Harbinger

This item has been covered on a number of local blogs, but the item is significant and will prove to be a harbinger of things to come.

The newspaper story in question (which you can read in the Province newspaper here) tells us about a real estate property which is now before the B.C. Supreme Court. The case is a potentially precedent-setting civil forfeiture that calls into question the role banks play, knowingly or unwittingly, in the province's multibillion-dollar drug trade.

But while the newspaper story focuses on the role played by banks in financing the grow-op, our focus zeros in on a revealing section within the story... one that confirms what many bloggers have suggested is going on with mortgage approvals in this country.

Every week we are reminded that the reason Canada has not suffered a housing collapse like our American cousins is that our banking system has been much more diligent with mortgage approvals and our banks have properly managed risk.

Thus, supposedly, there are no subprimer's in Canada.

Numerous posts have been made on this blog discounting this. We have subprimers. The conditions just haven't sufficiently presented themselves for their carnage to be unleashed on our market - yet.

Which takes us to the recent Vancouver Province newspaper story.

As details of the forfeiture case come out, it appears that the courts have come across several circumstances where banks have refinance mortgages on million dollar homes for lenders who, allegedly, were unable to provide proof they had the means to make the hefty monthly payments (about $4,000 a month).

That's right... million dollar mortgages approved without adequate proof of income to pay said loan.

In one case a prospective lender asked the Bank of Montreal to mortgage the property in question for its full value ($976.000) on Oct. 22, 2008. In August 2009 Vancouver police raided the home and uncovered a massive grow-op. Two days later, despite the raid, the lender sought and received an additional $70,000 mortgage on the property from the Royal Bank of Canada.

Make no mistake... this is not a 'one-off' story.

In the United States a minor drop in real estate values combined with mortgage resets at higher interest rates triggered the massive housing collapse we have witnessed over the past four years.

Those two conditions haven't come to pass in Canada, yet.

But they will.

And when they do, real estate in bubble areas of our country will suffer the same results as real estate in the bubble areas of the United States. And as the market here collapses inward upon itself, story after story will start to surface about other highly questionable loans that have been made.

This article is simply a portent of things to come.

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Email: village_whisperer@live.ca

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Canada's Looming Subprime Mortgage Disaster

Perhaps the greatest lie fed to the Canadian public is the one that says we don't have a looming subprime mortgage condition in Canada.

"Our banks only lend to qualified people," we are told and "not to deadbeats who will never be able to pay their mortgages like they did in the United States."

That, dear reader, is a crock.

What you have to understand about the US mortgage fiasco is what subprime mortgages were and who utilized them.

The common belief is that sub-prime loans were made to borrowers who did not qualify for loans from mainstream lenders. While that is, in part, true... it is not the whole story.

From 2004 through 2006 a large segment of the American homebuying public (both those who did not qualify from mainstream lenders and those who did) took advantage of mortgages with "teaser rates".

A teaser rate is a low rate - sometimes as low as 1% - that lasts a short time (anywhere from one month to 7 years). Most US subprime adjustable-rate mortgages had teaser rates that last two or three years and up to five to seven years.

After the teaser rate expires, rates can rise rapidly, causing minimum monthly payments to skyrocket.

Lenders got into the habit of qualifying borrowers according to their ability to pay the teaser rates, but not by their ability to make payments after rates rose.

It was never seen as a problem because borrowers could always renew their mortgage with a new teaser rate once the first teaser expired. Especially if the market value of their house had increased.

This only became a problem if the value of the property fell. Then you couldn't renew the mortgage because the value of the mortgage was greater than the market value of the property.

And that's where the whole issue imploded in the US. When values started to drop, mortages couldn't get renewed with new teaser rates. As a result the higher term rates then kicked in.

The end result: default and foreclosure.

So let me ask you a question. How is Canada much different right now?

We have a situation where thousands of Canadians are buying homes because they can take advantage of the lowest interest rates in our nation's history.

Some one year variable mortgages issued this year have a 1.47% rate.

Will these rates be like this for the next 35 years?

Not a chance. Even the governor of the Bank of Canada came out a few weeks ago and warned Canadians that "the days of ultra-low interest rates are ending and Canadians should prepare for more 'normal' rates."

The historical 'norm' over the last 35 years would be 8%.

In the United States, lenders got into the habit of qualifying borrowers according to their ability to pay the teaser rates, but not by their ability to make payments after rates rose.

In Canada, lenders have gotten into the habit of qualifying borrowers according to their ability to pay the current 'ultra-low' rates, but not their ability to make payments at higher mortgage rates down the road.

If the 'ultra-low' rates won't last for the next 35 yeras, it means Canada is pumping out mortgages with 'ultra-low' teaser rates by the hundreds of thousands. Just like the United States was.

And when these rates rise, minimum monthly payments are going to skyrocket.

And the media is starting to take notice. Check this out...

Here is an article in last Friday's Globe and Mail.

It's about a BC couple who are drowning in real estate debt and are worried that the debt could be unmanageable if interest rates rise.

A financial planner takes a look at their financial situation.

The couple owns a house and a rental property. With property taxes, their debt service bill is 77% of the family budget.

The planner concludes that "if interest rates rise just one percentage point, mortgage costs would consume all rental income."

If rates rise more than that "they might not be able to pass on the higher costs to tenants in increased rents nor find sufficient cash to pay their lenders," the planner warns.

A two percent raise in rates could put them into default and foreclosure.

The fact is, there are thousands of BC families in a similar condition.

They have leveraged mortgages at historic lows to make maximum purchases. When rates rise just 1 or 2 percentage points, they will be in the EXACT same position as all those American borrowers who utilized low teaser rates.

It doesn't matter if these BC families have 1, 3, 5 or even 10 year mortgages. NO ONE expects these rates to be around for much longer. If rates rise to only 4 or 5%, BC families like the one in this Globe and Mail article are FAWKED.

Our situation today is no different from the United States in 2005.

The clock is ticking. And when rates rise, our bubble real estate condition is going to hyper-explode.

We cannot escape this destiny.

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

Please read disclaimer at bottom of blog.