that much.

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The discount rate is never the same as the lending rate. The lending rate is always the discount rate plus a risk premium…?

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Only in the sense that they impact prices (which they ought not to in theory).”

Not true, if a mortgagee defaults the bank is stuck for more on the longer term loan. Less of the principal will have been paid.

“I can almost guarantee you that even an interest only won’t be under water 10 years hence.”

What? You’ll (almost) guarantee that prices will be equal or higher than today’s in 10 years? Is that what you’re trying to say in your convoluted way?

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Because they borrow demand from the future, as I have pointed out.

Also the US has interest-only (infinite amort) and neg-am (beyond infinite) and we all know how well they are supporting higher prices.

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Only in the sense that they impact prices (which they ought not to in theory).”

I’m surprised, then, that banks do not offer zero amortizations more regularly; lenders should be all over this product if it improves affordability.

“The equity cushion? If a crash happens soon, what difference does it make? The extra amortization of a 25 year is marginal”

After 10 years, principal payoff is 8% for 40 year versus 25% for 25 year.

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Only in the sense that they impact prices (which they ought not to in theory).

How will they handle longer amortizations when default rates go higher on these products than others? Right now I don’t see much rate spread between 25 and 40.

There is no reason why the 40 would have a higher default risk than a 25. As I have mentioned, it is lower in that payments are lower for an identical property.

The equity cushion? If a crash happens soon, what difference does it make? The extra amortization of a 25 year is marginal. If a crash happens much later, what difference does it make? I can almost guarantee you that even an interest only won’t be under water 10 years hence.

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“Low or no down payments were popular with first-time buyers in 38 per cent of markets. “

Vanzee what do you mean?Are you throwing this number to say thanks or you giving me rant.I say 37% and you found 38% but you are also applying them on first time buyer but i didn’t say first time buyers so it’s difficult for me to grasp your thanks or rant.

Freako,

You are good as already said neutral still our motive to be here is to serve bulls or bears.when Matt is giving you edge he also serving the purpose to ignore the bull case did he miss dave as bull that time? it is very clear in all thread bulls post or bears- if we are not hereon our own it is very difficult to see our part of representation.Only together we can make a difference but then bears won’t be able to buy on high and bulls won’t be selling cheap after four year long debate what bears got on the board? a strong market with 20k mls to bank on- as previously claimed by bears for crash, percentage of crash also changed by majority of bears from 60% in 2005 to 5-10% in 2008.how is this possible? if market suppose to crash around 2005 by 50-60% why it is only 5-10% in 2008?.

at the end bulls or bears both need to stay here to
represent our own part.

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Again it begs the question of how affordability relates to house prices. Since the asset value does not fundamentally change by extending amortization it must mean a greater fallout to bring prices back down to fundamental value. If 40 year (or 100) am mortgages are a permanent fixture it means more risk for lenders. How will they handle longer amortizations when default rates go higher on these products than others? Right now I don’t see much rate spread between 25 and 40.

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This is what I found.

“After test marketing a 40 year mortgage for some months, Fannie Mae announced last week that it will begin purchasing them. The Corporation acknowledged that changes in “housing market affordability and requests from (our) lender partners” led to the decision to extend the maximum loan term on certain loan products.”

published date 6/9/2005 http://tinyurl.com/5p6fre

I found this from the CMHC 2006 anual report.

“In 2006, we helped make homeownership more affordable, by providing mortgage insurance on 100-per-cent financing, and by extending repayment periods to up to 40 years.”

Not quite 2 years.

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