"Deja Vu - all over again"

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What's the next big financial disaster looming on the horizon in the United States?

Today's phrase that pays is 'corporate-style subprime loans'.

In 2006 we started to hear about loans that went to borrowers who might never before have been allowed to borrow. When they found repayment difficult, they were permitted to refinance their loans, generating fees for the lenders and postponing the ultimate reckoning.

Then the credit markets turned and both the borrowers and lenders were in deep trouble.

So it went with the subprime mortgage crisis. And so it is now going with corporate loans and bonds. It appears that defaults on leveraged loans and corporate bonds will soon rise to levels not seen since the Great Depression.

If that does happen, a wave of corporate bankruptcies will deal another blow to the American economy, and present the Obama administration with more painful decisions about possible bailouts — bailouts that could be made directly or indirectly by persuading bailed-out banks to make loans that might not seem wise to the bankers.

Oh... the tangled web we are weaving.

Calculations by Moody's Investors Service show that as of the beginning of April, a record 27 percent of speculative-grade debt issuers had a rating on their senior debt ranging from Caa down to C. These are the lowest rungs of credit quality — rungs that once rendered a borrower ineligible for a loan.

The default rate on leveraged loans and speculative grade bonds is rising rapidly. “We expect the default rate to get to the range of 14 percent by the end of the year,” said Kenneth Emery, a senior vice president of Moody's. That compares to peak default rates of 10 to 12 percent during the last two recessions, in 1991 and 2001.

That could turn out to be an optimistic forecast. Edward I. Altman, a finance professor at New York University says he thinks the rate will probably be in the range of 13 to 15 percent, but could go as high as 19 percent this year. If the recession continues into 2010, he fears that year could see a comparable default rate.

How did we get into this mess? The story is remarkably similar to the tale of subprime mortgages. Lenders who were making money by putting the loans into pools became more and more eager to make loans, and less and less concerned about their quality.

The way the loan securitization market developed, the most profitable loans to make were those rated B or even B-minus, levels of debt below the old standard for most junk bonds. There was a market for some Caa paper, even though such loans historically often landed in default.

Borrowers who ran into problems could refinance their debt, creating new rounds of fees for the banks making the loans and obscuring the problems with credit. And with the economy booming, there were not that many problems anyway.

The secret to all this was the collateralized loan obligation, or C.L.O. As with mortgage securities, the rating agency models figured that 70 percent of the money that went into financing single-B rated loans could be financed with AAA-rated paper.

As time went on, the big banks making the leveraged loans became more and more competitive, figuring the secret to profits was in making the loans and securitizing them — not necessarily getting them paid back. It was financial alchemy, but the AAA-rated paper was popular with buyers like banks and insurance companies, whose capital rules treated such securities as virtually risk-free. They wanted more such paper, and the big banks obliged.

“C.L.O.’s bought about two-thirds of corporate loans from 2004 to 2007,” said David Preston, a structured products analyst at Wachovia Securities. But there are now no new C.L.O.’s being created, and many of the old ones may soon be barred from reinvesting repayments in new loans — in part because so many existing loans are being downgraded by the rating agencies.

The loans were the corporate equivalent of the now-notorious pay-option mortgage loans, where the borrower could choose to pay only a fraction of the interest, adding the rest to the amount he owed.

It all sounds absurd now. But at the time, any bank that refused to lower standards on mortgage loans or on corporate loans risked plunging profits as all the business went to competitors. That might not have happened if regulators had been willing to step in, as some of them wanted to do.

Defaults are now rising because of the recession, but the news could get even worse. Unlike most mortgages, leveraged loans and junk bonds are not scheduled to be gradually paid off over the life of the loan. Instead, they come due and must be refinanced. Moody’s reports that leveraged companies need to refinance $26 billion in loans this year, $44 billion in 2010 and $120 billion in 2011. If credit markets remain tight, we could see lots of defaults even among companies that are doing well enough to make their interest payments.

When the subprime mortgage crisis burst into public view in 2007, government officials were slow to understand that the problem was much broader than the mortgage market. As it happens, the mortgage problem helped to bring on a recession, which is making the coming crisis in corporate loans — not to mention in commercial real estate loans — that much worse.

What was it that Yogi Berra said? "It's deja vu all over again!"

It's another reason to believe that the current stock market rally is nothing more than a bear market trap.

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Email: village_whisperer@live.ca

Bank Failure Friday and the 'real' name of the Stanley Cup

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UPDATE: Bankd Failure #29 - First Bank of Idaho, Fsb, Ketchum, Idaho

UPDATE: Bank Failure #28 - First Bank of Beverly Hills, Calabasas, California

UPDATE: Bank Failure #27 - Michigan Heritage Bank, Farmington Hills

UPDATE: Bank Failure #26 - American Southern Bank, Kennesaw, Georgia

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Not too long ago our Prime Minister said, "there won't be an economic recovery until the U.S. financial system is repaired." So we dutifully scrutinize US banking developments with keen interest.

As faithful readers of this blog know, bank failures in the United States always seemed to be delayed until late on Friday afternoons. This has prompted many blogs to jokingly refer to fridays as 'Bank Failure Friday'.

So far 2009 is off to a record breaking year with 25 failures to date.

We wait with eager anticipation for today's carnage. Updates from the FDIC as they come in. We will post them in red as updates at the top of the post.

Meanwhile you will have noticed the 'Canuck Stanley Cup Countdown' which now occupies the upper right corner of the blog. The Village on the Edge of the Rainforest erupted into ecstatic joy last Tuesday as the hometown Canucks eliminated the Saint Louis Blues 4 games to 0. The Canucks are now through round 1 and patiently await their next opponent.

With the hockey theme in mind, I offer faithful readers a bit of hockey trivia you can stump your friends with.

The holy grail of hockey is the Stanley Cup. But did you know that 'Stanley Cup' is a nickname for the silver chalice?

T'is true.

Nowhere on the famous trophy do the words 'Stanley Cup' appear. Hockey's ultimate prize was donated by Lord Stanley, Earl of Preston, when he was Govenor General of the Dominion of Canada - and he did not name the Cup after himself. Instead he gave the trophy it's own unique name which is engraved on it for all to see.

If you look on the famous silver rose bowl you will find the actual name of the Cup. Click on the image below to read it for yourself.

And raise a pint for the Whisperer when you win the bar bet on this timely Canadiana trivia question.

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Email: village_whisperer@live.ca

The Looming Mortgage Concern

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In yesterdays post about the Anatomy of a Bubble, we mentioned that a crucial component to a return to rising real estate prices would be the availability of cheap, plentiful debt. And since debt loads are at historic extremes, what conditions will enable trillions more in debt to be issued to buy inflated housing?

The answer, of course, is that those conditions won't occur. Real estate values will continue their decline as the current wave of bottom fishers discouvers that these current prices (almost 15% down from peak) aren't the bottom of the market.

That's when the next domino in the collapse will fall: mortgage defaults by current property owners.

Sounding the alarm on this is the Canadian Association of Accredited Mortgage Professionals who released a report today that warns "Canadian mortgage holders are facing significant challenges, with an uncertain job market increasing the risk of mortgage defaults in the months ahead."

In a survey down by the Association, eight per cent of Canadian mortgage holders, representing some 425,000 home owners, indicated that being able to make a mortgage payment is currently an issue or concern. Meanwhile, another 18 per cent of respondents – "a surprisingly large share" – reported that either they themselves or a primary earner in their household had lost a job in the past six months.

And rising unemployment is the chief concern of the Association. "The greatest risk facing the Canadian mortgage market is job loss," says Will Dunning, chief economist for the association and author of the report.

While Dunning stresses that Canadians are in much better shape than their U.S. counterparts (U.S. households have less equity in their homes than Canadians, at 43 per cent versus 72 per cent), there are still about 2% of Canadians report negative equity in their homes (where the value of the mortgage is greater than the value of the home).

Another 8 per cent have less than 10 per cent equity, says the report.

"Negative equity becomes a more risky factor when households have difficulty making current payments or lose a job," says Dunning. "Without equity, households are unable to raise funds by borrowing against the home or selling the property, and they have reduced options for refinancing."

Then comes the kicker from the report.

If house prices were to fall further, there would be an increase in the number of home owners with negative equity, a situation many U.S. consumers now find themselves in. And if mortgage holders with negative equity were to lose jobs, "There would be a more substantial rise in the extent of mortgage affordability problems and possibly defaults," warns Dunning.

As we have already reported on this blog, BC has been hammered by the biggest wave of unemployment in the country. The prospect for the spring and summer is for the trend to intesify. The forestry industry has a lot of pain still to come, the tourism industry is going to be smacked hard this summer, the construction industry is in a steep downward spiral and the 'Olympic Bounce' will not materialize without a dramatic turn in the world economy.

The report says optomistically that the debt loads are largely sustainable, as long as Canadians don't continue to see substantial job losses and as long as house prices don't continue to decline.

But if they do, you can see how conditions are aligning themselves to intensify and accelerate the collapse.


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Email: village_whisperer@live.ca

Have we hit bottom? Anatomy of a Bubble

(click on image to enlarge)

Anatomy of a bubble was posted on Charles Hugh Smith's blog and is very interesting so I have condensed and reposted it here. There are more graphs on his site if you are interested.

The big real estate debate in Vancouver right now is, "have we hit bottom? Is now the time to buy?"

Interestingly, no one refutes the fact that we have been in a housing bubble anymore. What people now deny is the fact it is going to continue to burst in spectacular fashion.

And so, with that in mind...

Anatomy of a Bubble

No model can predict the timing, highs or lows of any bubble, but all bubbles - be they real estate, stock market or whatever - tend to follow a pattern traced in human psychology:

1. As euphoria grabs hold, prices rise in a steep ascent to a point at which "everyone" believes there is no end to the trend.

2. The initial descent from the bubble peak is a "shock" which leaves the bubble mentality intact, i.e. the Bull Market in tulip bulbs, real estate, tech stocks, etc. is only suffering a standard retracement/indigestion; the trend higher is still in place.

[which is where we are in Vancouver right now. People are arguing that prices are only suffering a retracement and the upswing in prices will return shortly]

3. In housing, this psychology is embedded in such chestnuts as "they're not making any more land," "real estate always rises over time," "population growth means demand for housing will always rise," "the house is the foundation of middle class wealth appreciation," and so on.

4. At some point speculators who were left out of the initial explosive rise jump in because "prices are a real bargain now."

5. This buying pushes demand above supply briefly, and prices start rising again.

[which is what we are seeing in Vancouver with historic low interest rates and a decline, after 11 months, of over $121,000 in the benchmark price for SFHs]

6. But the realities beneath price action have changed, and this bargain-hunting burst soon fades as demand falters, supply rises and prices renew their descent.

7. Speculators and investors' memory of the tremendous profits made on the way up remain firmly embedded, forming an "investment memory" which locks them into the view that the upward trend will resume at some point. This drives wave after wave of bottom fishing in which speculators buy into an apparent bottom only to be disappointed and see that false bottom wiped out by a renewal of the downtrend.

8. At some point, all the bottom fishers have expended their capital and prices retrace to the pre-bubble levels, or even lower. This is what can be called "the real bottom."

[which in Vancouver Real Estate will probably be pre-2002 ($375,000), down from last years high of approx $910,000]

9. But the memory of past glories still remains in the minds of speculators/investors, and so a subdued uptrend starts as "hope springs eternal" buying kicks in.

10. Eventually this institutional/cultural "memory of an uptrend" fades as the "recovery" in prices fails. The truisms which fed the brief bubble and long post-bubble decline and recovery--that tech stocks were the future, real estate only goes up, the South Seas is the epic investment of all time, etc. are repudiated and lose favor. This is the ultimate bottom.

Can a 10-year bubble reach this "ultimate bottom" in a mere 11 months? History suggests not.

Vancouver's real estate market still has a long way to decline, years not months, with many minor bounces upward along the way.

Remember... it has only been 11 months since the market started to decline. In the United States it has been over four years. This bubble pattern has played out in every American city and Vancouver's drop in the first 11 months outpaces all but 2 or 3 US cities in their first year of collapse.

More importantly the economy has shifted dramatically. Add in the following financial factors that control real estate valuations and you cannot help but conclude the price declines will resume. These factors include:

1. Extreme bubble valuations must eventually retrace to the starting point, and in many cases they drop below the starting point.

Vancouver's real estate bubble started to inflate just prior to 2002. The benchmark price at that time was approx $375,000. We have come nowhere close to retracing to the starting point yet.

2. Housing and real estate are based on the availability of cheap, plentiful debt. As economy-wide debt loads are at historic extremes, it is prudent to ask what conditions will enable trillions more in debt to be issued to buy inflated housing.

3. As the Federal government borrows billions of dollars (in the USA, trillions of dollars) on the open market to fund its mega-stimulus-bailout debts, then the government is competing with private borrowers for a dwindling pool of capital/savings. That will drive up rates, making mortgages more expensive. And since prices drop as rates rise, this global push on interest rates is a profound headwind for housing prices globally.

4. Paying a mortgage requires steady income, which for most citizens means a steady job. Rapidly rising unemployment reduces the pool of potential buyers and adds to the inventory as those losing their incomes also lose their homes. (And BC is leading the nation in job losses with greater losses a certainty).

In short: with the national and household balance sheets at historic extremes of indebtedness it is difficult to see what fundamental financial foundation exists for higher housing prices.

The only conclusion to be drawn is that those currently buying "at bargain prices" will very likely be disappointed as prices renew their downtrend in the near future.

And Vancouver's bubble still has a long, significant ways to go in its downward deflation.


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Email: village_whisperer@live.ca

The Four Horsemen of Economic Doom

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The stock market goes up for a while, and then it takes a hard hit down. Some say the worst is over, others predict more pain to come. And the US President? Obama says there are “glimmers of hope.”

Have things really changed for the better?

Here are four analysts who correctly forecast the subprime and housing collapse. What do they think you should do in these uncertain times?

1. Mark Kiesel (managing director of Pimco in Newport Beach, Calif.)

Mr. Kiesel made a name for himself because he warned early on about the housing bubble. He was so worried that he sold his house in May 2006 and began to rent, instead.

Despite today’s upturn in optimism, he said, it’s too early to get into stocks.

What does he recommend? Get into select high-quality bonds.

The reason? The yield spread between investment-grade corporate bonds and US Treasuries are “at or near their widest levels in decades, and in some sectors they are approaching the widest since the Great Depression,” he wrote in a report to investors last week.

“Typically, when you come out of a recession and you get this recovery, the trade actually to do is to go into equities,” he said in an interview. “But what we think is different this time is that the economy is deleveraging and we’re also going through reregulation as well as deglobalization. So there’s secular change going on in the marketplace that makes it, in our opinion, more risky.”

So he’s dipping a “toe – and a leg” in high-quality bonds in selected areas, such as “national champion” banks (receiving cheap government money to restart lending), regulated pipeline and utility companies, and noncyclical industries like telecom and healthcare.

By the way, he’s still renting, because home prices have another 10 percent to fall in the United States. “By next year, you should really be in a position to want to start to make some offers.”

2. Nouriel Roubini (economist at New York University and chairman of RGE Monitor)

Mr. Roubini’s position illustrates how easy it is to get typecast. He has been gloomy about the US economy for so long (he predicted the coming of the recession in a prescient 2006 speech to the International Monetary Fund) that he’s become known as Dr. Doom. So when he was interviewed on CNBC last month, saying that there was light at the end of the tunnel, some took it as a big sign of change.

It wasn’t. Mr. Roubini had argued for months the contraction would slow this year and that recovery would occur in 2010, although it would be so weak that it would still feel like recession.

“I am not a perma-bear and will be the first to call for a sustained economic recovery and recovery of the financial markets when I see one,” he wrote in a post last Tuesday. It’s just that while the economy is no longer in a free fall as it was at the end of 2008, “we are still in the middle of a severe U-shaped recession that will last much longer than what is expected by the current consensus.”

His recommendation? Stay on the sidelines. Today’s rally should be viewed skeptically because earnings will remain weak as the economy keeps contracting this year and enters a weak recovery in 2010 (annual growth under 1 percent).

3. Peter Schiff (president of Euro Pacific Capital)

Mr. Schiff is a YouTube hero. In 2006, while analysts were blithely saying that the economy was strong, he warned about the real estate bubble and the overleveraged state of the economy. (Watch the scorn and bemusement of his fellow analysts here and here.)

Having called it right once, he now foresees a period of intensifying inflation as the Chinese and other creditors begin to lose confidence in the dollar and sell their dollar reserves.

His recommendation? Run, don’t walk, from the dollar. By pumping in trillions of dollars to prop up the current economy, the Obama administration is creating an even bigger problem that will cause hyperinflation and drive down the value of the dollar, he said in an interview. “As a nation, we go deeper into debt. What we need to do is get out of debt. We need to let the phony economy contract.”

“They’re not going to be the bankers for all this stuff,” he said in the interview. “Four years from now we could end up owing them $3 trillion. So [from their perspective], better to take a loss on $1 trillion than to take $3 trillion. You can hear the rumblings.”

Not everyone believes Schiff is right in this second call. But China and Russia have called for a new world currency to replace the dollar.

4. David Tice (chief equity strategist for bear markets at Federated Investors)

Mr. Tice warned of the housing bubble and rising debt in a March 2007 letter to investors. His view hasn’t changed much since then.

“We are as profoundly negative as we ever have been,” he said in an interview. “We have several more legs down in a secular bear market. Unfortunately, there’s a lot more pain to go because this is the big kahuna that we have deferred for a long time. The excesses and the imbalances [in the economy] have not yet been wrung out.”

His recommendation? Be defensive.

He counsels investors to stay with hard assets, such as gold, or stick with safe Treasuries, which currently yield next to nothing. In this era, “we have to think of return of principle rather than return on principle,” he said in an interview. But he also sees some good values in very safe, high-yield equities, such as natural gas trusts and utilities stocks with a big yield.

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So there you go... the opinions of four prominent forecasters who correctly saw the market crash and housing bubble before they occurred.

IMHO, more worthwile opinions than the talking heads on TV who never saw the crash coming.

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Email: village_whisperer@live.ca

Signs of the Times on Oak Street

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It is now 11 months since the bubble began to burst in Vancouver. The benchmark price for a SFH has collapsed over $121,000, a drop of over $10,000 a month. Think of it, that's a decline that is greater than the average yearly income of most lower mainland families.

Vancouver is curently dropping faster than many of the most bubbly American cities in their first year of collapse.

A quick drive down Oak Street in Vancouver these days gives you a glimpse of the changing face of Vancouver Real Estate. As soon as you come off the Oak Street Bridge (which connects Vancouver to the suburbs of Richmond and Delta), you immediatly come across this poster child of desperation (click on image above to enlarge).

If you look closely you see this building has nine seperate 'for sale' signs plaster around it. And that's after the developer had previously taken down two of them!

It isn't the greatest location either. You have virtually no yard (all you get is what you see in the front) and the view? You look out onto the escalating ramp of one of the busiest bridges in the City. Hopefully the townhomes are soundproof, unless you consider the gentle lullabye of the Detroit River outside a selling feature to insomniacs.

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The asking price...

Who said you had to go to California to visit Disneyland?

Further north, at about W. 43rd Ave is the Carrington. The site's original developer went belly up last year at the start of the collapse. At the time the story got a lot of media attention as the developer had to cancel his contract with pre-sale buyers and give them their deposits back.

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Another developer bought the empty site and build these condos. Recently these banners were festooned around the site. Clearly sales are not going well...


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Email: village_whisperer@live.ca

Wells Farce-Co?

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At the beginning of last week I made a post about how Wells Fargo Bank had stunned the world by proclaiming it had just finished its most profitable quarter ever. Stock market investors jumped on the news with blind faith and the bank's stock soared. What sent Wells shares soaring was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion. Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care.

As I said, we will watch the Fargo situation unfold with interest as questions were being raised about the Banks optimistic appraisal of it's financial situation.

On April 22nd the company will be releasing its first-quarter results and the flurry of speculation is intensifying.

We already talked about how Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books.

Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself.

It appears to be a very deceiving slight of hand. Had Wells completed its purchase of Wachovia on Dec. 31, it wouldn’t have been allowed to carry over the allowance had it completed the acquisition a day later. On Jan. 1, new rules by the Financial Accounting Standards Board took effect prohibiting such transfers. A Wells spokeswoman, Janis Smith, declined to comment.

As if that were not enough, other interesting tidbits are now coming out.

The most closely watched measure of a bank’s capital these days is a bare-bones metric called tangible common equity. While the term doesn’t have a standardized definition under generally accepted accounting principles, it typically means a company’s shareholder equity, excluding preferred stock and intangible assets, such as goodwill leftover from past acquisitions.

Measured this way, Wells had $13.5 billion of tangible common equity as of Dec. 31, or 1.1 percent of tangible assets. Yet in a March 6 press release, Wells said its year-end tangible common equity was $36 billion. Wells didn’t say how it arrived at that figure.

Even more disturbing is Wells’s Dec. 31 balance sheet. On it is a $109.8 billion line item called “other assets.” What’s in that number? For that breakdown, you need to go to a footnote in Wells’s financial statements. And here’s where it gets comical.

The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say.

That $44.2 billion is more than Wells’s tangible common equity, and no one knows what it is comprised of.

The more information that comes out, the more disconcerting the stability of the bank appears.

Watch for Fargo stock to drop like a rock when complete financial statements come out.

And with it could go investor confidence in the latest market rally.

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Email: village_whisperer@live.ca

Updates From the FDIC

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Bank Failure #24: American Sterling Bank, Sugar Creek, Missouri

Bank Failure #25: Great Basin Bank of Nevada, Elko, Nevada

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Email: village_whisperer@live.ca

The Bad News Hit Parade Continues...

Housing and the Economy are the main items in the news that grab our attention on this Bank Failure Friday (updates from the FDIC as they come in).

Royal Bank came out with it's latest Housing Trends and Affordability Report. Many news outlets reported on the story with the headline "Home Ownership Got More Affordable at end of 2008", but that was highly misleading if you didn't read the report.

Regarding British Columbia:

• Housing markets remain under heavy downward pressure in British Columbia. With the sharp rise in unemployment since last summer worrying households in the province, demand is generally weak and falls well short of available supply. This is sustaining the declining trend in prices for both existing and new homes. Nonetheless, there are signs that the situation might be close to stabilizing. After falling precipitously since hitting nearly record high levels in 2007, sales of existing homes appeared to have found a floor in the closing months of 2008 and the first two in 2009 – although at historically depressed levels. This, in part, might reflect a notable improvement in affordability, which removes a thorn in the B.C. markets’ side that emerged in the aftermath of the boom. From the end of 2007 to the end of 2008, RBC’s affordability measures in the province improved between 4.1 and 6.3 percentage points, depending on the housing type. Still, the restoration process has much further to go as measures remain significantly worse than historical averages.

Regarding Vancouver:

• To say that things continue to be tough in the Vancouver housing market would be an understatement. A small up-tick in existing home sales since December has brought only cold comfort after the collapse of more than 60% in the preceding 15 months. Prices are down 4% to 9% from peak – or more than 30% if no account is made for the changing mix of housing types being sold – and still sliding. Pricing power remains firmly in the hands of buyers with the sales-to-new listings ratio at historical lows, indicating an enormous imbalance and suggesting that prices will likely correct further in the months ahead. Despite the price decline to date and the break on mortgage rates in the past year, the cost of homeownership in Vancouver is still exorbitant both in absolute terms and relative to income or rent. As families in the area worry increasingly about dwindling job prospects, poor affordability will continue to weigh on the market.

Meanwhile news on the Economy continues to create conditions that will drive real estate prices down in BC.

Montreal based forestry giant AbitibiBowater filed for bankruptcy protection in the United States as sales of newsprint have collapsed. 4,000 workers are out of work in Ontario and BC mills have been dealt another blow.

Meanwhile stats are out on the number of bankruptcies in February. Across Canada filings jumped by 22.1% from a year earlier and 13.1% higher than in January. But bankruptcies were up 67.4% year-over-year in Alberta and 44.8% in B.C.

The Alberta number is significant because the Okanagan is driven by Albertans with summer property there.

The dominos continue to fall in advance of the collapse of the summer tourism season. It doesn't take a degree in rocket science to understand why.

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Email: village_whisperer@live.ca

Why the stimulus is failing

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A few weeks ago we profiled a speech given by Peter Schiff on the economy and the current steps being taken by the United States. Schiff concluded with a belief that North America would be best served by embracing the recession. He also issued a caution about what might happen if China stops supporting US Treasury Bill sales.

Debate on the best response to the economic crisis rages on in the US and around the world. The broad consensus is that we are mired in a Great Recession with a presumption that a depression is a distinct possibility.

Our poll-driven politicians, be they American, British or Canadian, hold to a myopic view that is fixated on a resumption of economic growth to address the crisis. Leading that charge is the United States. The American Federal Reserve wants to get credit flowing again to American consumers who are still vastly overextended, especially in mortgage markets. The US Congress wants to stop the bleeding in the housing market -- irrespective of the persistent imbalance between supply and demand. And the White House wants consumers to start spending again -- to avoid the perceived pitfalls of the “paradox of thrift” brought about by too much saving.

In Canada the Federal & Provincial goverments, along with the Bank of Canada, are working to a similar end.

Put it together and it all smacks of a dangerous sense of déjà vu. We are promoting a false recovery by kick-starting overextended, saving-short Canadian and American consumers to borrow once again by leveraging their major asset… their home.

But the efforts of our governments are coming up short because, it appears, Canadian and American consumer aren’t co-operating.

In the US, the personal saving rate has risen from 0.8 percent to 4.2 percent in the past six months alone, and is on its way to a new post-bubble equilibrium which will probably balance out in the 7.5 percent to 10 percent zone.

This is the essence of the macro disconnect that is now shaping post-crisis policies of governments around the world: The global economy has become overly dependent on one consumer – the North American one.

Yet, like it or not, this source of growth will be severely impaired for years to come through a necessary rebalancing of the North American economy. It isn’t the path the Canadian and American governments want to follow, but it is the path consumers are barrelling headlong down.

And before long this retrenchment by the North American consumer will start to serve as a wake-up call for other nations to fill the void by stimulating their own consumers.

A globalized world is going to move from one consumer to many.

And in the process it is going to put the current symbiotic relationship between the creditor (mainly China) and the debtor (the U.S.) in jeopardy.

Peter Schiff warned that one of these days China was going to start realizing this.

And despite the best efforts of the Canadian, American and British governments, North American consumers are going to ensure China gets that message lound and clear.

Are you prepared for the ramifications of that realization?

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Email: village_whisperer@live.ca

The US Economy & BC Real Estate

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The US Labor Department released its Consumer Price Index for March and U.S. consumer prices fell again triggering the first recorded 12-month drop since 1955.

"The numbers speak to an economy that is in deep recession, but we're no longer in the shock mode of staggering numbers that speak to a serious slide lower in terms of macroeconomic activity," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

It is the manifestation of what is driving the US Federal Reserve to print Trillions of dollars in stimulus money. Deflation has gripped America.

Deflation is a broad-based decline in prices that can undercut an economy by leading consumers to hold off purchases in the hopes of even lower prices.

And when US consumers hold off on spending, it doesn't take a fortune teller to predict what it means for BC.

Unless BC suddenly finds new ways to advance its economy, it will slow to a crawl, unemployment will remain high, trade surpluses will become deficits, and reduced government revenue will make it increasingly difficult for the provincial government to balance the books.

Tourism will tank this summer, the mining industry will suck wind, and the forestry industry will be watching trees grow bigger and taller.

It also means no American and European buyers to descend on Vancouver to fuel an Olympic Real Estate bounce.

The average single family house price in Vancouver is now down 14.2% from it's peak. It could well be down 25% by the end of the year.

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Email: village_whisperer@live.ca

The Debt Star

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A more detailed post later today. In the meantime I enjoyed this...
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(Click on image to enlarge)

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Email: village_whisperer@live.ca

Riddle me this...

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Spend some time last week ruminating with one of this blog's faithful readers about the stock market soaring on word that the US Bank 'Wells Fargo' had projected a surprising $3 Billion first quarter profit.

Howard Atkins, chief financial officer for Wells Fargo, said in the release, "Business momentum in the quarter reflected strength in our traditional banking businesses, strong capital markets activities, and exceptionally strong mortgage banking results — $100 billion in mortgage originations, with a 41 percent increase in the unclosed application pipeline to $100 billion at quarter end, an indication of strong second quarter mortgage originations.”

Uh-huh.

Market investors seized on the news. And since so many pundits have identified the stabalizing of US Banks as a key condition of restoring prosperity to the North American economy; the news was significant.

But you can colour me a skeptic.

Aforementioned faithful reader had a chuckle over my pensive reaction. But it seems my doubt may not have been completely misplaced.

I came across a report today on Housing Wire that suggests that as much as nearly one-third of the bank’s first quarter earnings may be nothing more than an accounting maneuver.

Apparently the jump in earnings pertains to FAS 160, an accounting rule first announced in 2007 that became effective on January 1, 2009. The rule addresses accounting for minority interests, and mandates that the ownership interests in subsidiaries held by parties other than the parent corporation be clearly identified and presented as equity for the purpose of consolidated reports.

The effect of the new accounting rule allows certain liabilities to ‘jump over’ to the asset book as non-cash transactions via paid-in capital, thereby rolling directly into earnings and boosting reported equity.

In the case of Wells Fargo, the bank found itself with up to $824m it could use this quarter as an accounting gain to earnings.

Now... even if HousingWire’s Teri Buhl is correct... that still leaves more than $2 billion in profit. But even that remaining profit margin may not survive scrutiny.

Further investigation has lead critics to query the status of a large number of bad loans at Wachovia, the diversified, wholly owned financial services subsidiary that Wells Fargo recently acquired. What happened to them?

In it's announced earnings, Wells Fargo gave no details on delinquency trends or Wachovia’s credit losses.

Now there is rampant speculation that the timing of the merger has obscured these losses through purchase accounting adjustments.

So while this anomaly is being investigated investors are being cautioned to remember that what Wells Fargo has released is merely a quarterly statement. Quarterly statements are not audited (only annual reports undergo a full audit).

And what is the significance of all of this?

Well... under normal circumstances such accounting games within corporate PR announcements raise nary an eyebrow with the general public.

But in these tenuous times, the stock market received a huge boost on the Wells Fargo first quarter profit announcement. And the announcement has played a crucial part in bolstering the confidence of the public in the governments efforts to resusictate the economy.

These are times of strained public confidence and trust in both Wall Street and the Banking Community. I suspect that if this so called 'profit' turns out to be an accounting slight-of-hand, there may be a severe public counter-reaction.

And that counter-reaction could trigger another round of significant losses on Wall Street.

We will watch with great interest as this unfolds.

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Email: village_whisperer@live.ca

Despair

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It's Easter Monday today.

For some it's a holiday. For others, another working day.

For me... I spent the wee hours of the morning in thankful reflection. Parked across the street from a GM dealership, I wondered how those working for, and connected to, General Motors are feeling today?

To them there is only one thought... Survival.

Sunday's news from the New York Times made Easter somewhat less than happy for the extended car maker family.

The U.S. Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline. The goal is to prepare for a fast “surgical” bankruptcy according to those initmate with the details of the plan.

In the United States one potential scenario would be to create a new company that would buy the “good” assets of G.M. almost immediately after the carmaker files for bankruptcy. One potential outcome would have the “good G.M.” enter and exit bankruptcy protection in as little as two weeks.

But that is the United States. What about Canada?

Well... that's where things get 'sticky'.

There is a profound difference in Canadian law compared with U.S. law on this issue. In Canada companies can't bust unions through bankruptcy.

In the United States, insolvencies can be used to end high-cost union contracts if certain procedures are followed. In Canada, however, such contracts survive insolvency and extend to successor employers who emerge from the ashes of a defunct company.

Moreover, a union collective bargaining agreement can also apply to any company that simply buys equipment, even if it's moved to a different location and possibly even if it's used for different purposes.

So, in the United States, you can impose a "cram down" and use the threat of bankruptcy to force unions to accept a deal. Here, that's a tactic that doesn't fly and the presence of a collective bargaining agreement makes it more complex when restructuring a company.

And while judges have broad powers under insolvency law in Canada, even they can't set aside union contracts to facilitate a restructuring.

The successor-rights issue is going to be a major stumbling block in Canada and is going to affect the dynamic of negotiations in restructuring. The worst case scenario is that GM can't effectively reorganize in Canada and because of those union obligations, nobody will buy the plants or the equipment.

The end result is that plants in Canada are mothballed and the equipment shipped outside the reach of the union's CBA, such as overseas or to a lower-cost jurisdiction. (Labour laws apply only to the province they cover.)

Rick Orzy, an insolvency lawyer at Bennett Jones in Toronto, often advises lenders in insolvencies. In a recent National Post interview he said the successor rights also affect valuations and financing. He tells lenders that if they lend to a company with a union and the company defaults and they have to collect on the loan by selling the company or its assets, the buyer is then subject to the CBA and the liabilities that go with it. "The price you are going to get as a result of the law is less."

Alison Narod, an employment lawyer at Farris, Vaughan, Wills & Murphy in Vancouver, said a CBA "is always an issue because of the effect it has on costs or running the business and any restrictions there may be on running the business. Typically, parties have to address that in cutting their deal. Some unions are practical and will be more concerned about preserving jobs if they are convinced that the employer is in a tight financial spot," she added.

For the GM factories in Ontario, the parts manufacturers that support them and the dealerships all across the country these are extraordinary, uncertain times where even the best options can only be described as 'bleak'.

So on this Easter Monday my thoughts go out to all the little guys caught in the middle of this power play.

The uncertainty and angst must be gut-wrenching, at best.

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Email: village_whisperer@live.ca

To all who drop by today...

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Email: village_whisperer@live.ca

Job Losses Will Be The Story of 2009

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UPDATE: Bank Failure Friday

Bank Failure #22: Cape Fear Bank in Wilmington, N.C.
Bank Failure #23: New Frontier Bank of Greeley, Colo.

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Way back in September, Vancouverites smugly looked out at the evolving economic crisis spreading across the United States with a bit of bemusment. We 'tsk-tsked' the subprime mortgage mess. It was an American problem and we were not directly affected.

When the stock market crashed, we shrugged our shoulders. Canada was economically sound and BC was even better off than the rest of the country.

The attitude bordered on arrogance.

From a July 22, 2008 Vancouver Sun article:

Finance Minister Colin Hansen looked The Vancouver Sun's editorial board in the eye late last week and maintained that, despite all the economic gloom and doom that's going around these days, the B.C. economy is doing pretty well.

From a October 20th, 2008 CTV story:

Finance Minister Colin Hansen introduced his Liberal government's economic relief package in the legislature, saying the province will avoid recession. "None of the leading economists that I have heard from have indicated a forecast of a recession," Hansen said. "Relatively speaking, British Columbia is doing remarkably well."

Oh how the times have changed.

The StatsCan data now puts B.C. at the epicentre of a massive Canadian recession. Gone is the talk of no provincial budget deficits. And the Real Estate industry - its folding in on itself.

For hidden in the job loss numbers is the real impact of what is happening.

Last month, the B.C. economy shed 22,600 jobs. But those numbers hide the full measure of the drastic downturn in B.C.'s construction/real estate sector.

The were actually job gains last month. B.C.'s service sector (the accommodation and food services sector) saw employment grow by 7,200 jobs.

7,200 jobs gained!!!

And these job ADDITIONS disguise the profound devestation that hit the Real Estate sector.

Last month not only did 16,000 construction jobs disappear; but there were 8,500 lost positions in the financial, insurance, real estate and leasing sectors - the support system for the housing industry. And the tally in those areas alone is greater than the overall number of net lost positions in the B.C. economy.

For any newly unemployed journeyman or real estate agent who has been longing to become a waiter, that's great news.

For anyone else, it's a sign of an economy that is shedding high-paying, full-time work for low-wage, part-time employment.

With the American and European economy in full retreat, look for BC's service sector industry to take in on the chin this summer. Which means the job loss hit parade will continue throughout the spring/summer months.

And as we have said before, people who substitute low paying part time jobs for high paying full time ones... and people without jobs... well they simply can't pay mortgages or buy new condos.

The blueprint for fall and winter in BC Real Estate is being drawn now. And it doesn't look pretty.

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Email: village_whisperer@live.ca

March Job Losses to be Announced Today

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UPDATE: Jobless rate hits 7 year high.

61,000 fulltime jobs announced as lost in March,
BC saw steepest job losses - 23,000 jobs,
8% unemployment,
Over 357,000 jobs lost in last 5 months, the largest five-month plunge since the deep 1982 recession.
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Statistics Canada will release the March employment data at 7 a.m. eastern time today. And the figures will not be pretty.

Canada has been shedding jobs at a faster rate than the United States and that trend did not abate over the last month. It will be the fifth straight month of job losses and the outlook for the summer is no better.

"I expect the numbers will continue to be worse over the next several months," Finance Minister Jim Flaherty told reporters in Oshawa on Wednesday. "I expect tomorrow's numbers to be not encouraging. When we lose jobs, it takes a long time to turn that around."

The median forecast of analysts surveyed by Reuters is for the economy to shed 55,000 jobs in March and for the unemployment rate to rise to 8% from 7.7% in February.

Personally I predict a much worse result and anticipate the statistics will show that the economy shed 60,000 - 80,000 jobs in March, up to 80% higher than the 'median forecast of analysts'. Look for the Canadian dollar to take a hit as well.

Look for the situation in BC to be particularly poor. And the impact to start catching up on Real Estate by the end of summer.

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The numbers by Province are now in. BC lost 23,000 full time jobs, Alberta lost 15,000 & Ontario lost 11,000.

The numbers for British Columbia are even more devestating when you consider that BC's population is 4,419,974. Ontario's population is 12,986,857.

BC had more than twice as many full time job losses as Ontario, but has one-third the population of Ontario.

On a per capita basis, BC was devestated last month. And all signs point to the trend continuing through April.

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Email: village_whisperer@live.ca

TD Bank Report: Canadian Housing Overpriced & Overbuilt

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In an April 7th, 2009 special report the TD Bank declares that Canada has been in a real estate boom from 2002 - 2008.

TD says that this boom was "a time of unsustainable price increases."

During this boom "affordability eroded severely over the last two years demonstrating an unsustainable disconect between house prices and incomes that was due for a correction."

"The steep erosion of affordability and the persistance of increases in house prices signal that speculation fueled this inflation. In a self-fueling spiral, expectation of higher prices were in turn driving prices even higher... The excess was most exagerated in the past three years."

The report goes on to make a foreboding statement which has particular relevance for Vancouver and echos what we have already said on this blog. The report notes, "over the long term, housing cannot exceed what households are able and willing to pay to live somewhere. House prices are necessarily tied to incomes. As well house prices are anchored by rental rates."

The Vancouver housing market has been in violation of those basic fundamentals for several years now. It means Vancouver is still severely overpriced and headed for a massive crash.

The report suggests an outlook for real estate that forcasts a potential of "seven years of hardship".

Looking at each province in Canada we read that "affordability in British Columbia has generally been the worst in the country and deteriorated even further during the past two years. Some of this deterioration in affordability can be explained by the settlement of retiree or immigrant households who have substantial wealth but not necessarily high current incomes. Nonetheless, during 2007 and 2008, resale houses in B.C. were over-valued relative to long-run fundamentals by at least 7%."

The report paints a very negative future for the condo market saying, "similar to Toronto, the Vancouver condo market may face a deeper structural weakness. The resale market already having deteriorated sharply, and, given the historically high number of multiples under construction, a surge of unsold condos is likely yet-to-come."

The report predicts a looming glut of over 4,000 new condos on the market for sale.

Adding to the woes in Vancouver will be the absence of Asian buyers. "As Asian markets are walloped, offshore owners may choose to liquidate (their) assets."

The prospect for 2009 in BC? "We project that the average house price will fall by approximately 15% relative to its current level over the course of 2009."

There were moderating comments in the report. The authors (Grant Bishop, Economist & Pascal Gauthier, Economist) do not expect the Canadian market to crash as hard as the US market, at least not yet. Nothwithstanding it is an astonishing report from the Banking Industry which has, until recently, been very bullish on real estate.

With the comments of Bank of Montreal's chief economist yesterday and this report from the TD Bank... one thing is crystal clear. The Banking Industry is rapidly abandoning the R/E shill bandwagon.

And since the Banks have consistently under forecast the collapse of the economy and the collapse of the real estate industy in the past... I think it is a safe bet that thier latest assessments continue to fall short in predicting what is coming.

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Email: village_whisperer@live.ca

Bank of Montreal Chief Economist 'Bearish' on Real Estate

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Sherry Cooper is the Chief Economist for the Bank of Montreal Capital Markets. And at a time when cheerleaders from the Banking and Real Estate Industry are heralding a bottom of the market and a great time to make a real estate purchase, Cooper is singing an entirely different tune.

Last week in a roundtable discussion on Real Estate in Toronto, BMO’s Chief Economist painted a very bleak picture of the real estate industry.

She looks at the devastation that has occurred around the world in the financial markets and is predicting that real estate is about to be decimated in a similar matter. “This isn’t over. It’s going to be worse before it gets better,” says Cooper.

“I think many Canadians are still in denial and that there’s a lot of la-la-land still around. There are whole swaths of upper-income people that have lost, as they say, 50 per cent, 60 percent of their wealth, and their jobs are at risk. They’re deer in the headlights. The last thing they are going to do is make an important residence decision.”

Cooper is so bearish on the current real estate scene that when asked what advice she would give her own son right now she says, “I’d tell him to wait before making any kind of a purchase."

When it was suggested that the worst of it is behind us and that now is a great time to buy, Cooper was adamant, “the fact of the matter is the world is in the midst of a crisis the likes of which (none of us) has ever seen in our lives. It isn’t the crisis in Canada that it is in the rest of the world and it isn’t the crisis immediately in the housing market that having 19% or 26% interest rates was. But it is going to get worse”

And why are prices going to deteriorate beyond the looming prospect of 26% interest rates?

“Our unemployment rate has been decreasing at a rate that has never been seen before. Retail sales, just in January, have fallen at a rate that’s never been seen before and layoffs are mounting in Canada.”

Cooper is astonished at the decline in the Canadian economy. “It’s way worse than what we expected, way worse.”

And while the real estate shills in Toronto and Vancouver are calling the bottom of the market - with an imminent turnaround - Cooper completely disagrees.

“Many Canadians, economically, are seriously in trouble,” she said. And until house prices and mortgages come down to match household incomes, Cooper predicts a very stagnant real estate market.

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Email: village_whisperer@live.ca

More Condo Developers Filing for Bankruptcy

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Real estate sales may be up from the number of sales in February but they're still well below last year's levels which has caused a spike in the number of condominium developers seeking creditor protection and/or going into receivership.

One of the appointed receivers for these failed developers, Bowra Group, has been involved in 12 seperate developments that are either in receivership or are struggling and have sought creditor protection.

“I think it’s just a sign of the economy. The forest industry has been in trouble for some time and has its casualties, and the real estate industry has been challenged for a while now,” Bowra group president David Bowra said in an interview with the Vancouver Sun today.

Across the Lower Mainland more and more developments are running out of money and being forced to have a receiver appointed. The receiver finishes the building and gets the best price it can for the units.

Others seek creditor protection, asking the court for time to get their financial houses in order before the lender comes knocking.

As we noted last week, there are currently 2,391 unabsorbed housing units on the market in the Lower Mainland with another 25,907 under construction.

Look for more and more developers to go under as the year moves along.

Kingsford the Piglet

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It's Sunday. No gloom and doom today. Instead we bring you Kingsford the Piglet who stays home, goes wee, wee... but thankfully avoids the market.



Kingsford Goes to the Beach - video powered by Metacafe

The significance of the alternate lenders failing

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Yesterday we talked about how 12 alternate mortgage lenders were unable to secure funding with the credit collapse. Now they were unable to renew over 25,000 Canadian mortgages as they came due.

The 12 alternate lenders have gone to Ottawa to ask for financial assistance warning that - despite the fact all 25,000 Canadian homeowners have never missed a mortgage payment - the companies would have to begin initiating foreclosure proceedings against homeowners because the company was unable to find new money to lend to them.

These 25,000 Canadian homeowners were lenders who had been unable to secure loans through the traditional banks due to income or credit histories.

This story is just the start of what is coming. The fact of the matter is that Canada hasn't begun to feel the impact of housing crisis yet. This has lead many to smugly believe that Canada will not feel the same effects as the United States.

They are wrong.

The process in Canada is just getting underway. The depreciation in Canadian Real Estate didn't get started until one year ago, March 2008.

In the United States, the process has been playing out for several years. It started in 2005 and, contary to popular opinion, it didn't start with the subprime crisis. What started the problems was a MINOR collapse of about 10-15% in the value of real estate in several of the bubbly cities in Florida and California.

When mortgages came up for renewal in those cities in 2006, a calvalcade of foreclosures was triggered because those with subprime arrangements couldn't renew their mortgages in their underwater condition (the market value of their house was worth significantly less than the remaining mortgage amount).

This put even more downward pressure on real estate values. When regular homeowners with non-subprime mortgages went to renew, they couldn't. They were also too far underwater with the market value of their property.

This forced even more foreclosures and a massive domino process then devestated property values.

But it took a year before the problem even surfaced and another two years to play out after that. That same process is now starting in Canada.

Prices started to slide in March 2008. It takes about a year for risky mortgages to start to reveal themselves as they come up for renewal. Yesterday's post outlined that, not only do similar risky mortgages exist in Canada, but they are about to be placed in a foreclosure position.

It's playing out here exactly as it did in the United States.

The current price drops we have experienced from March 2008 until March 2009 have been caused by the collapse of the worldwide economy - not mortgage problems.

That collapse took away the wealthy Americans, Europeans and Asians and forced them to liquidate their Vancouver properties. This caused a drop in real estate values which, in turn, took the ever rising market out from underneath the local speculators... further exacerbating the price drops.

Until now the only mortgage-related stories we have seen are speculators unable to secure mortages for pre-sales contracts, placing them in defaut of their pre-sale contracts.

Only later this year will we really begin to see the real impact of mortgage issues on our real estate scene.

It won't become visible until later this summer/fall as the absence of these alternative mortgage suppliers leads to a further drop in real estate prices of another 5-10%.

Then the next mortgage domino will fall.

The 0/40 crowd and the 5% down group of home buyers who bought in 2004, 2005 and 2006 will surface. Most took out five year mortgages with the traditional banks. Those mortgages are coming up for renewal starting later this year.

Unless real estate values start re-inflating dramatically, these people will be in a serious underwater position of 15%-25% with their outstanding mortgage compared to the market value of their home.

TD, Royal, Scotia, BMO and CIBC will not renew their mortgages while they are in that kind of underwater state.

You simply cannot walk into a bank and receive a $600,000 mortgage on a property with a market value today of $480,000 (20% less). It doesn't matter that you have a spotless five year mortgage history of never missing a payment - it's just not going to happen.

And with the evaporation of the alternate mortgage lenders, it means Canadians won't have another avenue of securing a mortgage renewal after being denied by the regular Canadian banks.

This is exactly the way it played out in the United States between 2005 - 2009.

And now it is starting to play out here.

Canada's Subprime Mortgage Crisis (and it's Bank Failure Friday)

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UPDATE: No failures reported by the FDIC today. They must all be in Europe with Obama.

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Hat tip to Greenhorn for this story.

Convential wisdom (and a dash of Canadian arrogance) has maintained that the Canadian Real Estate market will escape the crisis we are seeing in the United States because our banks did not engage in the disasterous subprime mortgage fiascos.

Well that isn't entirely true.

Most of us are aware that Canada had 0 down/40 year mortgages offered by conventional Canadian banks for a short period of time. A great many young couples jumped into the real estate market with nothing down. Now... with the recent drop in housing prices, all those who bought are now underwater which jeopardizes their ability to renew.

However it appears these are not the only risky mortgages out there. And the problem is far more widespread than most of the public knows.

It seems mainstream Canadian banks weren't the only ones offering risky mortgages and there are a whole range of risky Canadian subprime mortgages we haven't heard about.

In a recent story in the Globe and Mail (Lenders seek Ottawa's aid as thousands risk losing their homes), the paper reports that as many as 25,000 Canadian homeowners - homeowners who consistently have met their mortgage payments and have never missed a payment - could lose their homes unless Ottawa or other financial players help supply capital to the struggling Canadian subprime lending market.

They are Canadians who have mortgages issued by a loose network of about 12 alternative mortgage lenders.

It seems that these alternative mortgage lenders have been lobbying the Prime Minister's Office and the Department of Finance in January about what they say is a looming problem: An estimated $3-billion to $5-billion worth of subprime mortgages are coming up for renewal over the next four years, and the lenders can't renew them because the necessary capital that provides the financing has dried up. And because they are higher-risk borrowers, they will not qualify for mortgages from regular banks.

“These are hard-working Canadians who could face foreclosure on their homes if they are unable to renew or find mortgage financing,” said Paul McGill, the CEO of the N-B Group, an alternative mortgage lender that has been spearheading the campaign.

Apparently these mortgages were arranged in the early 2000s, when investors easily bet money on complex securities backed by mortgages.

Many investors were comfortable investing in Canadian securities with subprime mortgages because of the higher returns these investments offered. The torrent of money flowing into securitized investments, such as asset-backed commercial paper, allowed a new generation of lenders such as Toronto-based Xceed Mortgage Corp. and U.S.-based Accredited Home Lenders Inc. to offer mortgages to Canadians with credit score blemishes.

When the global credit crisis struck in August 2007, investors fled mortgage-backed securities, forcing these alternative lenders to turn to more conventional securities such as Canada Mortgage Bonds, which the Canada Mortgage and Housing Corporation administers.

And because Canada Mortgage Bonds require borrowers to meet higher credit standards to qualify for their investment program, those higher risk homeowners who got mortgages from the alternative lenders are now on the verge of being orphaned... they can't renew these mortgages.

Some of these alternative lenders, such as Toronto's Xceed Mortgage Corp., say they have been forced to start foreclosure proceedings on customers - even thought they are current with their payments - because they cannot find capital financing to take on these mortgages.

Ivan Wahl, chief executive officer of Xceed, said the company has initiated foreclosure proceedings against 200 homeowners, mainly in Ontario and Quebec, because the company was unable to find new money to lend to them.

He said another 1,200 of his company's mortgage customers will be in a similar predicament over the next four years.

Two weeks ago, The Globe and Mail reported that foreclosures in Alberta and British Columbia have spiked, with Alberta's foreclosures on pace to double from two years previous – to 5,300 in the first 11 months of 2008-09 from 2,510 in 2006-07.

Just how many mortgages have been offered to Canadians by the likes of Toronto-based Xceed Mortgage Corp. and U.S.-based Accredited Home Lenders Inc is unknown, but it would appear that Canada is not as immune to the subprime mortgage crisis as the real estate industry would like us to believe.

As these mortgages come up for renewal and default, watch for even more downward pressure on Vancouver real estate prices.

Why Vancouver is still a bubble waiting to pop

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It's fascinating to observe the real estate scene in Vancouver these days. There is this sense of optomism that the bottom has been hit and real estate is about to turn upward.

Are these people on crack?

Perhaps. If so they are the same people who six months ago couldn't fathom that Canada was about to be hit hard by the same recession that was engulfing the rest of the world.

The average city price is now $653,000, down 15% from it's highs. But in February sales were up and listings down, while in March sales are up over February. It has the optomist's brimming with glee.

But March sales numbers will still be down by over 25% from this time last year.

Hope, I guess, springs eternal. But the fact remains... real estate in Vancouver doesnt reflect the purchasing power of the population. The average family cannot afford the average home, even with the collapse in mortgage rates. Thus prices will continue to fall until that equilibrium is restored.

Gone are the easy-credit fuel inducded days that allowed that equilibrium to fall out of balance. Easy credit feed rampant speculation, allowing flippers to thrive. The flippers main source has been devestated by a world economy in tatters. Gone are the wealthy American, European and Asian buyers who allowed the speculation to drive up values.

Gone is the promise of money flowing into Vancouver from he Asian boom, the burgeoning film industry and the 'Olympic bounce'. Gone is the manufactured mania that said "if you don't get in now, you'll be priced out of the market forever".

The industry is still trying to leverage that fear in a desperate attempt to woo unwary first time homebuyers into the market by promoting the current lower prices and low interest rates. But economic events are sweeping that gambit away.

Jobs are now being lost in Canada at an annual rate that is, on a per capita basis, greater than that being experienced in the United States. Ontario is being devestated by what is happening. Chrysler Canada is probably history. GM is buying off workers with $20,000 cheques and new cars. The steel industry is collapsing and mills are closing everywhere, including northern BC.

The full effects of the recession have not even begun to hit our corner of the world. The forestry industry is preparing for a massive amount of pain. The sale of foreclosures in the United States is now surpassing new home construction. That means no lumber sales to our main customer. Employment in the resource centre has been dwindling rapidly.

Later this summer, the tourism industry will be crushed. The service industry will be wiped out along with it. New housing starts are grinding to a halt and the layoffs in the contruction industry are already starting to pile up.

We are nearing the tipping point where the vast majority of potential buyers for Vancouver real estate will be the average Vancouverite.

It can only mean one thing for real estate prices.

This chart shows Vancouver real estate prices from 1977 to Feb/2009 (click on image to see large size graph).

If we zoom in on the period from 2001 until 2008, you can see how prices shot up dramatically. Incomes did not rise in tandem with this increase. As a result prices have started to fall... (click on image to see large size graph)


So what, exactly, is going to re-inflate the bubble?

Without the artificial conditions that inflated the market in the first place, prices will continue to fall.

And, as you can see by the graph, they still have a long way to fall.

British Columbia is about to be hit with one hell of a wallop from the worldwide recession.

It is clear. Housing prices will continue falling to at least those levels of 2002. And I would be willing to bet they will fall a lot further than that.

I predict we will see 1989 levels once the dust finally settles.

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Email: village_whisperer@live.ca

Bank of England Chief Economist Warns 'Interest Rates Set To Soar'

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In a stunning display of candor Spencer Dale, the Chief Economist for the Bank of England, has warned the British people that interest rates will rocket as the Bank of England battles to keep inflation under control.

As reported in the London Daily Express on March 28th, Spencer Dale told insurers the Bank would remain focused on inflation, regardless of the pain that it would cause millions of home owners as their mortgage payments soared.


Dale, a member of the Bank’s ­Monetary Policy Committee, which sets interest rates, said: “The committee adjusted monetary policy boldly and ­decisively on the way down in order to meet the inflation target. And let me assure you that, when the time comes, we will be prepared to respond with equal vigour on the way back up."

In a speech to the Association of British Insurers, Mr Dale stressed that the Bank of England’s priority had to be keeping inflation within the Government’s two per cent target.

Figures out this week revealed a surprise rise in the Consumer Prices Index from 3 to 3.2 per cent, with an increase in the cost of food and drink being blamed. While inflation is still expected to fall sharply as the recession takes its course, the CPI figures caught experts off guard.

There are growing fears across the UK that the Government’s decision to print more money – an action known as quantitative easing – combined with high levels of borrowing and spending are throwing things out of kilter.

But Dale insisted the economic slump was showing no sign of easing yet and warned that not all the actions taken by the authorities so far were having the desired affect. “So there may still be more to do.”

As predicted here last week, it means that England plans on continuing with the 'quantitative easing' policy of printing more money. More importantly it cleary plans to dealing with the consequences of printing massive amounts of money in a drastic and dramatic fashion when (and not 'if') inflation comes.

The article goes on to note that if the Bank of England feels it is losing control of inflation, "a sharp rise in the base rate is likely to be employed as a blunt instrument to encourage a slowdown."

Liberal Democrat Treasury spokesman Vince Cable said, “the danger of such aggressive interest rate cuts and the start of quantitative easing is high inflation further down the road. The Bank of England is right to warn that record low interest rates are not sustainable in the long term."

Indeed they are.

And while some UK financial experts, like Jonathan Davis, are quick to soften the Bank of England's warning by arguing that he does “not envisage them raising interest rates for quite a long time to come," even Davis was forced to admit that “in the long term we are going to have very high inflation and we could have 1970s-style inflation."

Which is exactly what we have been predicting on this blog for several months now. And while we may not receive such candor from our own Bank of Canada, make no mistake... the policies of Canada, America, Japan et al, to print massive amounts of money to 'stimulate' our economy are going to come with the same dramatic consequences being forcast by the Bank of England for the UK.

And those consequences are particularly ominous for the Village on the Edge of the Rainforest.

For if the Bank of England says they will remain focused on inflation - regardless of the pain that it would cause millions of home owners as their mortgage payments soared - can there be any doubt that the Bank of Canada will act any differently?

Not a chance, 22% mortgage rates, anyone?

It's coming - you can count on it. And remember, it only means a mere monthly payment of $11,9000 on your $650,000 mortgage.

Gosh... it's a great time to buy real estate, isn't it?

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Email: village_whisperer@live.ca