Inside the CMHC and interest rates rising

Canadian Mortgage Trends has an interesting interview with Pierre Serre, the Vice President of Insurance Products and Business Development at CMHC.  The upshot of the interview is that the CMHC has plenty of dough in reserve and poses no threat to the Canadian taxpayer in the event of a housing market crash.  There are some other interesting figures in that interview: currently 9% of Canadian mortgage holders have less than 10% equity in their home.  They also remark on default rates during previous rate increase periods, which seems topical since Carney is planning on raising the benchmark rate by 500% in 2010 (from a rock bottom .25% to a still low 1.5%)

CMT: Can you tell us, what were default rates in past periods of large rate increases (like 1980-81 or 88-89)?

Pierre: According to the Canadian Bankers Association, the highest rate of mortgage arrears—which is, greater than 90 days–occurred in 1982 and in 1983. The rates were 0.96% and 1.02% respectively, compared to today’s rate of 0.43%.

CMT: Mortgage arrears are currently around 0.4% in Canada—exceptionally low, especially for a recession. I assume CMHC’s risk analysts have calculated what would happen in a worst-case scenario of mass defaults?

Pierre: CMHC internal analysis supports CMHC being able to cope with a variety of economic scenarios, including some rather severe ones.

By ‘rather severe ones’ I assume he means a US-style cliff diving real estate market.  Speaking of cliff-diving and on a whole different topic, check out this graph of US commercial real estate.

Thanks to Don for the links!

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Angry newfie

bull

Angry newfie

Time to get rid of Carney,all he cares about are banks. The common joe doesn't have a chance. Let's raise the interest rate so the fat f…. banks can get fatter.They talk of all this bs but really it's about,WE,the banks are missing all this money.

Do we,the people, not own the BOC, listen to us, not the banks.

Amazed

"I still think the CMHC is keeping prices above what is dictated by prudent supply and demand." Observer, CMHCs government guarantee is also keeping mortgage rates at least 1/2% lower than they otherwise would be. There are significant economic benefits to that. Supporting the housing market yields economic benefits as well (hundreds of thousands of jobs, equity for people's retirement, etc.). Housing accounts for $1 out of every $5 of our GDP. That some people can't afford as much house as they'd like, is an unfortunate but tolerable side effect. People can criticize CMHC and the government endlessly, but without them Canada could be a much grimmer place to live. If you want a housing market like the UK or US, then remove federal support for housing and you will quickly get there. Today's policies are inflating home prices. I… Read more »

Nic

Many of my friends and co-workers have either actually bought RE or thinking of buying this year because they are afraid of missing the train. Does that tell you something?

nonymouse

Story in the SUN http://tinyurl.com/ya64psx

Headline = "Don’t clamp down on home mortgage rules, federal government urged"

Take away = "low mortgage rates are merely coaxing buyers who would have bought in 2010 or later to make their purchases now"

Subprime

Most “believers” knew that prices could not be sustained, but they had hoped the “one hundred year mortgage” would soon come to the rescue to support more price appreciation.

When that hope was dashed, sales dropped, prices followed.

The alt lenders quickly moved in with low, low, teaser rates, to recapture the market share which had been eliminated.

The major lenders matched the low rates, and lowered the standards once again.

Will Flaherty come to the rescue with more credit swaps, or will he finally realize the banks won’t comply?

This is not just a RE Bubble, it is also a Credit Bubble

wakeupartist

The RCMP has lost all public support and confidence after the spate of citizen murders across Canada survey shows. Kick these incompentant loser cowards out and bring in people that don't want to kill when they get up in the morning. These RCM Psychopaths are the shame of this nation.

http://www.chtv.com/ch/cheknews/story.html?id=237

rp

#36 @nonymouse: Thanks for the link. As if "just talking about it" will somehow cool the market. More likely it have the opposite effect.

observer

@domus: Interesting article. It's worst than renting because you are locked in. Once prices correct here, it might take many years before people break even again. The CMHC is a joke. Without it, life would go on and the market would be the better for it because prices would correct to reasonable levels and there would be no need for it. Yes, there will always be some segment of the population who can't put down 20%-25% down payment, but that segment would diminish once prices drop to fundamental levels. The rest should really be renting. Trying to allow this remaining segment to buy creates systemic risk for the economy and taxpayers. It isn't necessarily because this segment itself poses default risk (it might or might not) but that the global support of prices above prudent supply and demand that poses… Read more »

domus

Arit, I guess probably many people had this figured out long ago — and way before me. Not claiming any originality.

What I find interesting, though, is the mechanism: CMHC was introduced with the objective to make homes more affordable. What it achieves, however, is a subsidization of loans (some for investment properties) which pushes up bottom line transaction prices and makes ownership harder (rather than the opposite). I don't know about slavery: this seems to me the law of unintended consequences.

The problem is that, like most government programs, this will also be hard to get rid of. They tend to linger.

nonymouse

The national had a bit on mortgage concerns.
http://www.cbc.ca/thenational/watch/

at about 8:40

arit

Domus,

You've been thinking a lot about it lately? We saw through this one since day one my friend LOL! It's called slavery, man. This whole housing bubble is all about the masses becoming the slaves of the PTB. When you owe them for the rest of your life, you are theirs (actually maybe I should go read the article you posted I might be preaching to the converted).

Slaves, sheep, masses, fools…

Regards,

arit the Contrarian (ala Conan the Barbarian)

domus

Hi Pope, I am posting the link to a VERY interesting article on Calculated Risk. It relates to something I have been thinking about quite a lot lately: the conversion of owenrs into effective renters, by means of subsidised loans which push up the effective price of buying. In practice, make the monthly payment feasible (at least temporarily) for enough people and prices will jump up, meaning that those payments will have to stretch for a 3 decades or more, effectively being equivalent to renting (what is an interest-only mortgage if not a rent of money/housing?)

Here is the article:

"Modifications: The Rentership Society"

http://tinyurl.com/y8h26ua

…modifications essentially turning homeowners into renters…

Read through, you will see the sheer craziness of the current setup.

Abolish the CMHC!!!

arit

Greed alert!

Greed alert!

Greed alert!

$1000 / 5br – Olympic Rental $1000 a day 5 bedroom HOUSE (richmond)

http://vancouver.en.craigslist.ca/rch/apa/1521895

1000 dollars A DAY in Richmond. This too funny!

But it's worth every penny because they SUPPLY THE PILLOWS!

Bwahahaha!

Regards

arit

RennieWhereRU?

#24, if there was any justice in this world the housing bomb will blow up in Flaherty's face. What a clown this guy is.

logic

yes, since about 2005.

ReadyToPop

@Homes2012

Lovely…the press calls it a "mess"!

Problem for Flaherty is that he's probably referring to Canadian averages when he uses the word "if", as he talks about "irrational" levels.

Problem is the Wet Coast has been irrational for quite some time.

Revolted 2

@28

"realpaul -You are disgustingly profane and no one should be subjected to your comments. "

Heartily agreed, with the proviso that realpaul does occasionally say something funny. I'm not a prude, but does it always have tend with an insult to someone?

Revolted

realpaul

You are disgustingly profane and no one should be subjected to your comments.

observer

@Amazed: In one (perverse) sense, you are right, by funding specuvestors and flooding the market with condo rentals we have seen that rents have been pushed down. But in another sense, the people you mention who can't afford to buy, can't afford to buy because of the loose credit the CMHC has been backstopping, causing prices to go above true market price.

All things considered, I still think the CMHC is keeping prices above what is dictated by prudent supply and demand.

realpaul

#24

Nowhere in Ian McGugans article does he mention the fact that the government give away of free money to unqualified buyers has been the crux of the problem. For a 'financial commentator he is a real dipshit!!!!!!

The entire article says "DUHHHHHHHHHHHHHHHHHHHHHHH". We have more intelligent commentary on this blog.

This guy is an asshole.

realpaul

#23 The CMHC has absolutley skewed the values of real estate by removing prudent competition from the market place. There is no notion of value because the screwball government has reduced everything to a monthly payment structure instead of values gained through supply and demand.

This is why everyone should question the so called 'price' of real estate today, it is grossly inflated on any economic measure. The SHITHEADS in government have created a false economy.

When John Law found out that pyramid schemes with government paper can't work you'd think that the supposedly educated finance department would have learned something.

I would suggest the values may have to fall back to represent the values before the government fuckfaces intervened. Thats some 50% lower then where they are today.

Homes2012

Interesting story from the Vancouver Sun:

Flaherty bombs on housing bomb
http://www.vancouversun.com/business/Flaherty+bom

DaMann

Sorry I meant CMHC has made housing far more expensive than otherwise would have happend woithout them!!!

We need an edit function!

logic

14 –

welcome to the interwebz