Snapshots

Let's take a peek around the internet today, shall we?

First up is the lastest stats from the Real Estate Board of Greater Vancouver (REBGV).

December stats reveal that the bubble is blowing ever higher and the average price of a detached home in the Village on the Edge of the Rainforest now sits at an astounding $952,927.00!

(click on image to enlarge)

Will we hit a million dollars? Possibly.

Canadian Banks continue to ignore the warnings from Carney and Flaherty to be 'prudent' with lending. Offers to get you in for zero down, such as this one from TD Canada Trust, continue to exist.

And realty companies, like Royal Lepage, continue to pump the market by suggesting that buying now will result in an 7.2% increase in value of your purchase this year in the Lower Mainland... "so long as the expected mid-year rise in mortgage rates isn’t a dramatic spike."

But that's the rub, isn't it?

That's the entire essence of the warnings we have been blurting out for the past year: rising interest rates will destroy you if you buy now.

And the warnings continue unabated.

The National Post chides today that "happy times for interest rates can't last forever".

So dire is that potential problem that the Post notes that a simple 1% increase in rates could dramatically affect you bottom line. "For a home buyer, rate increases mean hefty payment boosts. For example, it will cost $3,252 more per year to pay down a $500,000 mortgage balance when the interest rate rises from 3.5% to 4.5% , assuming a five-year term and a 25-year amortization."

The 25-year amortization comment is particularly important given the fact the Finance Minister is sounding warnings that the permitted amortizations could be reduced from the current 35 year maximum. Before 2006, that maximum was 25 years.

It means those with a mortgage face the double whammy of increased interest rates plus a shorter amortization period when they renew.

A simple 1% rise in rates could translate into $3,252 increase in yearly payments on that $500,000 mortgage.

When you consider that the conservative estimation on what will happen to interest rates is that we will see a minimum of a 2.5% spike in rates, it means the cost of renewing adds up quickly.

With that theme in mind, Report on Business is also warning mortgage holders to "Fasten your seatbelts".

They suggest you have roughly six to nine months to get a personal plan together for dealing with higher interest rates.

Yikes! At least they try and offer several strategies to get ready.

And it's not just in Canada that warnings are being issued.

In the United States, the FDIC has now come out with an 'Interest Rate Advisory' for institutions.

US Banks are being reminded "of supervisory expectations for sound practices to manage interest rate risk (IRR)."

The warning is very specific:

"In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates."

The only real question is how high might it go?

And THAT, of course, turns us once again to the issue of the US Dollar and US Treasury sales to foreign countries - particularly China.

With that in mind, consider this article from 'The Business Insider' which lays out a series of charts showing clearly that "China's Dumping of the US Dollar has begun". The yellow line represets the plunging level of Treasury purchases by China.

(Click on image to enlarge)

To sell sovereign debt, the purchasing of that debt is going to have to be made very attractive.

And there's only one way to do that: increase the yield. That means higher and higher rates on home mortgages.

We've been through this before... in the late 1970s.

22% mortgages, anyone?

==================

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Two profiles: US Banks, CMHC

Two snapshots of institutions on either side of the 49th parallel for you today.

First we start with with our favorite whipping post, the US Banks.

As our Prime Minister commented on last year, the recovery will not begin until the US Banking system stabilizes.

So what's the outlook?

Yesterday there were four more bank failures on Bank Failure Friday bringing the total to 57 for the year. Unfortunately that may only be a drop in the bucket compared to the tsumani of failures on the horizon.

A report in Forbes.com (see article here), notes that the banking industry is bracing for continued losses from consumer loans due to the rising unemployment rate and an expected wave of commercial real-estate losses.

At a Senate Banking Committee hearing in Washington on Thursday, Sen. Jim Bunning (R-Ky.), repeated a comment relayed to him by Federal Deposit Insurance Corp. Chairman Sheila Bair that another 500 banks could fail "unless something dramatic happens."

So much for stabilizing.

Meanwhile there is the Canada Mortgage and Housing Corporation (CMHC).

As I have already stated the Canadian goverment, in a desperate attempt to prevent a repeat of the US real estate collapse, has thrown massive fiscal stimulus and ultralow interest rates at the Canadian economy in a desperate attempt to supercharge real estate and forestall the collapse of values.

Not only could such a development put the Canadian economy is jeopardy, but the Canadian goverment could be facing a supreme risk as well.

Consider... Canada’s housing insurance agency, run by Ottawa and accountable to the Minister of Finance, provides endless amounts of cheap insurance for high-ratio loans (with minimal down payments). In doing so, CMHC allows Canadian banks to pass off the risk of these home loans to the federal government.

Presumably this allows them to be more willing lenders.

Currently CMHC guarantees about $630 billion in mortgages, an amount of equal in size to half the Canadian economy.

Half! That's an astonishing amount of money.

And what assets stand behind this? Down payments worth about $8 billion (plus the book value of the real estate).

So what happens if the real estate bubble bursts and asset values crash? For starters it will mean that up to 98% of its liabilities will not be covered. Moreover Canada will be facing a situation worse than that which faced US mortgage giants Freddie Mae and Fannie Mac, which lost 90% of their market value.

Some of you have asked why the government is moving heaven and earth to keep the real estate market afloat. That's why.

But as economic recovery takes longer and longer to come into play, we have a situation where the current average home price can only be supported at artificially-low interest rates. And our Canadian banks only make those loans because they are backstopped by a federal government now running its worst-ever deficit.

Over $600 billion in mortgage risk belongs to the taxpayers – and Ottawa is already tapped out. So what is going to happen when interest rates rise?

What we have is Canada's own little subprime crisis in the making. The Bank of Canada has ushered in interest rates that are comparible to the US subprime-style teaser loans.

I say this because the Bank of Canada knows that these rates will be doubled or tripled in the years ahead. Yet, by dropping their key lending rate to the lowest point ever, they have created a situation that allows 3% mortgages to further inflate house values.

And just like the US subprime teaser-rates, when the mortgages reset at the higer rates... a wave of defaults and foreclosures will result.

When that first wave hits, the banking system will seize up, credit will stop dead in it's tracks, and the goverment will be pushed to the brink of insolvency.

A series of dominos are building. And when they start to tumble, the result is going to be devestating.

The housing crisis has not been avoided in Canada. It's only been delayed as officials pray for a swift economic recovery that is not coming.

One only has to look at the US Banking system's failure to stabilze for that evidence.

==================

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

R/E Ethics, the Economy and Bank Failure Friday!

.
UPDATE: No word from the FDIC @ 7:15 pm PDT. Just doesn't feel like Friday.

Ahhh... another Friday and faithful readers are tuning in for the latest on Bank Failure Friday.

Before we get to that, let's touch on a few other things.

Real Estate Ethics

Recall last week (March 5th) we talked about the latest tactic of the Real Estate Industry to target first time home buyers. A campaign was launched insinuating that "other young couples are buying, you should too!"

Round Two of that campaign hit the streets this week. Simultaneous articles appeared all across the country. In Vancouver, the Sun’s headline was, “First-time buyers driving market,” in Calgary it was the Calgary Herald, “Entry-level buyers now driving Calgary’s home sales, report says".

Garth Turner beat me to this and you can read more about it here. Turner takes a look at the so called 'report' and notes "there is no data, no numbers, no proof, no confirmation. Just another real estate marketing gimmick – a 'report' which 'confirms new buyers are driving real estate' in almost every major centre in Canada." Turner concludes its nothing more than a fabrication of facts that amounts to a conspiracy of misinformation, unintentional or not.

It's hard to disagree.

The Economy

As we have written this week, the United States has taken huge steps to offset the collapse in asset values and bank balance sheets by buying up bad investments, stocks and debt. This is being done by printing money like it's going out of style.

Two weeks ago Britain decided to embark on the same course. Last week the Bank of Canada joined the printing press parade. And yesterday it came to light that three other countries climbed on board the ever-expanding currency producing wagon. Japan, China and Switzerland.

Market insiders say this confirms all the fears about the coming onslaught of hyper-inflation. The latest three day rally on Wall and Bay Streets saw not only stocks rise dramatically, but gold/silver/oil and mineral commodities too.

This (the rise of both stocks and gold/silver/oil) insiders say points to a bottoming out of the worst Bear market since the Great Depression and the start of the predicted hyper-inflationary period.

If they're right, buckle up folks, it means things are gonna take off like a rocket if that is the case. It's not the end of the recession or hard times in Canada, but the market is usually six to eight months ahead of the economy.

My recommendation? Now's the time to play the market. Silver stocks like First Majestic, commodities like Tech Resources, oil stocks. But beware! A rapid blowing up of the market could lead to another rapid collapse. Study the 1930s! The market recovered almost 60% after the crash of 1929. All the stimulus that has been announced will find it's way into the market - mark my words. But beware the rebound back down.

Bank Failure Friday

As our Prime Minister said, "there won't be a recovery until the U.S. financial system is repaired." So we watch the US banking developments with keen interest. And what a week it has been.

The FDIC went to Congress to ask for up to $500 Billion in extra funds to deal with failing US Banks. The FDIC is funded by insurance premiums levied against all US Banks. Those premiums are used to bail out bad banks. Well it turns out those running things believed their fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the insurance premiums from 1996 to 2006.

Ya gotta love it.

While we wait for today's carnage, take the time to check out this '60 Minutes' segment that follows the FDIC when they take over a failing bank on Bank Failure Friday. From the into...

"Most every Friday now the FDIC is seizing several banks. You haven't seen these takeovers happening because they're done secretly, at night, to make sure that there's no needless panic by depositors. But last week we were given extraordinary access to one of these operations... "

Another whirlwind week ends with 'Irrational Fear'? It's Bank Failure Friday and... a priceless youtube clip.

Laurel Magri: lying, deceptive, manipulative whore.
UPDATE: Bank Failure #17: Freedom Bank of Georgia, Commerce, Georgia (the weekend can officially begin now)

The day after the DOW plunges to fresh 12-year lows we reflect on quite a week.

The grim news reads like a police blotter: GM said its survival is in doubt, bank shares took a beating, Citigroup fell below a buck and China defied expectations by failing to boost its economic stimulus program (and that's just yesterday's news).

Meanwhile layoffs were the story of the week. Adding to the list yesterday was the Toronto Star, the biggest Canadian daily, who issued pink slips to 60 employees, all from sales and marketing. 3,400 Canadians have now lost their jobs over the past four days.

Bank of Canada deputy governor Pierre Duguay came out and warned Canadians not to be spooked by "irrational fear" over the economy but then goes on to tell the House of Commons finance committee that "there will be more bad economic news coming".

[Remember that if you are laid off. You can meet with your bank manager after failing to make three consecutive mortage payments and say, "hey, chill dude... don't be spooked by irrational fear, man"]

But it's Friday so let's turn our attention to our neighbours to the south as we keenly await the carnage from Bank Failure Friday.

As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be renamed 'Bank Failure Friday' by many economic blogs.

And it appears it might be a banner year of Friday's.

The Wall Street Journal reports that the Senate Banking Commission wants to give the FDIC $500 Billion from the Treasury Department Seems the FDIC's deposit-insurance fund has fallen precipitously with 25 bank failures last year and 16 so far in 2009. Loading up for the coming barrage, perhaps?

Maybe the Commission caught American CoreLogic's just released report on households with negative equity. They report 8.3 million US mortgage holders are underwater. Many analysts expect that the number of households with negative equity could rise to 17 to 23 million by the end of 2010. That means more US homes foreclosed, more US banks failing, and more bad economic news for America's largest trading partner: Canada.

Updates from the FDIC as they come in, check back late this afternoon.

In the meantime you may recall the rant from Rick Santelli that we posted on February 19th. Santelli is a former derivaties trader who reports for CNBC from the Chicago Mercantile Exchange. On Feb. 19th, Santelli took issue with President Obama's plan to bailout homeowners.

This provided quite the backlash since Santelli, as former derivatives trader, embodies the Wall Street wormhole into which much of the bailout money has gone.

In response, Jon Stewart eviscerates CNBC and Santelli in this soon-to-be-classic 8 minute clip.

It's worth the time to check it out while we wait for the FDIC.



Bank Failure #17

From the FDIC: Northeast Georgia Bank, Lavonia, Georgia, Acquires All of the Deposits of Freedom Bank of Georgia, Commerce, Georgia

Freedom Bank of Georgia, Commerce, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Northeast Georgia Bank, Lavonia, Georgia, to assume all of the deposits of Freedom Bank of Georgia.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $36.2 million. Freedom Bank of Georgia is the seventeenth FDIC-insured institution to fail in the nation this year. The last bank to fail in Georgia was FirstBank Financial Services, McDonough, on February 6, 2009.

==================

Email: village_whisperer@live.ca