Skip to content

Tagsub prime mortgage

Doomsday real estate prophecy….enough already!

This pic might best capture the image that comes to mind when I hear the phrase ‘real estate crash’.   Don’t adjust your screen.  This isn’t a hoax.   This 12 story building collapsed in 2009 shortly after it was completed.

Note how the building remained intact after it fell.   That is truly amazing.   Clearly, it was well-built.  But note the hollow concrete piers with no rebar.   This is a great example of how even the best built building will fall if it has a weak foundation.

Our U.S. neighbors to the south learned about weak foundations in 2008.   The U.S. sub-prime mortgage crisis was caused by Banks offering mortgages to anyone with a pulse.   There was little to no qualifying for a mortgage.  You could buy or refinance up 110% of the value of the home!   Mortgages were being given to those that didn’t qualify.  This was the root of the U.S. housing crash.

HOW DOES CANADA STACK UP?

But is this what the future looks like for Canada’s housing market?    We keep hearing reports about the imminent Canadian housing bubble.  It’s coming… soon… no, really.   We’ve heard this continually for the last 5 years.   You just have to wake up and turn on the TV, radio or computer.   It’s full of Doomsday forecasters.   But reality is very different.   Listen to facts and forecasts from proven sources….  Take CMHC’s most recent report released in the 4th quarter of 2012.  They are calling for a stable housing market in 2013.  Average house prices will stop climbing and remain flat.  Rental vacancy rates will stay low.   Click here for CMHC’s Q4 report.

The forecast isn’t calling for any huge price drop as the media would have you believe.  It’s boring news… but that’s good news for us.  CMHC’s historical forecasts have been pretty accurate.  And they probably have more data at their fingertips than any other organization.   The Doomsday forecasters don’t seem to reference this report… but I suggest we give more consideration to accredited reports…

Speaking of Doomsday… I saw a good article in The Financial Post entitled ‘Are we worrying ourselves into a housing crash’?  A great question… and they quote 2 of my favorite Economists and Financial Experts, Moshe Milevsky and Benjamin Tal.   Both believe we won’t see a housing collapse like the U.S. had.  The fundamentals are very different.  But they think that if we keep talking about a crash, then it could  speed up and prolong any housing slowdown.

To me, Canada is like the 12 story building, strong and intact.   The U.S. was like the foundation…hollow and weak.   Let’s make sure understand the differences before we write off our housing market.

As always, I welcome your questions and comments.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

 

Major lender cuts out self-employed and new immigrant lending programs

THE SKY IS FALLING AT CIBC?

On Tuesday, CIBC’s wholesale lending arm, Firstline Mortgages, announced drastic changes to their lending policies.   They will no longer participate in self-employment and new-immigrant lending programs.  These programs made it possible for Canada’s growing self-employed and new-immigrants to get a mortgage at discounted interest rates.

click here for The Star’s report featuring some of own personal comments.

HERE’S WHAT REALLY HAPPENED

The move by Firstline seems to have come immediately after 2 recent reports…  First, CMHC said they are reaching their $600billion cap limit on the amount of mortgages CMHC can insure.   Currently sitting at $541billion, as of the end of 2001.  (I think this is the real reason for Firstline’s lending changes.. a more thorough explanation is below).   But next, a Bloomberg news report was released, earlier this week quoting a 152 page OSFI report (by the way, I searched OSFI and couldn’t find that report).   The article drew comparisons between the US sub-prime mortgage lending and Canada’s self-employed and new immigrant lending programs.

Let’s get something straight… Canadian lending policies are NOT like the US sub-prime policies.  Not even close!  The US sub-prime mortgages were granted to people with poor credit history, they lent up to 125% of the value of the home, amortizations went up to 50 years, they offered interest only payments, appraisals were not always required, they offered low interest teaser rates for 1 to 2 years, they offered Variable rate mortgages with no payment adjustment even if rates went up….  We don’t have theses features or options in Canada…. To suggest that our lending practices are similar is not accurate and has to be corrected…or proven… (there was time when similar mortgages were made available to Canadians this only lasted a few years from 2006-08 and this only accounted for less 5% of all mortgages during these years)

In Canada, we have much stricter lending policies that is in keeping with our conservative reputation….. And let’s not forget, the Fed govt has made 3 major changes in the past 3 yrs… making it tougher to qualify for a mortgage.

-maximum amortization reduced to 30 years maximum.  -refinances were cut to 85%  loan to value.  -business for self without traditional income confirmation will need to put 10% down payment, instead of 5%.

We really don’t need any more tightening.  The record low interest rates are helping to drive the real estate market.  Once rates go up, the values will level off and maybe even drop.

And by the way, if you think this is a small segment of the population, guess again.   The Canadians Association of Accredited Mortgage Professionals (CAAMP), estimates that 13% of the country is self-employed.    (to further clarify, a self-employed person is anyone that is paid in full and then must deduct and pay their own income taxes.)   Being able to reduce your taxable income is part of the benefit of being self-employed…Remember, these people don’t have pension plans and usually don’t qualify for Unemployment insurance…  

New immigrants are a big part of what has made our country the best place in the world, to live in.   In 2010, there were over 250,000 new immigrants that came to Canada.   These are people, anxious to work, wanting a better life…..wanting to spend and borrow…helping our economy grow.   And as a former Senior Lending Manager with a major bank, I can attest to the fact that granting new immigrants a mortgage has always been considered a low risk loan.   Most new immigrants would give up their right arm, before not paying their mortgage.

BANKS HAVE TAPPED INTO CMCH PORTFOLIO INSURANCE FOR YEARS

You bought a house, you put down 20% or 25% and you didn’t have to pay CMHC or Genworth hi-ratio mortgage insurance.  Congrats…!  But did you know that your mortgage might still be CMHC or Genworth insured?   That’s right.  Banks and other financial institutions have been buying and paying for CMHC insurance through portfolio insurance.  This makes the mortgage a secure investment for the Banks.  If you default, the loan is guaranteed by CMHC, a Crown corporation.  Soveriegn debt.  You can’t get any more secure than than.   It also takes the mortgage off the Bank’s books and frees up more capital for other investments.

Here’s a thought… CMHC is a Crown corp that is there to help Canadians own a home… well, maybe they should take a look at the % of mortgages that are 85% loan to value or higher…this number isn’t as high as you might think.

Remember these stats from January 2011?

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

And we also know that last year, the total outstanding mortgage balance in Canada topped $1trillion for the first time in history….. You could say that CMHC has a very well secured book of business….

Come on CMHC, let’s make insurance available for those Canadians that need it…  it seems the Banks have found a way to eliminate all their risk when it comes to lending money…but we know they keep all the rewards and profits (how else do you explain $billion profits through the 2008-09 recession and beyond)   Maybe it’s time to increase that $600billion limit… There doesn’t appear to be any arrears problem with mortgages either… last I heard, we were at around 0.43% for mortgages in arrears more than 90 days.

%d bloggers like this: