Reaching for the Top - Another sign we are in the mania phase

Meet Larry and Adam Rachlin.

They're mortgage brokers in Ontario, and our newest poster children for the Canadian Housing Bubble.

Larry has Bachelor of Arts degree in Political Science & Speech Communication (honours) and is a 27 year veteran in mortgage financing and brokerage. He has an even longer tenure in the financial services industry including secured and unsecured funding, debt consolidation as well as personal & business tax preparation.

Adam is Seneca College graduate with a Diploma in Financial Services Underwriting. He's been in financial services for over 21 years including mortgage & loan underwriting, personal & business income tax preparation as well as commercial leasing & property management.

Together they run Mortgages Unlimited, a mortgage brokerage whose slogan is "We don't say 'NO', we offer an alternative."

Larry recently posted a youtube video (you can see it here) promoting their services and here is the opening pre-amble:

Every day someone calls and tells me they have an urgent cash crisis. 

They tell me nobody is able to help them, they're ready to give up. 

They say I'm their last hope. And I tell him this: I don't care if you have bad credit. I don't care if you can't prove income. I don't care if you have tax arrears or if you haven't filed an income tax return. Or even have mortgage arrears. I don't even care if you won't be able to make any payments for a while. 

All I require is that you have a good story and own a home that has some reasonable equity. If you have that, I'll get you the money you need. And I'll let you have up to 12 months with no monthly payments. Got a good story if so call me Larry Rachlin.

Your house is an ATM machine and all you need is a "good story".

Speaking of good stories, did you ever hear the one about the US housing crisis of 2008 and HELOC's?

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

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

Please read disclaimer at bottom of blog.

Holy HELOC

HELOC, or Home Equity Line of Credit, is an access to funding that turns your home into a piggy bank.

As the Canadian real estate bubble has inflated, many Canadians have turned to the 'home piggy bank' and borrowed like… well… pigs.

How bad is it?

Macleans Magazine had a March 22, 2014 article titled Living Beyond Our Means: Extravagant, reckless, debt-ridden—Canadian consumers have maxed themselves out after a decade-long spending spree. When did we start to be like Americans?

Macleans notes:

At the end of 2013, according to the Office of the Superintendent of Financial Institutions, Canadians had borrowed $225 billion through home-equity lines of credit (HELOCs)—a figure that doesn’t even include loans from credit unions and other lenders. 

$225 Billion!!!

How significant is that figure?

That’s just less than half the US$500 billion Americans owe in HELOC debt. But America is a far larger economy. Down there, HELOCs amount to 2.9% of GDP, and only reached 5% at the peak of the U.S. housing bubble. In Canada, though, that figure is 14%, and is up from 12% in 2012, showing that even though Canada’s economy has grown, the pace at which homeowners tapped their properties for cash grew even faster.

The impact of these numbers can't be understated.

Had Canada's housing bubble been allowed to deflate when the financial crisis originally hit in 2008, the effects would have been very painful.  But all we have done is delay the pain. And in the meantime… the problem has compounded as Canadians have pigged out on debt at emergency level interest rates.

It is going to make the pain far worse when the inevitable happens.

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

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

Please read disclaimer at bottom of blog.

Meanwhile... in the USA... a perfect storm is brewing to hit the Canadian HELOC situation

If you happen to come across this week's Macleans Magazine,  you will see the above small excerpt in a segment Macleans calls Good News/Bad News.

"The US housing market is back on sold ground. Housing prices rose for the third straight month in July in all 20 cities in the Standard and Poor's Case-Shiller index.  With homeowners feeling richer, consumer spending is likely to increase, leading to a wider economic boots. Indeed, this week consumer confidence in the US rose to the highest level since February.  There is some reassuring news here, too, for Canada, which appears to be in the midst of a housing correction, if not a crash. Where the US economy goes, Canada's always follows, sooner or later."

Reassuring words, to be sure. Except when you consider that if we are to follow the US 'sooner or later', we have a significant drop to traverse before we begin to recover.

Besides that 'not-so-minor' point, to say that the US housing market is on solid ground right now is a stretch, at best.

Especially when you scratch the surface to discover the source for some of that resurgence.

One of those cities on the rise is Phoenix, Arizona.

Phoenix was one of the cities at the epicentre of the subprime mortgage implosion and witnessed property values which plunged more than 50%.

Now Phoenix is on the rise.

Why?

Apparently Canadians have been flocking there for the past few years and have been buying everything in sight.

Macleans focuses on this a few pages later in the same edition with a story titled, "Attack of the Snowbirds".

According to Macleans, Canadians were the largest foreign buyers of American real estate last year representing a quarter of all international buyers.  Contrast that with who came second (Chinese buyers - the infamous HAM). Chinese buyers represented 11%.

And when it comes to Phoenix, Canadians represented 96% of all the foreign buyers there (and most of those were from Alberta and British Columbia).

All of this Canadian 'investment' has helped move Phoenix into the top 10 US markets for foreign commercial real estate investment in the second quarter of this year.

The high Canadian dollar and cheap real estate are proving to be an irresistible lure.

But the kicker comes when you take a look at how Canadians are financing their purchases.

Banks in both the US and Canada are refusing to provide mortgages for foreign investment properties.  So where is the money coming from?

Apparently some of it is from cash, but a lot more is coming from lines of credit.  Home equity lines of credit to be precise and studies show HELOC withdrawals are the most popular way for Canadians to access the cash they are using to buy Phoenix property.

The influx of cash has caused home prices to rise so quickly in Phoenix that prices are up 10% in the past year (compared to the historical average of 2-3%).

Locals say that investors have been bidding up foreclosed properties to the point where the foreclosed properties are selling much higher than for what neighbouring properties are selling for on the open market.

Macleans quotes Lynda Person, a Scottsdale real estate agent who buys properties at auction and flips them, who says;

"It's kind of alarming when investors are paying, in some cases, more than anything that's been on the Multiple Listings Service and the stuff on the MLS is not distressed."

This exuberance has banks now holding back onto their foreclosed inventory in the hopes that prices will be pushed up even more.

Says Macleans:

A study last year found that banks were holding onto around 11,000 foreclosed properties in the Phoenix area.  That number doesn't include the roughly half of Phoenix homeowners who are still underwater on their mortgages (a number well above the national average of 30%).

It is expected that many of those underwater homeowners will be walking away at some point, severely exacerbating Phoenix's shadow foreclosed property inventory.

It is a looming situation that has many local experts predicting that Phoenix's property values could go plunging once more.

And when it does, all those Albertans and BC'ers will be trapped.

Add it all up an you have an insane, perfect storm brewing.

As Canadian real estate melts away even further, pressure will build on our huge debt situation.   The tightening of HELOC regulations has already begun to restrict money Canadians have to buy Phoenix property.

As the melt continues, Canadians with massive HELOC's will be threatened in Phoenix and at home.

Canadian buying in cities like Phoenix (coming largely from BC'ers and Albertans) will evaporate. The massive Phoenix shadow foreclosed home inventory will again flood the market.

Not only will these BC'ers get hit hard by evaporating equity in Canada... but their US properties will collapse as well.

This double whammy will trigger an unanticipated wave of foreclosures in BC that could conceivably hit Tsunami levels.

It won't be a complete replay of the California experience.  There will be no US-style housing collapse in Canada.

Not at all.

Incredibly we have managed to find a way to forge our own, unique, Canadian collapse.

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

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

Please read disclaimer at bottom of blog.