Tuesday, September 7, 2010

We will pay you to take out a mortgage!

Just before the housing bubble collapsed in the United States, real estate mortgages had reached absurb proportions.

You could actually buy a house with nothing down and get money back from the bank when you bought... in essence you could get paid to buy a house.

One of the items making the rounds in the Canadian blogoshpere today is this article in the Globe and Mail which notes that Canadian banks are struggling to boost loans as demand ebbs in the weak economic rebound.

  • Royal Bank chief executive officer Gordon Nixon said the banks must now find ways to build their lending operations – a key driver of their profits – without being coaxed into making unattractive loans just to get more business in the door.

    “What you hope you don’t see happen is banks starting to do stupid things again,” Mr. Nixon said in an interview, referring to the past several years where credit was easy to come by, and banks around the world were all too eager to lend.

    “Right now we’re in an environment where demand for credit is very, very low... It’s not that credit isn’t available – there’s not a lot of demand.”

Well I've got news for Mr. Nixon. Canadian banks are doing stupid things as he says this.

In the comments section from yesterday's post comes this link from Rob to an offer from CIBC.

Seems CIBC will you cash back based on your mortgage amount and term, and is available if you are approved for a 3, 4, 5, 7 or 10-year closed, fixed-rate residential mortgage. For example, if you have a $500,000 mortgage and select a 10-year term, you will receive 7% cash back, or $35,000!

And since your 5% downpayment is only $25,000, you can basically buy the home with nothing down and get PAID $10,000 for making the purchase.

Good thing our conservative banks aren't making the same mistakes the Americans did. Again I ask, is it so hard to see what is coming?

Meanwhile I am watching with keen interest as a colleague attempts to sell his one bedroom condo.

He bought the condo several years ago for %54,000 and has moved his girlfriend's house. As a result, the condo has been listed for sale.

After consulting with his realtor, the property was listed for $144,000 - right in the middle of the price range for what comparable apartments were selling for.

So I asked him, "if you get a low ball offer, what would you accept?"

His reply was that he would go as low as $139,000!

Now that's a measly 3.5%, but perhaps that sums up the current mindset of sellers right now. Despite having paid only $54,000 a few years ago, he firmly believes his property is worth almost three times what he paid. And he isn't prepared to move on the price... because 'that's what it's worth'.

Of course... that was three weeks ago.

After receiving the sum total of ZERO hits on the MLS listing, his realtor recommended adjusting the asking price.

This week it was dropped to $139,000. No comment on if he's adjusting the amount at which he is willing to accept.

I'll keep you updated on how things go.


Email: village_whisperer@live.ca

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  1. Re. your Colleague: it's called GREED.

  2. I sold in the Spring and was looking to buy again, but decided against it.

    I was continually amazed by sellers who resolutely refuse to lower prices, or worse, who think that a listing which has ZERO interest will suddenly become appealing after a 3.5% price drop.

    We viewed one place listed at 650k. It wasn't getting any interest from anyone else AND it was siting vacant so we tried to feel out the listing realtor suggesting that we wouldn't go a penny higher than 618k - asked if it was worth making an offer.

    The answer was we could try, but leave some room to come up another 10k. What didn't they understand about "no higher than 618k"? We told them we weren't bugding and to let us know if they wanted us to write at 618k (and we didn't want any counter offers).

    Never heard back, and the listing languished for a few months before dropping to 630k. Another couple months and dropped to 610k.

    At 610k it would have sold instantly 6 months ago. Now, it still garners no interest.

    Talk about chasing the market down. Sounds like your colleague is destined to do the same.

    In this market if he gets no interest at 144k, he should be dropping to at least 124k if he has any hope of selling.

    The key is: "right in the middle of the price range for what comparable apartments were selling for"

    Tell him to put himself in the shoes of a buyer and the comparables. Would he buy a condo priced right in the middle, or one priced at the bottom? In this market a seller has to have the best product AND the best price.

  3. $54,000 for a condo? The condo, or the parking spot for the condo? Where were condo's available just a few years ago for $54,000?

  4. And thus begins the slow trudge..this human desire to maintain a price-point is a key reason it'll deflate over years rather than a huge drop. I saw it happen in the US, and the tricky part how is that it's impossible to know the bottom

  5. thanks for the post........
    so what do you think these banks are up to. there is no way they come up with plans unless they think they will win.

    i think they will bring buyers in, give them there money for the cashback, cancel the cashback as real estate goes down more as it says so on the fine print, they go bankrupt and loose the home. the bank used the mortgage as a deriviative to expand their balance sheet and loans, they take the house.

    to me i think banks only care about the mortgage document and not the interest because they can expand that 400k loan so many times (9 to 10 times) on their balance sheet based on fractional reserve lending. plus the chmc will be on the hook anyways :)

  6. Hello Robert.

    Banks are battling for business. They loan to reap the immense profits from the interest on mortgages.

    The main thing, as you have noted, is the CMHC. They really don't care how weak the applicant is just so long as that applicant qualifies to take out CMHC insurance (insurance which is to protect the bank, not the borrower).

    The problem here is the federal government (through CMHC) - not the banks.

  7. At the end of the day everything sells for a price and guess what.... that is what the place is worth.