Tuesday, May 7, 2013

Turning off the taps

There seems to be growing enthusiasm that since the housing market hasn't crashed hard yet, that it's simply a matter of waiting out the downturns for it to take off again.

But there was an interesting article about the Canada Mortgage and Housing Corporation (CMHC) in today's Financial Post.

As we all know too well, CMHC has been the great enabler of our housing bubble. A condition which haunts policy makers and keeps them awake at night.

As the Post notes:
The federal government and policy makers are scrambling to engineer a soft landing for the country’s overheated housing market. As the largest provider of mortgage insurance in the country with about 75% of the mortgage default insurance market, CMHC plays a critical role in Canada’s housing market. In fact, the agency has been at the forefront of changes that made it easier to get a loan, much to the chagrin of the Finance minister, who has expressed concerns about the role CMHC has developed from its historical mandate to advance housing in Canada.
This is the most important consideration when taking stock of real estate in the Village on the Edge of the Rainforest... that "the federal government and policy makers are scrambling to engineer a soft landing for the country’s overheated housing market."

The correction hasn't even really started here but with policy makers determined to engineer it, why do people still believe it's not coming?

To bring about that "soft landing", the Post notes the Federal Government:
has attempted to curb CMHC’s growth and reduce taxpayers’ exposure by making it prohibitively difficult to obtain an insured mortgage backed by the federal government. For one, amortization terms were trimmed from a high of 40 years to a 25-year maximum. Furthermore, Ottawa capped the amount it is willing to backstop at $600-billion in an attempt to curb the amount of bulk insurance in CMHC’s portfolio. It is noteworthy that, according to CMHC’s annual report released Monday, it reported that it is insuring less mortgages in dollar terms, roughly $566-billion, in 2012, than it has in recent years.

Having reined in its lending activities, Ottawa also moved to tighten control and oversight of CMHC “to ensure its commercial activities are managed in a manner that promotes the stability of the financial system.” Mr. Flaherty criticized the extent to which CMHC’s commercial functions had commandeered its lending capacity and core functions, most notably CMHC’s willingness to provide default insurance on conventional mortgage loans with more than a 20% down payment, which is not required by law because they are considered low-ratio mortgages.
But while CMHC is insuring less mortgages, in dollar terms, than it has in recent years it is important to note that CMHC is reaching it's limit for insurance mortgage coverage.
In the hustle and bustle of everyday life, whispers are being heard of Canada’s mortgage cap reaching an all-time high with concerns about Canada’s economy hanging in the balance.

With mortgage rates at an all-time low, such as Dominion Lending Center reflecting 2.84 per cent on a five year term, homeowners have taken on substantial household debt.

Finance Minister Jim Flaherty was said to be concerned about lenders loosening their mortgage standards, resulting in “emerging risk” to Canada’s economy.

As well, the Canada Mortgage and Housing Corporation is nearing its limit for insured mortgages.

CMHC controls about 75 per cent of the market and is 100 per cent backed by the federal government.

The numbers say it all—CMHC’s number was about $541 billion in insured mortgages and the agency’s limit is $600 billion.

That leaving only $59 billion for future mortgages.

This has resulted in federal government is again cracking down on Canada Mortgage and Housing Corp. and the mortgage insurance sector.
Ben Rabidoux, analyst and strategist with U.S.-based Hanson Advisors, sums it up:
“Looking back over the last decade, I see an unbelievable mandate creep where CMHC was doing things that would infuriate taxpayers and running a massive, potentially public liability in the process. If there’s ever been a time to be cautious with giving out mortgage debt, now would be that time. What they are doing at CMHC is finally forcing it to act in the best interest of the general public.”
The taps are being turned off and with it goes the liquidity that permitted the bubble to inflate in the first place.

Without it the bubble simply cannot grow higher.


Email: village_whisperer@live.ca
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  1. "why do people still believe it's not coming?"

    Class normalcy bias.

  2. They're called bubbles for a reason. They pop, which means cannot be "engineered" to pop in slo-mo.

    What the government should engineer is how to retain a modicum of governance after the inevitable pop, which will also pop the Bigger Generic Credit Bubble of debt money in a catastrophic deflation.

  3. It’s amazing the negative reaction I get from people when I try to explain what I see coming. For those of us predicting the eventual outcome, and ridiculed by our friends for appearing to be wrong for so long the wait is almost over. The eventual outcome has taken longer than expected. You can thank our government for manipulating the markets and extending this bubble, by backing up 100% of high ration mortgages and (and bulk mortgages) to the tune of almost $600 billion dollars, taking the risk away for our banks and putting the risk squarely on the backs of the Canadian tax payer.
    Fortunately for the banks they will make out like bandits, while unfortunately the Canadian tax payer pays to clean up the mess. Don’t bet against the banks.

  4. Whisperer,

    As much as I read and enjoy your blog, I think that it would be beneficial if you stayed consistent with your arguments in regards to mainstream media.

    In many blog entries you decry the integrity of journalism, bemoaning how mainstream media has fallen to sub-par standards that has faux articles being represented as objective.

    And yet when it suites you, you quote their every word...

    "This is THE most important consideration when taking stock of real estate in the Village on the Edge of the Rainforest... that 'the federal government and policy makers are scrambling to engineer a soft landing for the country’s overheated housing market.'"

  5. I don't think Whisperer has said all mainstream press is non-objective, has he?



  8. The CMHC was set up to allow low income Canadians that banks refused to get into the market. By the end it had become an instrument of the Conservative Government monetary policy!

    Insuring investment properties, second and third homes (how does that help low income Canadians) and speculation.

    The problem is the monster is so large that when it falls, we all go down.

  9. It should have been over in 2008-09.

  10. fish10 u r 100% correct

  11. When the CMHC limit is reached I wonder what the chances are banks will raise the minimum down to 10%, given it will then be their own necks on the line?

  12. The Japan bubble has been slowly deflating for 23 years.

    1. They also allow multi-generational mortgages...

  13. Okay now this is worth a laugh…..one seriously misguided article from across the strait -

    Sellers need to price accordingly, and be ready to make less on the sale, which they'll likely make up on their next purchase


    1. It's true. Sell now for less. Wait. Prices fall more. Buy for even less. Good advice.

    2. Really?!? Try to sell for more, when it sells yours has gone down and then try to get the same type of place after you pay realtor fees, transfer taxes and closing costs?

      Give your head a shake......

  14. As with most things Conservative the 600B insurance limit is a sham... Conservatives have increased mortgage insurance limits for private companies such as Genworth up to 300B.

    1. Commenters both in and out of MSM often comment on the CMHC $600B limit but not on the overall insured amount for which CMHC/taxpayers are on the hook - around $1trillion at last count when you include Genworth, Canada Mortgage Guaranty etc.

      And fish10 is also absolutely correct.

  15. Engineering a soft landing is a good thing. A soft landing does not mean a crash. Also banks are flush with cheap cash. Mortgages are the way they make money. CMHC may change or modify it's policies but all that is going to do is give notice to the banks that they are going to have to take on more of the risk. This is what's happening. Back to the good ole days of banking where their loans were not back stopped by the govy

  16. Anyone care to speculate on when CMHC will reach its target cap rate of 600 billion. They report quarterly as I recall so we will not know until after the event has happened. It is sure to be newsworthy when it happens. What a dogs breakfast!

    1. CMHC has qualitatively changed its habits; it may well never reach that cap, since it sees little appetite in Ottawa for extending it further.

  17. Whispers: upon re-reading this article I see a government hustling to cover its butt by casting the blame on the CMHC board and probably Karen Kinsley. While this attempt is ridiculous in the eyes of anyone who has been following the housing bubble and knows the scenario as laid out by fish10 is accurate, the public at large will unfortunately probably buy it.

  18. Whether the bubble bursts in 12 months or the air comes out slowly over 60 months the result of the landing is still the same........you have a bubble with no air remaining, and it will be painfull and disasterous for tens thousands.

    If you're upside down in 12 months, or it takes 60 months, the end result is that you are still upside down.......

    Had we been allowed to implode 5 years ago we'd be in a real recovery now, not some government mandated "death by a thousand cuts" economic ICU where the financial morphine is being rationed and also in short supply.

  19. Bubbles do not deflate slowly; they burst. That is the nature of a bubble.

  20. Falun Gong organ donorMay 8, 2013 at 4:30 PM

    Read between the lines folks.

    By doing a re-org the Cons will point the finger to the Karen Kinsley and the previous board members, but the Harperites will deny any wrong doing on their disastrous CMHC policies(the good,the bad and the ugly) they've imposed on Canadian tax payers over the last 6 years.

    P.S. @ Bo Xilai, when you gonna give up your organs!!

  21. As has been pointed out, the chmc cap is meaningless. Pc gov is transferring mi to private companies and raising their caps.