Reckless Canadian Banks not so Reckless

There’s an interesting opinion piece over at the Tyee:

Canada’s Reckless Banks Inflate House Price Bubble

The story suggesting house prices were overvalue by just 20 per cent was based on a report from Fitch ratings — a company which rates mortgage backed securities. A less sanguine and more objective estimate of the overvaluation comes from a report by The Economist, which says the figure is 78 per cent as against rents (the highest in the OECD) and 34 per cent (second only to France) as against income. The U.S. is undervalued by seven per cent and 20 per cent respectively, which gives you an idea of how bad things can get when a bubble bursts, or even if a balloon deflates — the favourite analogy of the wishful thinkers.

Writer Murray Dobbin calls the banks ‘reckless’ for pulling in buyers with rock bottom interest rates, but they aren’t being reckless at all. It would be reckless to leave taxpayers money on the table when the government is so eager to give it to them via the CMHC.

He does wrap up the piece with a very clear statement of who is to blame for the mess we now find ourselves in:

Responsibility for the intractable mortgage dilemma can be laid decisively at the feet of Flaherty and his own recklessness back in 2007. That’s when he opened up the CMHC’s mortgage business to U.S. competition. We soon had the same lunacy here as they did south of the border: no down payment, 40-year sub-prime loans. That year-and-a-half experiment (Flaherty finally got scared smart and started to rein it in) is what spurred the irrational drive by so many Canadians to own a home.

Read the full article over at the Tyee.

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Bo Xilai
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Bo Xilai

I completely agree… CMHC has been the source of the “Heads, you win, Tails, I lose” proposition being dealt to Canadian banks for their mortgage lending practices.
Canadian banks have known for a long time their mortgage lending to CMCH-insured borrowers represents NO RISK to their capital.
Good for bank shareholders, bad for taxpayers…

Devore
Member
Devore
This is what Patriotz, myself and many others have been repeating for years. Banks aren’t reckless. They’re perfectly rational, and not taking excessive risk. That’s why they were pushing people into minimum downpayment, CMHC insured mortgages, instead of traditional 20% down, for which they eventually paid out of their own pocket to insure with CMHC. When loans are 100% guaranteed, the only thing stopping money from flying out the bank door are government lending criteria; as long as CMHC insures the mortgage, at borrower’s expense no less, the bank doesn’t care what kind of a risk you are. This whole mess is to be laid at the feet of CMHC and Flaherty; CMHC for being the enabler, and Flaherty for loose regulation. In the coming years we will hear many stories, just as in the US, about shoddy and shady… Read more »
Loon
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Loon
Oakvillian wrote this: “I am an experienced coffee broker and am qualified to answer your question. The apparent cooling of your coffee is actually the result of normal seasonal variation, combined with the effects of government-imposed rules designed to curtail dangerously high coffee temperatures. Rather than assess the heat of your coffee minute by minute, you should look at the longterm hourly figures. In the past hour, your coffee changed from cold water and grounds at roughly 4 degrees Celsius, to a tasty liquid at 50 degrees Celsius. That’s an adjusted Celsius increase of 1250%. As you can see, in the long run, COFFEE GETS WARMER. I advise you not to microwave your coffee, or throw it out, but to hang in there for the long run and profit from the rise in temperature that will almost certainly occur over… Read more »
Anonymous
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Anonymous

Devore: “This is what Patriotz, myself and many others have been repeating for years. Banks aren’t reckless. They’re perfectly rational, and not taking excessive risk.”

We will see how it works out for the banks long term. Short term it probably worked out great for executive bonuses but long term the banks will suffer when the Canadian economy tanks due to the housing implosion. How did the housing bubble work out for the US banks over the full cycle. Not so good.

b5baxter
Member
Anonymous Says: “Because [sic] not statistically significant….” Statistical significance is a term that can apply to a sample of a larger population. Since we are using a complete data set for inventory, not a sample, the term is not applicable in that sense. It would also apply if we were making a estimate of probability but there was no such claim here. The only claim was that inventory growth was slowing and clearly the data contradicts this. Looking at the increase for just one day would not be a good indication of the trend. Which is why I suggest looking at the average of the last 30 days and comparing it to previous years. Measuring the rate of increase (the number of homes added to inventory each day) is a very valid measure to help understand real estate trends. Using… Read more »
vanpire
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vanpire

When I was applying for mortgage pre-approval last year it was made very clear to me that while I easily qualify for a higher-than-expected financing with %5 or 10% down, if I was to put 25% down my chances of getting a mortgage for the same amount dwindled to near zero.
And as of this writing you can still buy with 0% down if you look in the right places.
Awesome or what?

JD
Member
JD

The 44% drop Moodys is talking about, is a drop to the rent supported price. Economist magazine says prices are 78% above the rent equivalent.
IE: Prices rose from 100 to 178.
To get back to 100, fall from 178.
78 is 43.82% of 178.

JD
Member
JD

@vanpire
The larger mortgage is possible because you have more liquid assets with the smaller down payment. Banks want your money not your house 🙂

Lifetime Renter
Guest
Lifetime Renter

Is it entirely the fault of “recklessness” by the government? Given the tight links between the political establishment, top level government bureaucrats and the owners and top personnel of the banks, there is no doubt the government’s decision to loosen loan restrictions and backstopping it through CMHC guarantees was done through consultation and with the complete support of the banks. The policy changes were done for those who, by far, have the most influence on government policy regardless of which party holds office – Canadian finance capitalists. Flaherty knows who his real bosses are and he was merely doing his job.

Vote Down The Facts
Guest
Vote Down The Facts

JD, but they said it was a “worst case scenario”, and we already know that the US is considered undervalued by the same metrics. So a fall back to 100 can’t be the worst case.

Short'em High
Guest
Short'em High

@JD Says: 44% = 78/178 per Economist.

Good find! Here is that Jan. 2013 valuation schedule published by Economist.

http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home?fsrc=scn/tw_ec/home_truths

Moody’s plagiarism business model is raking in the dough. They probably ripped off somebody elses original risk paper too. LOL!

Dan
Guest
Dan

Sub-prime loans? Every loan in Canada is sub prime…by true definition sub prime loans in the states were mortgages that had low teaser introductory rates that reset to higher rates in coming years. Most loans in the states are 30 year fixed rates and they still saw a major correction due to a small percentage of sub prime and liar loans.

Every fixed mortgage in Canada is sub prime as they all likely renew every 3 to 5 years and going forward will do so at higher interest rates.

We are in serious trouble.

Democrass
Guest
Democrass

We know from VHB and others that MOI bottoms out in March. Does anyone know when in March the bottom in MOI is typically seen? Is it even possible to be that precise?

vanpire
Guest
vanpire

JD said:
“The larger mortgage is possible because you have more liquid assets with the smaller down payment. Banks want your money not your house”

Or simply because 25% down = no CMHC insurance

Drachen
Member

I disagree with the characterization of the banks as ‘not so reckless’.

It’s still reckless driving if you cause the guy next to you to crash his car, even if your Escalade has armor plating and airbags keeping you safe. They are being reckless in regards to the Canadian economy and taxpayers.

taylor192
Member

Slightly OT, yet since its related to rates I think it has merit:

A judge ruled Air Canada can take longer to make up its pension deficit. Part of the decision is that a return to higher rates will increase the returns of the plan eliminating the deficit.

Who actually thinks higher rates are coming anytime soon? I doubt it, and this decision will just make Air Canada’s pension deficit worse. Like low rates are contributing to Canadian debt, specifically mortgage debt.

Its a double edged sword. Keep rates low and all sorts of trouble is brewing, not just in housing.

elvince
Guest
elvince

@Dan: a subprime loan is one where the collateral (in this case, the house) is worth less than the loan at the moment the loan is made (worth is defined as market price here, not as intrinsic value).

A subprimer borrower is one who, based on some arbitrary criteria, can’t pay the interest on the loan.

A liar loan is one where the lender accepts not to worry about either of these questions.

The medias kinda mixed all 3 in one category and called everything a subprime loan, but there can be big differences between the 3.

advoc8
Member
advoc8

Great article!

@Dan: Every fixed mortgage in Canada is sub prime as they all likely renew every 3 to 5 years and going forward will do so at higher interest rates.

We still have 2 more years of mortgage renewals at lower rates giving home owners extra money to prop up the economy, then.

Is that going to be enough to keep housing prices from dropping? Will enough of these people feel wealthy enough to trade-up and take advantage of these “mild, temporary” lower prices?

I suppose that’s going to depend on if there are enough first-time buyers out there to support the bottom of the home-food-chain. Let’s see if the elimination of the HST brings them out next month.

HAM Solo
Guest
HAM Solo
Just another story from the trenches. Yesterday, our friends told us they were planning on moving from West side to a cheaper hood (Richmond). Wife thinks the house is still worth $2.7 million because a house on their street sold at that price back in 2011. They are looking at a nice $1.7 million newbuild house which they could own “mortgage free” … or in other words they are seven figs into mortgage on the West side “mansion” (not). Unfortunately for them, everybody seems to have the same idea at the same time. Still probably possible for them to downsize the net mortgage or get out of the westside house with lots of cash with which to rent a swanky pad. I hope they make it. However, odds are, they end up listing in May to 10+ Months of Inventory… Read more »
oneangryslav2
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oneangryslav2
15 Drachen Says: March 13th, 2013 at 11:24 am I disagree with the characterization of the banks as ‘not so reckless’. It’s still reckless driving if you cause the guy next to you to crash his car, even if your Escalade has armor plating and airbags keeping you safe. They are being reckless in regards to the Canadian economy and taxpayers. The behvaiour of the banks is, indeed, reckless, but not irrational. What we have with the banks is what game theorists refer to as an n-person prisoner’s dilemma situation. Each of the banks is doing what is individually rational for itself. Unfortunately, the end result is sub-optimal from a societal perspective. The logic is the same in North American professional sports. Each team wants to sign the best free agents around, so the price for these players is bid… Read more »
HAM Solo
Guest
HAM Solo
@ Devore As bank CEO’s and risk managers now discussing, there are a few chinks in the “risk free chartered bank” thesis. As follows: 1) Whether or not the banks lose on the loans, they ramped home lending so quickly during the post 2009 bounce, that they got a lot of earnings growth from the activity. As the market stalls, they lose the growth in this line item (negative growth can turn a 14 P/E into an 8/ P/E quickly). 2) Even though the CMHC-insured mortgages are covered from loss, the HELOCs the banks have been writing are not. HELOCs are huge to the banks (30% plus of home-related lending). Therefore there will be a hit in a weak house/job market. 3)Once we get to the point where the CMHC is paying out serious $$ in claims, the sloppy underwriting… Read more »
Anonymous
Guest
Anonymous

guys, are banks reckless or not!? i really want to know!! it’s super important to me.

rp1
Guest
rp1

“Canadian banks are in the same situation as NHL teams, with the difference being that the federal government has not instituted something analogous to a “salary cap” in this sector.”

Wrong, they charge the banks for mortgage insurance. That’s the right mechanism, but unfortunately it’s used as a subsidy.

goldmember
Guest
goldmember

The banks and bugs are getting shmoked today.

rp1
Guest
rp1

So I heard this website is under new management. Not sure what all the ruckus is.

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