Wed Feb 1st Post #2: Did you know the Housing Bubble in North America was deliberately created by the Feds?

Since we are returning, we thought we'd throw up a few posts reviewing how we got to where we are with our Canadian Housing Bubble.

With all the intense press attention on our housing bubble over the last year or so, China has become the scapegoat for all our housing woes.  And while the world is awash in Chinese money today, it's important to acknowledge the home grown roots of our problem.

And to understand that... it's crucial to recall how the CMHC was specifically instructed by the Harper Conservatives to create our housing bubble.

"Say what?", you exclaim!

It's true.  What is even more astonishing is that the United States also deliberately created their housing bubble too.

Both nation's predicaments were deliberately crafted.

After the dot com crash of 1999 and the 2001 terrorist attacks, America had a choice of entering a painful recession (which critics say was desperately needed to correct the imbalance of excessive monetary stimulus in the 1990s) or politicians could kick the can down the road and artificially inflate the economy.

Economist Paul Krugman, writing in the New York Times on August 2, 2002,  identified the problem:

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. 

This was a prewar-style recession, a morning after brought on by irrational exuberance. 

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Yes... you read that correctly. To offset a morbid economy, leading economists were recommending that the US Government and the US Federal Reserve create a housing bubble so that consumers could use that 'sense of wealth' to drive the economy with consumer spending.

The creation of a housing bubble was a deliberate economic stimulus move.

And Canada followed America's lead on this.

In America, from 2002-2008, President George W. Bush almost singlehandedly, through cheap rates, lax regulation, government housing subsidies, presidential boosterism and financial engineering, managed to get the home ownership rate to 70%.

Following the lead of Republicans in the US, the Canadian Government saw the success of this plan and began pumping the Ownership Society as well. Gifts, incentives and inducements were showered on home buyers and the result was demand swelled, prices popped and a bubble was born.

The main vehicle for these inducements was the CMHC, or the Canadian Mortgage and Housing Corporation. Founded after World War II to provide housing for returning soldiers, the CMHC's role has grown dramatically in the following 70 years.  A Crown corporation owned by the Government of Canada, it's main function today is  providing insurance for residential mortgage loans to Canadian home buyers. (Note: This insurance isn't for the Canadian who buys a home, rather it protects mortgage lenders against mortgage defaults by home buyers on mortgages with less than 20% down)

Here's how CMHC and mortgages in Canada evolved in the 2000s:

• Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years.  CMHC also had limits on how much you could buy with their insurance.
• Just after 1999 CMHC lowered the down payment to 5% with price limits on how much they would insure depending on the area. Amortizations were still 25 years. There would be no price limit on what they would insure if 10% or more was put down.
• By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased. 
• In March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured).
• In March 2006 you had  0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year.  Interest only payments were allowed for 10 years.
• In November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years. 
• Canadian banks ramped this up by allowing up to 7% cash back offers is you would take on a mortgage with them.  You could basically get paid if you bought a house.
• Not only were the rules surrounding the granting of money loosened, but CMHC's cap for granting mortgages grew from $100 Billion in 2006 to almost $600 Billion by 2014.

Right there, in all those details, is where all the money originated to fund our housing bubble.

Conservative Prime Minister Stephen Harper's government altered mortgage and tax rules to the point we had the zero down, forty year mortgage. They allowed Canadians to raid RRSP's for down payments. They created the Home Reno Tax Credit. They gave us the first-time buyer's closing cost gift and they instituted the infamous 'emergency interest rate' which has kept interest rates artificially low since 2009 - an astonishing 8 years! 

Harper's Conservatives gave us more pro-real estate initiatives than Canadians had seen in the last quarter-century.

But wait... there's more!

The most astonishing element, in addition to of all this, was something that has been effectively buried. Something that, now that the mainstream Canadian media have finally turned their attention to the chaos being created by all this malinvestment in Real Estate, are completely unaware of.

Back in 2009 we profiled series of excellent articles put out by Murray Dobbin. One of them, Dobbin's 2009 article titled 'Why Canada's Housing Bubble Will Burst', garnered significant interest in the blogosphere. In that article he stated:

• In an effort to prop up the real estate market in 2008 (when affordability nosedived), the Harper government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing. CMHC described these risky loans as "high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities." The approval rate for these risky loans went from 33 per cent in 2007 to 42 per cent in 2008. By mid-2007, average equity as a share of home value was down to six per cent -- from 48 per cent in 2003. At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income; in Canada today that ratio is 7.4:1 -- almost 50 per cent higher.

That's a stunning statement. He's saying the Harper Government specifically directed the CMHC to approve risky loans in an attempt to keep the economy afloat and blow the Housing Bubble even bigger.

Shortly after the article was written, this blog contacted Dobbin and asked him about the source for this comment.

Dobbin stated he got the reference from a CMHC report which was freely available on the CMHC website.  

Your dutiful scribes from this blog checked out the document and read it personally.  Unfortunately we did not download a copy (and if anyone out there did, we would love to know).

Dobbin's statement was confirmed, CMHC stated in that document that they had been directed by the government to approve as many high-risk borrowers as possible.

A few months later, when a curious reader asked us about the source for this quote, we went to the CMHC site to forward the link to the report.  It was then we noticed the report had been removed.   When we asked Dobbin about it, he also noted (with surprise) that the report was gone from the CMHC website.  Dobbin also had failed to download a copy.

Dobbin columns had obviously struck a nerve and CMHC were directed to remove the document from their website.

Curiously Wikipedia incorporated Dobbin's information into it's database about the CMHC.

Don't bother to look for it now, tho. Curiously, when we went to reference the site for our original post on this several years ago we discovered that the Wiki CMHC page had undergone a significant sanitization.

Gone was the notation about CMHC being directed by the Conservative Government to change policy to approve more high risk borrowers.  Also removed were all the statistics about the ballooning level of CMHC backed mortgages.

In it's place are bland descriptions of CMHC functions. 

At the top of the page is this warning bar (click on image to enlarge):

If anyone is interested what the Wiki page used to say, you can still find it at a website called 'the full wiki'. It contains the old information that the Wiki page used to hold. 

In Slide #7 it states: "In 2008, Canadian home prices started to dip as affordability become 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 marked and keep credit flowing."

That is a stunning acknowledgement.

When the American housing bubble popped in 2008, the Conservatives bet heavily they could shield our boom from the 2008 financial crisis. What they did to add fuel to a powder keg which has now grown insanely large as other Central Banks (US Fed and Peoples Bank of China) have flooded the world with Quantitative Easing and excess credit.

But make no mistake. The foundation of this massive bubble started at home - with the manipulation of CMHC policies.

(Below are the screen shots of the original Wiki site on CMHC before it was sanitized)

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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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Email: village_whisperer@live.ca
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CMHC, Risky Borrowing, and the Wiki rewrite

If you are remotely interested in the Canadian Real Estate bubble then you are well aware of CMHC or the Canadian Mortgage and Housing Corporation.

Founded after World War II to provide housing for returning soldiers, CMHC's role has grown dramatically in the last 65 years.  A Crown corporation owned by the Government of Canada, it's main function today is  providing insurance for residential mortgage loans to Canadian home buyers.

This insurance isn't for the Canadian who buys a home, rather it protects mortgage lenders against mortgage defaults by home buyers on mortgages of less than 20% down.

And after the dot com crash and the 2001 terrorist attacks, this insurance has had a profound effect on the Canadian economy.

Following the lead of Republicans in the US, the past decade has been one of pumping the Ownership Society for the Canadian Government. Gifts, incentives and inducements have been showered on home buyers and the result was demand swelled, prices popped and a bubble was born.

In America President George W. Bush almost singlehandedly, through cheap rates, lax regulation, government housing subsidies, presidential boosterism and financial engineering, managed to get the home ownership rate to 70%.

In Canada it was our own Conservative Prime Minister, Stephen Harper. The Conservatives gave us the zero down, forty year mortgage. They allowed Canadians to raid RRSP's for down payments. They created the Home Reno Tax Credit. They gave us the first-time buyer's closing cost gift and they instituted the infamous 'emergency interest rate'.

Harper's Conservatives have given us more pro-real estate initiatives in the last five years than Canadians have seen in the last quarter-century.

As stated numerous times before on this blog, the only reason our real estate market hasn't tanked like it has in the United States is because of the way our government intervened in the financial and real estate crisis.

The Conservatives created an economic boom in the 2000's around real estate and then bet heavily that if they could shield that boom from the 2008 financial crisis, the economy would start to recover and the bubble would weather the financial storm.

The problem, as you know, is that four years into the Great Financial Crisis of 2008 it is becoming crystal clear that this is a once in a multi-generational storm. Unlike an average recession, this crisis is persisting longer than anyone anticipated.

Both the Governor of the Bank of Canada (Mark Carney) and our federal finance minister (Jim Flaherty) have recognized this.

For over a year now Carney has issued warning after warning about high levels of household debt, especially mortgage debt. And Flaherty is desperately trying to engineer a soft landing from the real estate bubble by changing mortgage qualifying regulations and altering the parameters of CHMC insurance.

Those changes included reducing the maximum amortization period for loans qualifying for CMHC insurance first to 35 years from 40, then to 30 years from 35 years; lowering the maximum amount that Canadians can borrow to refinance their mortgages to 85% from 90% of the value of their homes; and withdrawing CMHC insurance from non-amortizing home equity lines of credit.

The fallout from those changes are now starting to make news.

In an article on Monday the Financial Post asks, Did CMHC promote risky borrowing?

In compliance with new federal regulations, CMHC published its first set of quarterly results. Among the more salient disclosures: refinancing activity tumbled nearly 40% following a move by Finance Minister Jim Flaherty to tighten mortgage rules this past spring.

Sales of the CMHC’s mortgage insurance fell by 10% immediately after the changes were introduced, though they have regained some ground since then.

CMHC says this shows it’s doing a good job of maintaining a healthy, sustainable housing market.

But Finn Poschmann, vice president of research at the C.D. Howe Institute, is skeptical. “The size of the drop in refinancing is surprising to the point of shocking. You could hardly have better evidence of the extent to which CMHC practices have been supporting high debt and risky borrowing by homeowners.”

Charges of this kind are nothing new. And you can rest assured that scrutiny of this kind will make the Conservative Government very uncomfortable.

Faithful readers will recall a series of excellent articles put out by Murray Dobbin. Dobbin's 2009 article titled 'Why Canada's Housing Bubble Will Burst' garnered significant interest in the blogosphere when he stated:

• In an effort to prop up the real estate market in 2008 (when affordability nosedived), the Harper government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing. CMHC described these risky loans as "high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities." The approval rate for these risky loans went from 33 per cent in 2007 to 42 per cent in 2008. By mid-2007, average equity as a share of home value was down to six per cent -- from 48 per cent in 2003. At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income; in Canada today that ratio is 7.4:1 -- almost 50 per cent higher.

Shortly after this article was written, this blog contacted Dobbin and asked him about the source for this comment.

Dobbin stated he got the reference about the Conservative Government directing CMHC to approve as many high-risk borrowers as possible from a CMHC report which was freely available on the CMHC website. 

Your dutiful scribes from this blog checked out the document and read it personally.  Unfortunately we did not download a copy (and if anyone out there did, we would love to know). Dobbin's statement was confirmed, CMHC stated in that document that they had been directed by the government to approve as many high-risk borrowers as possible.

A few months later, when a curious reader asked us about the source for this quote, we went to the CMHC site to forward the link to the report.  It was then we noticed the report had been removed. 

When we asked Dobbin about it, he also noted (with surprise) that the report was gone from the CMHC website.  Dobbin also had failed to download a copy.

Dobbin obviously struck a nerve and CMHC were directed to remove the document.

Dobbin's reference has been used extensively around the blogosphere. The great social experiment, Wiki, even incorporated Dobbin's information into it's database about the CMHC.

Don't bother to look for it now, tho. Curiously, when we went to reference the site for the Financial Post article mentioned above, we noticed that the Wiki CMHC page had undergone a significant sanitization.

Gone was the notation about CMHC being directed by the Conservative Government to change policy to approve more high risk borrowers.  Also removed were all the statistics about the ballooning level of CMHC backed mortgages.

In it's place are bland descriptions of CMHC functions. 

At the top of the page is this warning bar (click on image to enlarge):

If anyone is interested what the Wiki page used to say, you can still find it at a website called 'the full wiki'. It contains the old information that the Wiki page used to hold. 

Screen shots from 'the full wiki' CMHC page are below (click to enlarge). And it anyone has a copy of the original CMHC report, send it along. It would be great to add it to the document paper trail:

Much like the inhabitants of Orwell's Animal Farm, we are left to look at what is now written on the wall and scratch our heads trying to remember what may have been changed. 

Fortunately for us, the Internet never forgets.



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

Please read disclaimer at bottom of blog.