Fri Post #2: CMHC Announcement - Much Ado About Very Little?

So the big CMHC announcement, which had the real estate industry all a tither, was made this morning and the result was a bit of a yawner.

As we speculated yesterday, it was all about CMHC premiums.

Starting in May Canada's national housing agency has increased the amount of money that homeowners with less than 20% down payments must pay to insure their mortgages.

On 95% Loan to Value mortgages the standard premium rises from 2.75% to 3.15%. Under the old system, that borrower would pay an insurance premium of $6,875 for a $250,000 mortgage. Under the new system, their premium would jump by $1,000 to 7,875. On a typical 25-year mortgage at 3.49 per cent, that person would be paying $4.98 more on their mortgage payment, every month, to pay down the fee.

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Thurs Post #2: So what's the speculation on CMHC's announcement tomorrow?

Scanning the web, the blogosphere is all a twitter about the CMHC news conference tomorrow but there seems to be very little concrete info about what's coming.

Even Garth Turner, who normally seems to have connections with upcoming announcements, is reduced to mere speculation.

So what will Evan Siddall, CMHC's new CEO, have in store for Canadians tomorrow?

The Globe and Mail reported in December that there has been pressure on CMHC to raise its premiums and many believe this is what the big presser is about. CMHC has not raised its premiums since the late 1990s, and actually lowered them between 2003 and 2005.

While premiums are technically paid by the lenders, the cost is passed along to borrowers, so any increase will be felt by borrowers. 

Premiums vary depending on the size of the down payment and are calculated as a percentage of the mortgage. The smaller the down payment, the higher the premium. For example, the standard premium is 1% for a mortgage with a loan-to-value ratio of 80%, and 2.75 percent for a mortgage with a loan-to-value ratio of 95%.

CMHC has two private-sector rivals: Genworth MI Canada Inc., and Canada Guaranty Mortgage Insurance Co. Industry sources say the private-sector players have been reluctant to raise prices on their own, for fear of losing business, but they have told the federal government that they would like to see CMHC raise its premiums.

The private-sector players argue that higher premiums are overdue because mortgage insurers have been required to bolster the amount of capital that they set aside in recent years, and flat prices coupled with higher capital requirements have put pressure on profit growth.

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Wed Post #2: More Mortgage Changes from CMHC on Friday? - Updated

Are there more, significant changes coming our way from CMHC this friday?

The website Mortgage Trends posted today that CMHC has advised reporters that will be making an announcement Friday at 11:00 A.M. EST.

What's interesting is that they’ve notified reporters well in advance, which apparently is somewhat unusual. So unusual, in fact, that it has many speculating that it will be a major announcement. Some suggest CMHC will be increasing the down payment required for CMHC for insured mortgages from the current 5% to back to 10%.

Reuters, however, ran a story on Feb 24th, 2014 which noted Federal Finance Minister Jim Flaherty said there were no imminent plans to intervene in the mortgage market:

In the interview, Flaherty indicated he is not overly concerned about the state of the housing market and said, as expected, there are no imminent plans to intervene in the mortgage market to curb lending after having done so four times already since 2008. But he said it would be "unwise" to rule it out as a tool in the future… For now, the minister is focused on increasing scrutiny of the mortgage insurance business of the federal housing agency, the Canada Mortgage and Housing Corporation (CMHC), and encouraging the growth of private mortgage insurers.

This real estate blog offers their opinion on what the changes might entail:

Option 1 – Some Form of Privatization? This would be big news and create great political fodder, if this was part of the announcement would likely be under taken by a partial break up of sectors with some remaining core functions of the crown corporation. Australia took a similar approach with success.

The recent budget included the statement “The Government continues to adjust the housing finance framework to restrain the growth of taxpayer-backed mortgage insurance and securitization,” which have also been a running theme to statements made by the Finance Minister. Reducing future taxpayer burden is clearly part of the agenda,.So the question that begs here, is what step could they take to reduce taxpayer risk, which leads to our Speculation Options 2 and 3:

Speculation Option 2 – A change to the down-payment requirements: A return to 10% down-payment structure, eliminating the 5% down option.

Speculation Option 3 – A reduction in the amount of insurance protection offered: Will it be less geared to impact the end consumers of mortgages and more to the banks in as much that the reduction will be in the security provided to the bank through CMHC reducing the risk from 100% of loan value to a similar percentage that the likes of Genworth and AIG now see at 90% of loan value. This would also even up the competitive playing field putting CMHC Insurance on par with Genworth and AIG.

My money is on Speculation Option 3 and here is why. It doesn’t impact the end consumers which would for lack of better words tick off a lot of potential home buyers (voters), have a big impact on the market (from construction to industry professionals). It would also be a step towards privatization, just like the Receiver General Fee structure implemented within the budget…is that not the trend here?

At the end of the day we only speculate and will await with anticipation what this major player in the real estate insurance market has to say this Friday!

We shall see on Friday.

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In these two sets of numbers lie Canada's housing bubble.

There's an article in today's Vancouver Sun by Barbara Yaffe.

Titled: The high cost of home ownership: Canadian homeowners carried nearly $1.2 trillion in mortgage debt last year, the article shares a stunning statistic:

The Canadian Association of Accredited Mortgage Professionals estimates, homeowners in this country — of whom 60 per cent carry mortgages — owed nearly $1.2 trillion in mortgage debt last year, up from $664 billion in 2008. In other words, national mortgage debt has nearly doubled in just four years.

Combine that with the fact that CMHC has gone from $100 Billion in insured mortgages in 2006 to almost $600 Billion today and you know where Canadians got the money to bid the price of real estate to astronomical levels.

Debt fuelled our bubble, plain and simple.

Throw in emergency level interest rates to facilitate the low monthly payments on massive mortgage amounts and you get a real sense of why the bubble has continued for so long.

But make no mistake.  These are not real estate prices which reflect intrinsic value.  The real estate bubble is born of excess credit.  Massive, excess credit.

This is a scenario that has been repeated over and over the past 500 years.

• Tipper and See-Saw Time (1621)
• Tulip mania (top 1637)
• South Sea Company (1720)
• Mississippi Company (1720)
• Railway Mania (1840s)
• Encilhamento ("Mounting") (1886–1892)
• Florida speculative building bubble (1926)
• Roaring Twenties stock-market bubble (c. 1922–1929)
• Poseidon bubble (1970)
• Japanese asset price bubble (1980s)
  • 1997 Asian Financial Crisis (1997)
• The Dot-com bubble (1995–2000)

A boom caused by excess credit will always bust. Ours will be no different.

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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.

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The battle over the mortgage changes heats up

Wikipedia defines the OFSI (the Office of the Superintendent of Financial Institutions) as an independent agency of the Government of Canada reporting to the Minister of Finance created "to contribute to public confidence in the Canadian financial system".

Seems with all the backlash about recent changes to the regulations surrounding the mortgage industry, the OFSI feels it is in need of some public confidence themselves.

Yesterday the OFSI set up a twitter account.  Their 2nd tweet?

OSFI has authorized CMHC to commence web-based social-networking campaign to booster public image.

Which seems odd because while the OFSI joined twitter yesterday, CMHC has been on twitter since July 2011.  Mind you the sum total of their twitter contribution so far has been only 2 tweets:

The backlash in question, in case you have missed it, is coming from the mortgage broker industry, as the Huffington Post noted a few days ago.

The press coverage comes as CAAMP (the Canadian Association of Accredited Mortgage Professionals)  issued a report declaring that “the changes to mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy.”

As the Huffington Post notes:

Ever since Canada’s housing market began swooning earlier this year, mortgage brokers, bankers and real estate agents have been busy telling us that the federal government is to blame, thanks to its tightening of mortgage lending rules this past June.

Never mind the evidence that the most overheated markets were already cooling by the time the mortgage rules were announced; never mind the rather extreme “coincidence” that our housing market began to slide just as we reached household debt levels similar to those seen in the U.S. and U.K. when their housing markets crashed. No; the real problem, according to the industry, is Finance Minister Jim Flaherty’s reduction of government-insured mortgage amortization periods from 30 years to 25.

The CAAMP report presents data to suggest the new rules have priced some percentage of prospective homebuyers out of the market.

According to CAAMP's estimates, if the new mortgage rules had been in place in 2010, 11 per cent of the high-ratio mortgages approved that year wouldn’t have been. A high-ratio mortgage is one where the buyer has put down less than 20% as a down payment.

CAAMP argues that this will impact employment as the construction sector struggles.

And that's the heart of the offensive.  CAAMP argues real estate has become such a significant part of the economy and as real estate goes, so goes the economy... so, federal government, don't stick with the changes you have made to mortgages.

But as the Huffington Post notes:

[CAAMP's] warning about the economic dangers of an overheated housing market could just as easily be an argument for Flaherty’s mortgage rule changes as they are an argument against them. If the economy stands to be devastated by a housing slowdown, then the best thing to do is to stop the overheating as soon as possible — or face an ever larger crash. This is what the mortgage rule changes were meant to accomplish.

And the effect of the mortgage rule changes is really no more than what one would expect to see with a fairly small hike in interest rates.

Right now, a 25-year mortgage at three per cent interest on a $350,000 house (the average price in Canada right now) would cost you $1,656 per month, according to TD Bank’s rate calculator. If the rate went up to four per cent, the payment would jump nearly $200 per month, to $1,847.

According to estimates, the new mortgage rules would jump housing payments on average by $140, due to the shorter repayment periods. In other words, the new mortgage rules have less of an impact on affordability than a one-per-cent interest rate hike.

This is what the real estate industry is freaking out about and blaming Flaherty for — the equivalent of a small hike in interest rates.

The hypocrisy in CAAMP's arguments are gleefully exploited by the Post:

And yet Dunning’s report asserts that “Canadian mortgage borrowers and lenders have been prudent and there is very substantial room to absorb higher interest rates.”

Really? Really?! Our household debt burden is now 163 per cent of household income, a record high and a higher level, slightly, than what the U.S. and U.K. saw before their housing market collapsed.

So how is it that Canadians have room for more debt, when the same debt levels in the U.S. and Britain proved to be unsustainable?

The truth is, Canadians don’t have room for more debt. And the contradictory argument that they can handle higher interest rates but not tougher mortgage rules is proof that the blame-the-mortgage-rules argument doesn’t hold water.

Our housing market isn’t experiencing what Dunning calls a “policy-induced housing slowdown.” It’s experiencing fatigue from excessively high debt levels, and a long run-up in prices, combined with general weakness in the job market and unimpressive wage gains.

Yet it seems the industry will continue to maintain that the blame for the housing market slowdown lies not with the irrational exuberance of a housing bubble, but with the entirely rational efforts to fix it.

You can be sure this battle is only getting started. 

Which is why the OFSI is taking to social media as part of it's counter-offensive.

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Tidbits in the news...

A couple of interesting tidbits for you today.

Interesting quote from TD analyst Jason Bilodeau who was quoted in the Globe and Mail as saying:

“We have not had a single investor meeting in the past three months that has not focused significantly, if not exclusively, on the outlook for Canada’s housing market. We believe that the evidence is building that the sector is now in the early onset of what will ultimately prove to be a material deceleration in housing activity in this country.”

Speaking of deceleration, the Globe and Mail also had a story telling us who a "Jump in claims pinches CMHC's insurance business":

“Canada Mortgage and Housing Corp. saw profits at its mortgage insurance business fall sharply in the second quarter largely due to a jump in losses from claims. The rise in claims losses suggests that an increasing number of borrowers whose mortgages were insured by CMHC have been unable to make their payments and have lost their homes. Mortgage insurance pays the bank back when a borrower defaults.

In its second-quarter results, released Wednesday, CMHC said that its losses on mortgage insurance claims rose to $168-million for the three months ended in June, up from $144-million in the same period of 2011 and $154-million in the first quarter of this year.

That’s part of the reason why profits from CMHC’s core mortgage insurance business fell to $255-million, down from $341-million. The earnings were also hurt by paper losses on a mutual fund investment that suffered when international stock markets fell.

Part of the reason for the growing claims losses of late has been the dramatic increase in the amount of insurance that the Crown corporation has in force.”

CMHC claims against insurance jump and TD says we may be in early stages of material deceleration... how could this possibly end badly?

Well... how about this?

Vancouver is the second least affordable housing market according to the 8th Annual Demographia International Housing Affordability Survey, with a multiple of (10.6) times average household income, which means that Vancouver is approximately 253% overvalued.

Vancouver house prices would need to correct in excess of 70%, to bring house prices close to the 3 times average household income level considered affordable by the survey.

That's in excess of 70%.

Now where have you heard that before?

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CMHC insists there will be no housing crash in Canada

The Canada Mortgage and Housing Corporation (CMHC) insists there will be no housing market crash in Canada.

CMHC has been saying for some time that it expects housing prices in most local markets will grow more slowly than they have been recently.

The Ottawa-based federal agency isn’t calling for a major decline, but its latest forecast suggests next year will be somewhat softer than estimates CMHC issued in June while 2012 may be somewhat stronger than previously expected.

(In other words, they keep getting it wrong and have to 'revise' their forecast constantly)

Mathieu Laberge, CMCH’s deputy chief economist, said:

“Balanced market conditions in most local housing markets will result in a slowing in house price growth”

Is that why they call it right now? A 'slowing in house price growth'?

(Prices never go down, you see... growth simply 'slows')

Contrast this with the normally always upbeat and optimistic Ozzie Jurock. On August 4th, Jurock pulled no punches in analyzing what is currently happening in the real estate market.  Rather than spin the numbers, he offered a very succinct (and negative) take on the drop in the average price.

The real estate market is down 12% on the average price - July over July ... but down a whopping 20% in price over May 2011!!!

July 2012 - $669,000 to July 2011 - $762,000: down 12%

July 2012 - $669,000 to May 2011 - $834,000: down 20% !!

Volume is down too. Listings are higher.

As Ozzie succinctly notes, the average is down 12% on a simply year to year comparison, but go back a couple of months more and it's down a full 20%.

So if a 20% decline in prices is a 'softening', what will they call a decline of 50%?

One thing we know for sure... they won't call it a 'crash'.

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Mon Post #2: The Canadian Banking System - a myth built on quicksand?

Long time readers of this site know that on numerous occasions we have talked about the Canadian Banking System and the myth of it's stability.

It was on December 7th, 2009 that we quoted a Sprott Asset Management report and discussed how the Canadian banks escaped the 2008 meltdown unscathed.

Few realize all five Canadian banks are levered at an average of 31:1 and that if tangible assets were to drop by 3% in value, tangible common equity would effectively be wiped out.

Nor do many realize that Canadian Banks were bailed out by receiving $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP) in 2008 - Canada's version of TARP - whereby the CMHC purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.

No one seems to be aware that the Bank of Canada then gave our Canadian Banks an additional $45 billion in temporary liquidity facilities or that the Canada Pension Plan, through the purchase of $4 billion in mortgages prior to the IMPP program, raised the total government bailout to $114 billion.

Back in 2009 we talked about how we have been fed almost daily fed propaganda that tells us that the dramatic performance of our nation's real estate during this worldwide economic crisis is all a result of the solid foundation of our nation's banks and the virtuous conservatism of the Canadian financial system.

And that's it is... propoganda.

Earlier today on of the contributors to our first Monday post left a link to an article titled "Canada's Housing Bubble Blow out amid Global Collapse".

The article provides an interesting analysis of the recent downgrading of Canada's banks by Moody's and the reasons behind the downgrade.

The move by Moody's marks the first of what will, no doubt, become widespread worldwide realization that the stability of Canada's Banks is more myth than fact.

The article is a great read and while the blog doesn't agree with all of it, it does articulate many of the points we have attempted to make in the past.

For your consideration:

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Canada’s Housing Bubble Blow Out Amid Global Collapse.

Sunday 24 June 2012, by Christiane

By Matthew Ehret-Kump

While this shouldn’t come as much of a surprise, the long-standing myth, proclaimed by official talebearers, that the Canadian banking system is the most “stable system in the world” due to its “conservative banking culture”, has been seriously undermined. Moody’s Investors Services recently spooked the Canadian banking community when it announced in a June 25 [1] report that the emergency “corrections” being made to the overblown Canadian real estate bubble to deleverage itself from oblivion, has come too late.

What happened?

In April of 2012, the Canadian Centre for Policy Alternatives (CCPA) issued a report called “Big Banks Big Secret” which demonstrated the sleight of hand $114 billion of bailouts of Canada’s five biggest “too big to fail” banks which had found themselves loaded with worthless assets from November 2008 until 2009 [2]. As the CCPA report documented, these bailouts were initiated by the Canadian government directly via the Canadian Mortgage and Housing Corporation (CMHC), which produced $67 billion to clear the books of private financial institutions of their toxic paper, followed up by the Federal Reserve’s 0% open discount window of 2011, which was tapped heavily by those same five banks who all the while maintained that they were in perfectly sound shape, and didn’t need any help yet took liquidity injections nonetheless. This Fed scheme, as well as a similar operation conducted by the Bank of Canada represented the remainder of the $114 billion bailout (figure 1).

Defenders of the bailout from all sides of the aisle in Canada, much like their American counterparts, will defend the scam by first calling it either a “liquidity injections” or “investment”, and then stating that they actually turned a profit after the initial capital was returned with interest! However, like in the United States, what tends to be avoided is the fact that those toxic assets covered by taxpayer revenue, represented magnitudes more than their nominal value due to infamous leveraging practices on the national and international derivatives scene. In the case of the USA, actual assets associated with those bailouts were in fact over $29 trillion [3]. This begs the question: how much fictitious speculative capital was actually represented by the underlying $114 billion?

Figure 1,

Canada’s Real Estate Crisis

Canadians have swallowed hook, line and sinker the story that ours is “the finest banking system in the world”. As a by-product of such a delusion, a great number of citizens have allowed themselves to get caught up in a gigantic real estate bubble where prices have doubled on average since 2002, although countless cases of quintupling or sextupling prices over the same interval exist (figure 2*). This bubble has resulted in average real estate values having surpassed even those of the United States at its peak as of June 2011 (see figure 3). When this is combined with the personal debt to GDP ratio of $1.50 to $1.00 as one of the highest of all Western countries, the image of Canada’s “conservative” financial culture no longer holds, and in its place, the dark shadow of a predatory banking system is expressed in the great northern dominion of the British Empire.

It now stands that total assets associated with securitized mortgages have stretched beyond $1.1 trillion dollars, and it is important to keep in mind that this is happening, not within a vacuum but within the context of the hyperinflationary meltdown of the trans-Atlantic monetary system.

Figure 2.

Figure 3.

What has kept this bubble growing?

In the immediate maelstrom now at hand, the chewing gum holding the hull of the Canadian financial system together is to be found in a few key factors, but not least among them is the ultra low interest rates being maintained by the Bank of Canada. These low interest rates of nearly 0% (figure 4) make borrowing cheap; attract international speculative agencies resulting in an ever stretched bubble. Insiders in the Canadian government have revealed to this author that during internal briefings, Mark Carney himself has pointed out that should even a small increase in interest rates occur, an immediate 10% default of houses across the board would follow resulting in a vacuum much greater than its $110 billion dollar nominal value.

These interest rates have been kept artificially low primarily as a function of the unprecedented taxpayer-backed insurance scheme provided by the Canadian Mortgage and Housing Corporation which was created in 1946 as a federal insurance agency modelled on the American Fannie Mae and Freddy Mac, but which under the current liberalized order, now behaves as a monster used only to prop up a dying system, evidenced by its astronomical insurance cap of $600 Billion dollars (a ceiling that had been increased several times by the Harper government in recent years from its $350 billion limit in 2007, and $50 billion in 1988 (see figure 5)). The other major mortgage insurer Genworth Canada, while remaining private, also has a cap of $250 billion, 90% of which would be covered by the Canadian government were it to go under.

Figure 4.

Figure 5.

To restate the formula: risky assets are guaranteed by the government on the condition that interest rates are kept nearly nil by the government such that exponential profits may occur as out of thin air. For this scheme to function, however, a highly centralized top down meshing of government and private finance must occur. As historian Tom Taylor wrote in 1976; “The political power of the larger banks and of the Bankers’ Association can hardly be exaggerated. The bank acts were written largely by the very banks supposedly regulated by them [4] .”

While it is important to understand the current chewing gum holding the ship of Canadian finance together, it is vital to keep one’s mind on the more important question “who designed the ship, and sailed it into the maelstrom?”

For this to be understood, it is necessary to look back a little farther into history and recognize the treacherous effects of the Mulroney governments’ destruction of three of the four pillars of banking in 1987. It is demonstrable that those speculative practices underlying the current bubble which Canadian financial cartels have been complicit in creating, both at home and internationally alike, could not have occurred were it not for the repeal of those laws which forced the separation of commercial banking, trusts (which were the sole issuers of mortgages), securities dealers, insurance companies and which had been maintained for decades following World War II, otherwise known as the “Four Pillars”. After the repeal of those pillars all of the above financial institutions could all mingle under one roof and waves of mergers of the already cartelized financial institutions during the 1990s resulted in a new type of beast which could take legitimate deposits and create the means of leveraging risky securitized debts (as well as other insured liabilities) as “universal banks”, much of which would be now backed by tax guarantees. To re-emphasize, mortgage related securities could not have existed had the Four Pillars not been repealed.

This was the Canadian experience of the same essential process which lead up to the repeal of the Glass-Steagall under the Gramm-Leach-Bliley Act in the United States in 1999 orchestrated by the City of London centred oligarchy around Lord Jacob Rothschild’s Inter-Alpha Group of banks.

Today, this system has inflated itself beyond all containable limits. The Canadian Council of Chief Executives has implemented a veritable coup over the past several decades for their London masters. The time has come to decide whether Canada will move with the LaRouche three-step program of a Glass-Steagall-like bank separation, the adoption of a public credit system and the North American Water and Power Alliance (NAWAPA) or abandon all remnants of national sovereignty as it follows the City’s crazed British financial empire faction into hell.

*Graphs 1, 3 and 4 were taken from www.theeconomicanalyst.com and Figure 2 was taken from www.mjperry.blogspot.com

Footnotes

[1] “Moody’s Warns on Mortgage Debt” June 25 2012, www.globeandmail.ca

[2] “Big Banks Big Secret: Estimating Government Support for Canadian Banks During the Financial Crisis”, by David Macdonald, Apr 2012. www.policyalternatives.ca

[3] “$29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient” by James Felkerson Dec 2011. www.levyinstitute.org/

[4] History of Canadian Business: 1867-1914, 1976

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Flaherty's Folly - updated

Took the day off and wandered down to Greek Days in Kits yesterday.

As you can see, tons of people in attendance.

If you've never been to Greek Days, the festivities all revolve around one basic theme - food.

Wandering the internet this weekend, the Canadian real estate blogosphere was also focused on one basic theme too: examinations and criticisms of 'the week that was.'

In describing last weeks events, a number of different sites invoked the phrase: "Flaherty's Folly" to describe events.

I agree with the moniker... but I would broaden the perspective in applying the term.

History won't remember 'Flaherty's Folly' as the sole actions he took last week. Instead it will refer to the past six years.

Let's wind the clock back 10 years and review.

In 2002 total outstanding mortgage debt in Canada was a cool $467 billion.

These mortgages were on the whole issued to households with good credit, and to 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 a newly elected Conservative government.

AIG was now permitted to insure high risk Canadian mortgages.

CMHC 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 amortizations that were coupled with 0% down payments. A few months, but before 2008 - this was expanded to 40 year amortizations.

Thanks to Canada economic stimulus package of 2007 the mortgage market radically changed.

Historically high home prices continued to gain steam. High risk borrowers flooded the real estate market.

Throughout 2007, the average Canadian home buyer who took out a mortgage had only 6% equity in their home. The 6% equity is or equals the national average downpayment for all mortgages including home buyers who traded up to more expensive homes.

In 2008, Canadian home prices started to dip as affordability became the worst on record in many cities.

CMHC publicly admitted that it was ordered to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing.

In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.

Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% -- possibly the smallest amount of change in post WWII history.

Mortgage Securitization has accounted for 90.5% of all growth in total Canadian mortgage credit outstanding since 2007.

The cap on the Canadian mortgage securitizaton market has grown from

• 100 billion in 2006
• 130 billion in 2007
• to 295 billion by mid-June 2009

In 2009 CMHC indicated in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of that year.

In 2009, at the height of a global recession, we started to see many individuals  being granted $500,000 - $800,000 mortgages for their first home purchase if their household income ranges from $110,000 - $170,000.

It forced the Canadian Government to raise the cap on CMHC insurance to $600 Billion. But at these rates of progression, it only took until 2012 for the cap limit to fill up.

In a February 3rd, 2012 article in the Vancouver Sun, the daily paper asked "Is the mortgage industry running out of money?" as CMHC closed in on their $600-billion cap for mortgage insurance.

Think about it. In 2006 that cap was $100 Billion. Six years later it is hitting $600 Billion.

In that one statistic alone lies the real foundation of what caused Real Estate values to skyrocket in Vancouver and the rest of Canada.

The explosion in real estate values was fuelled by the crack cocaine of cheap, easy money... it's that simple.

And now the supply of drugs is being drained away.

This is the fourth time in just four years that the government has made changes to mortgage rules. The first change occurred in 2008, when they shortened the maximum amortization period from 40 years to 35. In January of last year, the government announced that it would be reducing the maximum amortization period of government-backed insured high-ratio mortgages from 35 years to 30 years. Now it has reduced them from 30 to 25 years.

Dropping the amortization period back to 25 years and tightening HELOC rules isn't the problem. Increasing amortization periods and insuring HELOC's to begin with is what triggered this mess.

Flaherty is the man who brought us the 40 year, zero down mortgage.

Flaherty's folly was not, as some are suggesting this week, bringing us back to the 25 year mortgage.'

The folly lay in moving us from 25/10 to 40/0 in the first place.

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Ottawa Citizen Newspaper chastises Federal Government on debt message

Yesterday the Ottawa Citizen newspaper chastised the Federal Government on it's mixed message about Canadian debt.

Here is the content of their editorial:

OTTAWA CITIZEN MARCH 10, 2012 

Why is the federal government warning Canadians about debt while it is encouraging aggressive mortgage lending?

When it comes to interest rates and housing prices, it's difficult to see the thread of consistency in federal government policy. Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty frequently warn Canadians that levels of household debt are too high. At the same time, the Bank of Canada's low interest rates make possible the low mortgage rates that are fuelling the housing market.

The government encourages risky mortgage lending even more by facilitating it through the Canada Mortgage and Housing Corporation. The government-owned mortgage insurer charges a substantial premium to home buyers with less than 20 per cent to put down, a federally mandated practice that effectively takes the risk out of mortgage lending for Canada's banks.

As concerns about a contraction in Canadian housing prices increase, the CMHC is finally getting some long overdue scrutiny. This week, the Ottawa-based Macdonald-Laurier Institute recommended a thorough review of how Canada finances mortgages. The institute questioned whether home buyers are paying too much for CMHC mortgage insurance, a fee which can be up to 2.9 per cent of your loan, higher if you are self-employed.

This mortgage insurance fee costs home buyers thousands of dollars, and the institute asks whether the fees are unduly high. The fact that the CM-HC has returned profits to the federal government of $14 billion over a decade suggests that this is a cash cow.

Other organizations, including the International Monetary Fund and the C.D. Howe Institute, are worried that the publicly owned CMHC has taken on too much mortgage liability, exposing Canadian taxpayers to undue risk. While there is a debate about whether Canada has a housing bubble, housing prices have increased 44 per cent since 2006. The CMHC's total loan insurance portfolio is now $541 billion, up from $350 billion in 2007. The Howe institute has suggested encouraging private mortgage insurers to play a larger role.

The main question, generally unasked, is why a federal agency has to take the risk out of mortgage lending for Canada's big banks. It's particularly pertinent with banks lowering rates again this week as they fight for more lending businesses. Normal businesses take risks. Why not our banks?

Our financial leaders say they are against debt, but their policies encourage it, and the government makes a tidy profit off insuring it. As long as those policies persist, they should spare us the lectures.

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Where's the pony?

It's somewhat breathtaking to tune into the mainstream media these days when it comes to the topic of a real estate bubble in Canada.

For years the topic has been the private peruse of the blogosphere, but now it seems everyone is bending over backwards to discuss the topic.

Yesterday we had Bloomberg talking about how the Toronto Condo Bubble Risk is Topping New York. The focus of the article centred on the fact Toronto has more skyscrapers and high-rises under construction than any North American city - with almost three times as many as New York.

Then Macleans magazine has followed up on their story about the Canadian Housing Bubble (and the fact it is about to pop) with a specific article about Vancouver. Titled 'The Real Problem with Vancouver's Outrageous House Prices', the magazine observes:

The international media have finally clued in to the wackiness on Canada’s west coast, otherwise known as the Vancouver real estate market. Last month Bloomberg noted that when compared to median household incomes Vancouver homes are more expensive than even New York. The story linked soaring prices to the influx of wealthy buyers from mainland China. Today the Wall Street Journal retraces the exact same material. The warning in both pieces is clear: Vancouver’s housing market has become disconnected from reality and is primed to crash.

You'd almost think the Whisperer, Fish, Jesse or VHB was writing for Macleans with lines like the Vancouver housing market has become "disconnected from reality and is primed to crash."

Over at Money Week magazine, readers are told about the Canadian housing bubble and are advised to "Cash in as yet another housing bubble bursts."

House price mania has been a major feature of the global economy over the last ten to 15 years. Canadians joined the party several years later than their counterparts in other Western countries. The early-1990s recession was still taking its toll on the country’s dole queues, and also on its domestic property market, right through to the middle of the decade.

But as interest rates tumbled, Canada caught the bug just like everywhere else. And how. The ‘real’, ie inflation-adjusted, price of the country’s homes has increased by an average of 85% since 1998.

Sure, house values stagnated at the height of the financial crisis in 2008. But by 2009, property prices were back on a roll, rising by almost 20%. Canada’s current housing boom has now become one of the longest lasting in the world, says the Bank of Nova Scotia.

Indeed, Vancouver is the second-least affordable city anywhere on the planet, according to the annual report from the Demographia International Housing Affordability Survey 2012.

Like every other housing bubble, it’s been inflated by loose credit. Canadian household debt hit a new high last year. The average borrowing burden of Canadian families now stands at 153% of disposable incomes, according to Statistics Canada. To put that in context, that’s almost as much debt as US households had taken on at the peak of their own housing bubble.

In other words, the warning signs are everywhere. Canada’s housing market is plagued by “overvaluation, speculation and over supply.”

But in case you think it's all gloom and doom enter CMHC.  The enabler of our housing boom wants you to know that they predict "A Stable Canadian Housing Market."

Canada's housing market will remain stable for at least two more years, Canada Mortgage and Housing Corp. predicted Monday, with the expected slow growth in the economy keeping house prices in check. CMHC, the Crown corporation that insures Canadian mortgages, expects little change during 2012 in prices and sales of existing homes.

In light of all the media stories flying around, it reminds me of the eternal optimist.  Standing neck deep in manure the eternal optimist says, "Gee... there must be a pony around here."

Maybe it could be a sales gimmick. Buy a new condo at the Olympic Village, get a free CMHC pony?

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The most interesting element...

There has been so much going on since I last sat down to write a post that it's hard to decide exactly where to start.

But as I sift through everything that has been going on, perhaps what stands out amongst all the others is the revelation that the Canadian mortgage industry may be facing a liquidity crisis.

In an article today in the Vancouver Sun, the Vancouver daily paper asks "Is the mortgage industry running out of money?"

What prompted this rumination is the recent Jan. 31st announcement that CMHC is starting to worry that they are closing in on their $600-billion cap for mortgage insurance.

CMHC is required by law to stay below this cap and most Canadians are oblivious to the fact that it is CMHC which has enabled our housing bubble.

As CMHC approaches this cap (the Sun states CMHC sits at $541 Billion currently) the Canadian housing and mortgage markets could be significantly impacted. 

Raising the $600 Billion roof will not be easy politically. CMHC's cap has risen in tandem with the housing bubble.

In 2006 that cap was $100 Billion. Six years later it is hitting $600 Billion.

In that one statistic alone lies the real foundation of what caused Real Estate values to skyrocket in Vancouver and the rest of Canada.

Eliminating the crack cocaine of cheap, easy money may be the Conservative government's way of slowing down a heated housing market without raising rates.

It's a significant development.

And I'm sure we will be talking about it for months to come.

Vancouver listings on the market as of February 2nd is 13,447 units; up from 10,671 on January 3rd - already a significant increase. Let's see if that number starts to grow dramatically.

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