Wed Post #1: What will the government do with a stubborn real estate market? Hit it again, of course.

“That deafening silence you hear is the sound of the Canadian housing bears gone quiet. Not only has the resale market absorbed last year’s round of mortgage rule tightening, but the supposedly at-risk banks have just recorded a unanimously better-than-expected earnings season, with a handful of dividend increases to boot.”

Those are the goading comments of Bank of Montreal economist Robert Kavcic, comments contained  in a research note he sent out on Friday.

And while this housing bear blog may have taken a summer break, we are far from quiet.

We are reminded of our January 13, 2013 post in which we talked about a Bank of Canada study suggesting lower home prices were a national priority.

A substantial downturn in prices – say, 10 to 20 per cent – would, in theory, not only reduce mortgage debts for new home buyers, but, significantly, push down non-mortgage debt to the tune of 4 to 8 per cent. That would get Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney a lot closer to solving the country’s household debt problem, reducing what is considered a serious risk to the stability of the Canadian economy.

And if lower home prices are a 'national priority', you can be sure the Bank of Canada and the OFSI are far from finished in the efforts to achieve that goal.

Which is why it is not surprising that Canada's banking 'regulator eyes tighter mortgage rules.'

Canada’s banking regulator has been gathering detailed mortgage information from financial institutions, in what could be a precursor to changes in the rules for home loans.

The Office of the Superintendent of Financial Institutions (OSFI) has spent months considering a tightening of mortgage rules for lenders, a decision that’s being weighed as the housing market begins to pick up after a year-long slump. That slide began when Finance Minister Jim Flaherty tightened the rules for mortgage insurance in July, 2012.

Policy-makers in Ottawa, including OSFI head Julie Dickson, have been concerned consumers are taking on too much debt and that house prices have risen too much. Toronto-Dominion Bank economists estimate that home prices are 8 per cent above what they’re actually worth, nationally. The average selling price of existing homes in July was 8.4 per cent higher than a year earlier, driven by a resurgence in the pricier markets of Vancouver and Toronto.

Years of ultra-low interest rates have spurred consumers to take on more mortgage debt than they might have otherwise. To rein the market in, Ottawa has tightened the rules around mortgage insurance four times since 2008 – Mr. Flaherty’s latest move cut the maximum amortization period for an insured home loan to 25 years from 30. Insurance is mandatory for home buyers who have less than 20 per cent of the purchase price of a house as a down payment.

The government and the Bank of Canada have made it clear what they want to occur in the real estate sector.

The next moves should not really come as a great surprise.

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OFSI confirms it's considering mortgage amortization changes

On Thursday we asked "Are 30 and 35 year mortgages about to be banned in Canada?", a question triggered by Garth Turner's reported inside information that federal Finance Minister Flaherty was about to implement this significant change.

The speculation has triggered a firestorm of interest in the real estate community.

And now comes confirmation that the Office of the Superintendent of Financial Institutions Canada (OSFI) is indeed looking at the issue of limiting amortizations to 25 years on conventional mortgages (those with 20%+ equity).

Canadian Mortgage Trends has verified this with the OFSI.

A spokesperson from Canada’s banking regulator, The Office of the Superintendent of Financial Institutions Canada (OSFI), verified that it is looking at the issue of limiting amortizations to 25 years on conventional mortgages (those with 20%+ equity). Currently, those “low-ratio” mortgages can have amortizations up to 35 years.

OSFI is “doing some preliminary consultation with financial institutions” on the matter, said the spokesperson.

Those communications appear to be behind the scenes with banks and federally-regulated trust companies. OSFI will not be issuing a public statement in the very near term (i.e., next week).

The regulator added, “We are working to determine the desirability of some changes given current conditions in housing markets and recent trends in household indebtedness.”

“A decision in that regard would be taken once we hear back from the industry. Any proposed changes to our mortgage guideline that may result from this work would be subject to a public consultation process.”

Officials from OSFI, the Department of Finance (DoF) and the Bank of Canada have been working together closely. Their aim is to stabilize housing, moderate debt levels and reduce economic exposure to rising rates.

When implementing the last set of mortgage changes in 2012, Finance Minister Flaherty made it crystal clear that he considers it “desirable” to make home buying more difficult.

In December, he told reporters: “Less demand, lower prices, modestly, in the housing market are much better for Canadians than a boom followed by a bust. So I'm all for a soft landing.”

But real estate has been more resilient than many expected. And some at the DoF are not satisfied that housing is slowing fast enough.

Presumably we will now see the real estate industry go into hyper-lobby mode to mitigate the changes as much as possible.

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Are 30 and 35 year mortgages about to be banned in Canada?

Garth Turner is out this evening with intriguing speculation that Canada's federal finance minister is getting ready to end 30 and 35 year amortization mortgages in Canada.

As you already know, CMHC insured mortgages are now limited to 25 year amortization. But 30 and 35 year mortgages still exist, provided borrower's put 20% down and bypass CMHC insurance.

Turner asserts borrower's ability to do this is about to end:

Last week the CEOs of the monster banks were given a clear message that 30-year mortgages need to be wiped away. Completely. In fact, they’ll be banned. That letter will go out next week, the result of a decision made jointly by the Department of Finance, OSFI (the bank regulator) and the Bank of Canada. Regulated financial institutions will also be prevented from buying any securities which are made up on mortgage with 30-year ams.

Stunning news to be sure, and it's estimated such a move will shave 5-10% off already dismal real estate sales.

It continues the theme we talked about on Tuesday when the Financial Post that told us "the federal government and policy makers are scrambling to engineer a soft landing for the country’s overheated housing market."

It also adds credence to Marc Faber's recent comments that there could be significant depreciation in real estate values ahead.

Faber says... he’s observed a significant disconnect between selling prices of homes relative to what they really should be worth.

The precarious state of the housing market has made Canadian banks more risky investments. Dr. Faber doesn’t follow the Canadian banks that closely, but observed that Canada, like Australia, has higher household debt than in the U.S. “With the higher leverage in Australia and Canada, I think I’d be very careful about any lending institution,” he said.

The Federal Government is determined to unwind the housing bubble without raising interest rates, a move that would be harmful to the overall economy.

Is a return to a minimum 10% downpayment the next move for the Feds?

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Sat Post #1: Fool me once....

Yesterday we told you how the OFSI set up a twitter account.  We even profiled their 2nd tweet:

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

We noted that this comment seemed odd because CMHC had been on twitter since July 2011. Turns out there was a good reason this comment seemed out of place.

As one contributor to our comments section noted, a closer inspection of the OFSI logo was in order:

Umm... "Office of Starfleet Intelligence?"

The Twitter homepage for the account states they are:

Official Twitter page of OSFI. Bureau de L'étoile de la Flotte de Renseignement 

Ottawa, Ontario

Clever.  Because "Bureau de L'étoile de la Flotte de Renseignement"  is french for 'The Office of Star Fleet Intelligence'.

LOL

The real CMHC did launch a new twitter account titled @CMHC_ca, which you can see here:

But the @OFSI_ca account, which was set up a mere hours after the CMHC account, is that of an individual portraying themselves as a civilian watchdog.

It doesn't detract from the media campaign we profiled yesterday by CAAMP (the Canadian Association of Accredited Mortgage Professionals), but the OFSI did not create a twitter account in response.

Ya gotta admire the creativity of the faux twitter account tho... made me laugh.

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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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Tuesday Post #2: Can I get a purchase order # for all the cheese we need?

If you've every worked in a large bureaucratic company, you are familiar with purchase orders.  You need them for everything.

Glancing at the world press today, I wonder if I could get a purchase order for all the cheese we need to procure?

I mean... let's face it... what good is all that whine without lots of cheese?

Tonight we start in China.  As the Vancouver Sun notes, home prices are in decline in a record number of Chinese cities.  The decline is no accident. China is engineering a much needed deflation of their housing bubble.

"Prices fell in a record 46 of 70 cities tracked by the government in April from a year earlier as officials pledged to keep restrictions on property purchases that have sapped buyer demand... The Housing Ministry said China will steadfastly continue curbs on the housing market and won’t flip-flop on its policies. This followed a pledge by the State Council, or Cabinet, last month to stick with existing property controls implemented over the past two years, where the government tightened down payments and mortgages, and imposed restrictions on the number of homes families can buy.

“The general price trend as a result of developers cutting prices and regulatory environment is continuing this month,” Chris Brooke, chief executive officer for Greater China at CBRE Group Inc., said in a Bloomberg Television interview from Beijing. “The objective is to remove the speculative element from the market."

China has been struggling with an all-too-familiar dilemma... how to prick the speculative housing bubble while helping the general economy.  Thus the China government has been implementing (and maintaining) its housing curbs while the central bank lowers the amount of cash that banks must set aside as reserves, a move the PBOC has done three times since November to boost liquidity and spur loan growth.

Of course the government's moves have been met with wide spread howls of complaint.

And attempts by some of the locals to circumvent the federal government's moves have been quashed. Wuhu in Anhui province and Foshan in the south in the past six months have tried to lift local property curbs. Both locales had their efforts halted within a week.

"Prices haven’t fallen low enough for the government to relax the property policies," said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc.

Whining about government attempts to deflate the housing bubble aren't restricted to China.

On this side of the Pacific, the Government of Canada is also trying to find a way to deflate the Canadian real estate bubble while still assisting lending for the broader economy.

One of the Fed's key strategies in doing so appears to be shaping up in the new regulations being proposed by the Office of the Superintendent of Financial Institutions (OSFI).

Among the host of proposed changes to the regulations governing Canadian banks are rules that would require that banks recheck areas such as employment status, current income and the current value of the home for mortgage renewals and refinancings.

“This would be a significant, significant change,” Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals (CAAMP).

So concerned is CAAMP about the impact of the changes on it's self interest that the professional association has launched it's own organized media whine campaign.

The OSFI unveiled the proposed new rules in March and requested submissions from the real estate industry as part of the government process of consulting with state holders. A significant number of submissions from trade associations, lenders, insurers and the brokers as well as private citizens have been received.

OSFI is still reviewing them and hopes to release final rules by the end of June, along with a summary of the submissions and the reasons for its decisions.

But CAAMP can see the nuances of the political back room process at work. The OFSI proposed changes were released after the Financial Stability Board, a global financial oversight body, called on all regulators to ensure mortgage lenders were adhering to certain underwriting principles.

And with Ottawa seeking to prevent a runup in Canadian house prices from leading to a crash, it's clear you can see the hand of the Conservative government behind the proposed OFSI guidelines which go a bit further.

CAAMP has clearly launched it's counter offensive to try and stir up the general public in an attempt to influence pressure on the government to back off.

With the June deadline rapidly approaching, expect the level of whining to increase exponentially.

Cheese anyone?

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OFSI: "Banks not immune to Housing related failures"

Yesterday we once again brought up the topic of the OSFI – the Office of the Superintendent of Financial Institutions - which is the organization regulating Canadian banks.

In the early part of the year the OFSI released a draft about upcoming changes to banking regulations. Yesterday's post was about how the mainstream media is picking up on those changes and what it could mean from for Canadian Homeowners... specifically that homeowners should 'beware' of the looming changes.

The OSFI theme continues today as Bloomberg reports on information they obtained in freedom on information request.

And it appears there is grave concern by the regulator for the health of Canadian banks in the event of a housing collapse..

Shortly after the OFSI was criticized on March 19th for it's proposed changes via the mortgage-industry website Canadian Mortgage Trends, the OFSI wrote an internal memo reflecting on the Canadian banking system.

The OFSI noted that while Canada’s banks may be ranked the soundest on the planet by the World Economic Forum, they aren’t immune to collapses triggered by falling housing prices.

The documents Bloomberg uncovered were written by Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions.

Melessanakis said that previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again.

“Canada is not immune. Just because nothing happened in Canada in 2008 (a U.S.-centered crisis), does not mean that Canada is not vulnerable to a housing correction now.”

Canadian Mortgage Trends had critically asked in it's website posting, “How many new lending ‘guidelines’ can the market bear before it breaks?”

Melessanakis' response?

“The market may break because the fundamentals are not sound (i.e. overvaluation of homes), not because of OSFI guidance. Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again."

Somehow I get the feeling the battle over these proposed changes is only just getting started.

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Homeowners Beware

Homeowners Beware!

That's the ominous intro to the above newscast story on the upcoming changes to Canadian bank regulations.

We have discussed this topic a couple of times (and it's something I raise with colleagues regularly).

The OSFI – the Office of the Superintendent of Financial Institutions - is the organization which regulates Canadian banks.  In the early part of the year they released an announcement about upcoming changes to banking regulations.  This was followed by a  discussion paper on those changes.

It's the common procedure for changes implemented by the OFSI.  And rarely are the implemented changes all that different from those outlined in the discussion paper.

Hence the news story.  Some of those changes are HUGE.  And they will be implemented by the end of the year. The OFSI wants banks to tighten up when it comes to renewing your mortgage.

• They want verification of a home’s true value (not the bidding-war price).
• They want the elimination of cash-back mortgages.
• They want to make sure that when your mortgage is renewed you would still qualify for that mortgage.
• And most importantly... they want your loan-to-value ratio to still be intact when your mortgage renews.

In a rising real estate market this is never a problem.  But there are markets where values have fallen (hello Okanagan and Vancouver Island).

And in the Lower Mainland, as inventory hits seasonal highs, as the flood of Asian buyers evaporates, as the Spring Market disappears and sales plummet... are price drops all that far off?

Garth Turner provides a striking example of how this could affect everyone:

"If you bought a $400,000 place in 2010 with 5% down, then your mortgage is $380,000 and your LTV is 95%.

If the same place is worth $340,000 in 2015 (after a 15% correction) when the loan renews, then the LTV means the maximum loan is $323,000. If you took a 3% VRM when you bought, with a 30-year amortization and made 5 years worth of payments, then (counting in the mortgage insurance premium), you still owe $349,000 upon renewal. So, you’d have to come up with $26,000 in cash to maintain your home loan – after spending $101,457 on mortgage payments.

Let’s see, that’s a downpayment of $20,000, plus $101,457 in payments, plus a $26,000 mortgage renewal payment – or a total of $147,457 in cash for a home worth $340,000 on which you still owe $323,000.

This is a nice, simple example of why all those horny young virgins with their 5% downpayments are at risk of being wiped out financially."

For years everyone has assumed that the banks will renew your mortgage without question.

It is a topic we have raised numerous times on this blog and anytime we have raised the issue with local banks we have received vague, noncommittal answers.

Well... the OFSI is now making sure we have an answer to that question.

And the mainstream media is starting to spread the message.

Homeowners Beware!

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