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Wednesday, June 16, 2010

Harbinger

This item has been covered on a number of local blogs, but the item is significant and will prove to be a harbinger of things to come.

The newspaper story in question (which you can read in the Province newspaper here) tells us about a real estate property which is now before the B.C. Supreme Court. The case is a potentially precedent-setting civil forfeiture that calls into question the role banks play, knowingly or unwittingly, in the province's multibillion-dollar drug trade.

But while the newspaper story focuses on the role played by banks in financing the grow-op, our focus zeros in on a revealing section within the story... one that confirms what many bloggers have suggested is going on with mortgage approvals in this country.

Every week we are reminded that the reason Canada has not suffered a housing collapse like our American cousins is that our banking system has been much more diligent with mortgage approvals and our banks have properly managed risk.

Thus, supposedly, there are no subprimer's in Canada.

Numerous posts have been made on this blog discounting this. We have subprimers. The conditions just haven't sufficiently presented themselves for their carnage to be unleashed on our market - yet.

Which takes us to the recent Vancouver Province newspaper story.

As details of the forfeiture case come out, it appears that the courts have come across several circumstances where banks have refinance mortgages on million dollar homes for lenders who, allegedly, were unable to provide proof they had the means to make the hefty monthly payments (about $4,000 a month).

That's right... million dollar mortgages approved without adequate proof of income to pay said loan.

In one case a prospective lender asked the Bank of Montreal to mortgage the property in question for its full value ($976.000) on Oct. 22, 2008. In August 2009 Vancouver police raided the home and uncovered a massive grow-op. Two days later, despite the raid, the lender sought and received an additional $70,000 mortgage on the property from the Royal Bank of Canada.

Make no mistake... this is not a 'one-off' story.

In the United States a minor drop in real estate values combined with mortgage resets at higher interest rates triggered the massive housing collapse we have witnessed over the past four years.

Those two conditions haven't come to pass in Canada, yet.

But they will.

And when they do, real estate in bubble areas of our country will suffer the same results as real estate in the bubble areas of the United States. And as the market here collapses inward upon itself, story after story will start to surface about other highly questionable loans that have been made.

This article is simply a portent of things to come.

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3 comments:

  1. It is very difficult to find information regarding "loan types" in Canada. For instance, how many no doc loans, how many interest only loans, how many people are doing the 5% cash back? It would be very interesting to see stats on this, then we would have some idea of how much trouble we are in.

    I mentioned this in another blog, and the answer was "this is proprietary information"; one bank doesn't want to show their hand to another bank. If I were a shareholder of a Canadian bank, I would definitly want to know what kind of loans they are making.

    Don't know whether you read "Market Ticker", he had an interesting article about banks starting to charge monthly fees in the US. I am old enough to remember a time when Canadian banks didn't charge monthly fees for accounts. Can't remember exactly when this changed, but there wasn't a big hue and cry about it. If you look at a Canadian bank, and look at their income, a big chunk of their profit is fees, makes you wonder the real reason Canadian banks are doing so well.

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  2. p.s. I have been enjoying your blog for about 6 months now, you're doing a good job...

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