A good read about this:
Monday, July 20, 2009
CMHC - Canada's Breaking Point
(ALL GRAPHS EXTRACTED FROM CMHC PUBLICATIONS)
Everyone here is probably very well aware of who CMHC is. For any international visitors, CMHC was formed as a crown corporation in Canada after World War II to address the shortage in housing. It's mandate was to make home ownership accessible to all Canadians. CMHC primary deliverables is mortgage insurance and mortgage backed securities. Think Fannie and Freddie.
In 2001 GE Capital was permitted to join CMHC in the Canadian mortgage insurance industry to provide competition in the marketplace. GE Capital began insuring Canadian mortgages and issuing NHA-MBS (Mortgage Backed securities insured by the Government of Canada). In response to competition, CMHC began its trip down a new road.
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In 2002 total outstanding mortgage debt in Canada was still a cool $467 billion. This was predominantly issued to good credit and people with proper downpayments. CMHC insured a small portion of this debt.
In 2003 CMHC decided to remove the price ceilings limitations. That is, it would insure any mortgage regardless of the cost of the home.
In 2007, after years of lobbying, the now defunct AIG found new hope with the newly elected Conservative government. AIG was now permitted to insure high risk Canadian mortgages. It was also permitted to issue mortgage backed securities and exchange these on the open market. At the same time, the Conservative government launched a radical policy that allowed CMHC, AIG & GE to insure 35 year ams and 0% down payments. A few months later this was expanded to 40 year amortizations.
Thanks to this stimulus in 2007 the market radically changed. Historically high home prices continued to gain steam. High risk borrowers flooded the real estate market. Throughout 2007, the average home buyer who took out a mortgage had only 6% equity in their homes. That's the national average downpayment for all mortgages including buyers who moved up.
(2006 and prior years reflect a combination of larger downpayments, home price appreciations, payments on mortgages and shorter amortization terms)
In 2008, Canadian home prices started to dip as affordability became the worst on record in many cities. CMHC admits that it was ordered to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing. 42% of all high risk applications were approved, a 33% increase over 2007. (Please see matrix below for more information)
While many banks were flogging that it was a great time to buy a home, not one of them increased their mortgage holdings. Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit oustanding listed on their books by only 0.01% (see CMHC chart below). One has to question if real estate was such a great investment, why didn't they want to touch it?
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The only growth has been in the securitization of Canadian mortgages. In Canada this scheme has worked very well despite the credit crisis since the government of Canada insures 100% of any losses (not just the 20% downpayment). This means that the securities are as secure as government bonds, yet pay a higher premium (currently 3.1%).
The banks get to keep the difference between the interest rate charged to consumers and the rate paid to investors. The result of a government backing is cheaper subsidized funds for them to issue mortgages with. It also removes all risk.
The largest market for MBS is 5-year fixed single residential homes. The average term has swelled over the past two years and the majority of issues are for ams over 30 years. Some pools of MBS were issued at 9% but pay investors only 4% - representing how risky and profitable these loans are. CMHC charges 0.2% for the insurance, leaving up to 4.8% profit for the bank.
Securitization has accounted for 90.5% of all growth in total Canadian mortgage credit outstanding since 2007. Its market has grown from 100 billion in 2006, to 130 billion in 2007, to 260 billion by Q1 of 2009 (UPDATE: $295 billion by mid-June 2009). CHMC plans to expand securitization of debt to 370 billion by the end of 2009 as per the conservative government request.
All of these securties are traded on an open exchange and insured by the Government of Canada. Currently TD issued 59 billion in securities outstanding, CIBC 51 billion, BNS 32 billion, RBC 45 billion and BMO 27 billion. This explains why, if you are like so many, your eye balls popped when the bank preapproved your mortgage.
Many individuals are being granted 500-800K for their first home purchase if their household income ranges from 110-170K. The banks don't care. You either qualify for securitization or you don't. Their is no emotion or extra thought put into the loan by the bank since it bears zero risk. Investors don't care who you are since the security is backed by the government. In fact the only person who should care is you, the taxpayer. But apparently in Canada noone cares about the risk the taxpayer takes on. It's all about having a lavish political career.
As interest rates edged up about a percent in early 2008, Canadian real estate began to nose dive losing 10% of its value by September 2008. 10% is a significant confidence level in real estate. Surpassing it means that all the buyers in 2007 would move into negative equity. Cranking interest rates down to 0% in October of 2008 along with the expansion of government backed securities allowed mortgage rates to reach an all time low. The resulted in a house boom in the middle of the worst Canadian recession since the Great Depression. Home prices in May 2009 reached an all time high of $326,613 or over 7x the average Canadian income.
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On Jan 1 2009 CMHC allowed non regulated financial institutions to issue mortgage backed securities. Furthermore on January 26, 2009 CMHC allowed the securitization of line of credits, non amortizing and amortizing loans and readvanceable loans to also be securitized.
CMHC indicates in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of 2009. Looking at 2008 and 2007, one can clearly see that CMHC has drastically exeeded their planned figures. 812 billion is more than likely a minimum target. At this rate the Government of Canada will be insuring well over $500 billion in securitized mortgages and lines of credit by the end of 2010. It will also have issued over $600 billion in outstanding mortgage insurance.
Even at the zenith of the US housing bubble, prices peaked around $250,000 US while incomes were around $47,000 US. In Canada, incomes are $44,000 and prices are now at $326,613. If I have evidenced to you at this point how risky our lending has been, how are we so different than America? One might even say that we are much worse.
None of this is sustainable. This will all end very badly for our nation and taxpayers in the next couple of years.
References:
All charts, facts and figures were extracted from the CMHC website. CMHC provides free monthly, quarterly and annual publications on their website. Graphs were extracted from these publications.
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5 yrs is a long time if you happen to meet someone, find another job, finances change (after being maxed out to buy in the first place like many people), ... IMHO the extra 0.1-0.2% savings isn't worth the lack of flexibility/mobility.
