Monday, June 25, 2012

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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  1. Thanks for the article. ~$500B of CMHC money over the last 6 years. This kills off the argument that the crazy Vancouver (and GTA) market is a result of Hot Asian Money (HAM).

  2. Can you please update the inventory? It is not updated for last few days.

    1. Paul B has not update the sales totals for Friday so we don't have the inventory numbers for June 22nd yet... as for Sat/Sun, There are never any stats for weekends or statutory holidays.

      Hopefully we will be able to update with today's figures after 6 pm.

    2. Man, was I ever wrong about when we would hit 20,000. I don't suppose I will get my free Greek Salad or a party hat after all.

  3. I was thinking about this same thing the other day... how do these highly paid "experts" manage to get things so screwed up? Even a person with limited intelligence could see where the policies of the last six years would lead to.

    1. You have to appreciate this was really a Greenspan initiative. It was sold to countries all over the planet as the cure for slow or low growth. We have property bubbles everywhere today as a result and the outcome is one nasty headache for everyone involved. I do not believe that the idea was conjured as a quick fix either. It was very methodical in its approach and based on some good research into buying behavior and herd instincts. The authors of the idea knew very well that the outcome was going to be economic hardship for many countries and it is my belief that is why the US bubble was inflated hardest. The intent was to be the first in and the first out and take the advantage over everyone else. It is why you need to be invested in the US too and some of its most aggressive global companies. At its heart we are witnessing a resource play and it will cost many countries controlling interest in their commodities. That is partly why Brazil, Canada and Australia will be amongst the hardest hit in the end. Just conjecture you ask? No, I don't think so. The Americans got us in the eighties too and strip mined all our best foresty companies as just one example. Bought them for pennies on the dollar and we were all thrilled they came and saved a few jobs.......but it was really a theft.


  4. Do you have a citation for this "CMHC publicily admitted that they were ordered to approve high risk mortgages..."?
    I have never seen a source of this.

    1. It used to be cited on the old wiki page (see link in post). Murray Dobbin is the one who first brought it to my attention


      Shortly after he wrote the Tyee article he sent me the link to the CMHC report on the CMHC website that contained the reference.

      Unfortunately, while I read the article, I did not save a copy of it. Neither did Murray. The report is no longer online.

    2. Would it be possible to request the original report directly from CMHC?

    3. I have given thought to putting in an Access to Information request for all their monthly reports from 2006 -2012.

    4. Thanks for clarifying this for me. I thought the Internet Archive may help, but not sure what to search for. I spent some time before trying to trace it without success. Its good to know you actually seen it first hand. It would be much appreciated if you were able to get them to send it to you.

    5. And this is why we need to capture screen images rather than just post links. Years ago there were worries and suggestions that with the new electronic media that history could be rewritten unless we were vigilant. It was just bits and bytes after all that were under the control of others. Not like actual printed books in our homes that remained true day after day. Those worries may not have transpired here yet but to make history disappear is getting awfully close.

  5. "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."

    So much truth in 3 sentences. ;-)

    Brilliant article Whisperer.

  6. I was given one of these mortgages in 2008,40years amortization, 5 year fixed term 6.97% cash back mortgage. It has led to financial ruin. 5 years on, no equity, 70,000 dollar deficiency and foreclosure. Bank had no interest in assisting us with our mortgage, even though we had made a prepayment of 7000 dollars to try to move the principle a little. It is a disgrace that the government scrambled these high risk loans, the banks have no obligation to help and ultimately no risk. Who will pay for these deficiencies... YOU the tax payers!

    1. If you would like to email me more details, I'd love to do a post on your story.