Monday, July 20, 2009

Canada's Emerging Credit Quagmire

CMHC was formed as a crown corporation in Canada after World War II to address the shortage in housing. It's mandate was to make home ownership accessible to all Canadians.

CMHC primarily achieves this by delivering mortgage insurance and mortgage backed securities.

CMHC was once an ultra conservative crown corporation.

But starting in the new millennium, pressures started to build on CMHC to change the way it does business. And those changes are creating an alarming set of conditions that should alarm all Canadians.

In 2001 GE Capital was permitted to join CMHC in the Canadian mortgage insurance industry to provide competition in the marketplace.

GE Capital began insuring Canadian mortgages and issuing NHA-MBS (mortgage backed securities insured by the Government of Canada). In response to this competition, CMHC began loosened that conservative approach.

As late as 2002 total outstanding mortgage debt in Canada (approximately $467 billion) was predominantly issued to only good credit candidates and people with proper down payments. More importantly, CMHC only insured a small portion of this debt.

In 2003 CMHC decided to remove price ceiling limitations on the value of the homes that it would insure. It meant that CMHC would not insure any mortgage regardless of the cost of the home.

In 2007, after years of lobbying, the now defunct AIG group successfully lobbied the newly elected Conservative government to allow AIG to insure high risk Canadian mortgages, issue mortgage backed securities on these loans and exchange them on the open market.

At the same time, the Conservative government launched a radical 35 year amortization campaign and 0% down payment policy.

A few months later 40 year amortizations were permitted.

These radical changes supercharged the real estate market.

Buyers, who couldn’t previously get into the market, flooded in. Historically high home prices continued to gain steam. High risk borrowers surged forward and throughout 2007, the average home buyer who took out a mortgage had only 6% equity in their homes.

6% equity! And that’s not just the new buyers, that's the national average down payment for all mortgages including buyers who moved up.

In 2008, as Canadian home prices started to get slammed with the worldwide bursting of the housing bubble, Canadian home prices started to dip.

CMHC admits that it was ordered to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing.

42% of all high risk applications were approved, a 33% increase over 2007.

And that was before the dramatic lowering of interest rates to their lowest point in history.

A stunning situation is developing that has some analysts suggesting Canada is in a far more precarious position than the United States was in 2006.

Tomorrow we will take a closer look at it.


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  1. It's interesting to hear how highly leveraged people are. We've heard a lot about how we're much different (and better) than the US in terms of the subprime situation....I guess we haven't been as responsible here as we are led to believe.

  2. Read an interesting account on yesterday about AIG and what transpired there with mortgage insurance, banks and AIG's downfall.

    What do you think of the comparisons to CMHC, GE and Canada and is GE exposing our financial institutions or federal government? Or is GE themselves overly exposed?

  3. At the momemnt I do not have information on GE's exposure.