Macleans on the CMHC bubble

Some juicy quotes about the CMHC fueled Canadian housing market in this article over at Macleans. How much longer can this madness go on?

“The CMHC is a driving force in the housing market. But critics warn its policies could fuel a U.S.-style meltdown.”

“CMHC’s balance sheet looks strikingly similar to both Fannie and Freddie”

“CMHC has distorted the housing market by making homes, especially ones that are on the pricier end of the spectrum, more affordable and encouraged a lot of people to get in over their heads.”

The full article is here and is worth the read.

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metalhead
Member
metalhead

"the CMHC’s board of directors—a board that includes a political consultant, real estate developers, a small-town lawyer and even the owner of a plumbing company—though not one single economist or recognizable financial services professional."

Good article. I found this little tidbit interesting.

This "board" is the cherry on top of the cow pattie that is the CMHC.

CelicaMan
Guest
CelicaMan

Macleans editorial staff these days seem like a bunch of cynical Gen Xers, like me. I follow some of their writers on Twitter and they seem to be pretty good at telling it like it is.

Vansanity
Guest
Vansanity

Here's what I don't get… what exactly precipitated the US crash? And why is it not happening here?

In the US their market tanked after interest rates were already low, but here in Canada prices and sales have remained strong. We're all waiting for interest rates to climb but that didn't happen in the states, so what gives?

McLovin
Guest
McLovin

He's a story to brighten your day…

Met a Kelowna mortgage broker who said that many of her drug dealer clients are being forclosed on. She said even the drug dealers in Ktown are hurting. The strange thing is she thought this was funny becuase they were "DD's" and they deserved it. What she didn't find ironic was that she arranged their mortgages and obviously and wilfilly lied on their applications.

So who's better, The DD or the Mortgage broker?

JR
Guest
JR
The CMHC is at the core of Canada's real estate delusion. In the context of mortgage lending we are reminded ad nauseum that "we are not as bad as the US". The great unwashed have interpreted this to mean "we are good" – and this alleged lending conservatism will save us from a price correction. In fact, we've been and are only slightly less reckless than our neighbours to the South, and for the same reasons. Banks in the US could hive off their ultimate exposure to a host of other arms length investment vehicles whereas banks here hive off their low ratio exposure to taxpayers through the CMHC. In the US, some mortgages featured initial teaser rates, zero down and cash back. Same here, even today. Banks in the US would loan to anyone with a pulse. After listening… Read more »
jesse
Member
I ran some quick numbers about NET taxpayer exposure to CMHC and the numbers don't look overly "bad". I see the net exposure being around $20BB in terms of loss recovery. But I don't think that will be the big story. CMHC isn't exactly the analogue of a GSE because it deals in insurance. What Fannie/Freddie found out was that it's not net exposure that's important in the interim. They faced a significant liquidity problem as they need to make payouts but the recovery efforts were delayed due to low sales volumes and so-called "shadow inventory". Hence the huge loans from the US government to cover. Add to this, CMHC will become the "lender of last resort" because, as house prices fall, more and more people will find themselves over the 80% LTV threshold for requiring MI. As a result,… Read more »
Best place on meth
Member
Best place on meth

@Vansanity:

>>>Here’s what I don’t get… what exactly precipitated the US crash? And why is it not happening here?<<<

Global/Remax news channel?

registered
Member
registered

@6 jesse: To be honest I never understood that analysis. If the CMHC/taxpayer has low exposure guaranteeing half a trillion dollars with less than 2% in backing assets, and the banks have already offloaded that risk, who picks up the balance when the market tanks?

Some Guy
Guest
Some Guy
"In the US their market tanked after interest rates were already low, but here in Canada prices and sales have remained strong. We’re all waiting for interest rates to climb but that didn’t happen in the states, so what gives?" This is not correct. Look at the chart of Fed Funds rate, and see how it triples in about 2 years from 2004-2006 which is when their housing market rolled over. Canadian rates increased as well in that timeframe, but didn't rise nearly as much, and began their rise much later. Chart Also, the period of rising rates in Canada coincided with reduced lending standards (smaller down payments, and in particular longer amortizations) which mitigated the impact. The U.S. lowered standards as well, but most of that was done before rates rose, and they didn't have the same amortization extension… Read more »
jesse
Member
@fixie guy: "who picks up the balance when the market tanks?" There is always residual recovery from mortgage insurance so looking at standard ratios to something like auto or fire/theft is not correct. The analysis I did was with $500BB insured assets, average remaining LTV of the pool at 75%, and 20% foreclosure rate over 10 years. Say prices drop 20% nation-wide under this scenario, CMHC must make up the shortfall after recovery, and that includes raiding borrowers' non-registered savings. I think tens of billions net, from this simple analysis alone, is about right. The bigger problem, IMO, is when CMHC has significant delays recovering capital. That was the big problem in the US, where the government had to bridge notional amounts, and those can be close to an order of magnitude higher than the eventual net losses. And the… Read more »
Vansanity
Guest
Vansanity

@Best place on meth: So because of the media pumpers here it hasn't happened? That's it?

This is what I mean, I'm missing something, what is it?

Anonymous
Guest
Anonymous

@McLovin: I guess those are perfect examples of stated incomes.

patriotz
Member
Active Member

@Vansanity:

Here’s what I don’t get… what exactly precipitated the US crash?

They ran out of idiots. Same cause as every RE crash and every bubble burst in general. If prices are out of proportion to rents and incomes this is inevitable.

And why is it not happening here?

Because the idiots haven't run out yet. But even in Vancouver, they are not inexhaustible.

Anonymous
Guest
Anonymous

@jesse: Does the CMHC exposure take into account falling RE values or is it just based on current values?

DQ
Guest
DQ

So who’s better, The DD or the Mortgage broker?

******

Uumm the drug dealer, without question.

At least a drug dealer is honest and never tells his "clients" that prices, like interest rates, will never go up.

Steve
Guest
Steve

@Vansanity: The us had big bubble markets across the country. Here in Vancouver it can be hard to remember that national houseprices in Canada didn't start really going bubbly until a couple of years ago. Also, the CMHC started flooding the market with credit in 2008 in reaction to the downturn so the Canadian schedule is behind the US by quite bit. They're just hoping that they can pull off the trick no one else could: economic boost through housing with no big hangover.

BLOC
Guest
BLOC

And why is it not happening here?

Because the idiots haven’t run out yet. But even in Vancouver, they are not inexhaustible.

***

Sure, we just import them to keep the party going – come on HAM!

Aleks
Guest
Aleks

How does a person find out what a house actually sold for? I heard that 3338 Inverness sold, and I was curious what they got, so I looked at MLS. On Tuesday it was still listed as for sale for $819,000, yesterday it told me no such MLS number exists in the system.

Drachen
Member

@DQ:

"At least a drug dealer is honest and never tells his “clients” that prices, like interest rates, will never go up."

And the drug dealer serves clients who know the product is bad for them. The mortgage dealer pretends like he's helping his clients.

data junkie
Guest
data junkie

@Aleks: It sold for $800,000 (down from asking price of $819K) on February 15th.

data junkie
Guest
data junkie

@data junkie: Sorry, March 11, Feb 15 was the list date. In my defense, I haven't had my morning coffee yet.

patriotz
Member
Active Member

@Aleks:

How does a person find out what a house actually sold for?

Cheapest way is to make friends with a realtor (perhaps by making him think you're interested in buying something) and get him to look it up from their database.

If that's stooping too low, you can wait for the sale to complete and get the information from BC Online for a fee.

Or if you can wait longer the sale will show up on the BC Assessment website.

jesse
Member

@Anonymous: "Does the CMHC exposure take into account falling RE values"

CMHC is "exposed" regardless of RE values. It's a matter of how much loss they could incur if/when prices drop.

mohican
Member

@jesse: Yes, from the cursory analysis I've done, the CMHC may be politically very unpopular in coming years as it will suck cash from the federal treasury to pay out claims from defaults. Things will have to get pretty bad for that to happen, 20% + national house price decrease with high unemployment.

That said, it is extremely unlikely that the CMHC's troubles would have an impact on Canada's credit rating or any lasting impact on the federal fiscal situation. It will be painful for the governement of the day to deal with and it may mean the demise of the CMHC as we know it.

I would be very happy if that day came and the market (ie. banks) correctly priced borrowing based on borrower risk and demanded down payments based on borrower risk as well.

Devore
Member
Devore

@McLovin: Nothing illegal about stated income mortgages.

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