Dobbin: Canada's Reckless Banks Inflate Housing Bubble; remember the WIKI re-write?

Meet Murray Dobbin.

Dobbin has been a columnist for the Financial Post and Winnipeg Free Press, contributes guest editorials to the Globe and Mail and other Canadian dailies and now writes a bi-weekly column for the the on-line journals the Tyee and rabble.ca from his home in Powell River, BC.

Faithful readers will recall we have talked about him several times over the years, the last being September 2011 when we exposed the re-write of the CMHC page on Wikipedia; a sanitization which, among others things, removed a notation that CMHC had been directed by the Conservative Government to change policy to approve more high risk borrowers.

Dobbin has written another excellent article about CMHC and Canada's reckless banks.  You can read it on his blog or over on The Tyee.

Titled "Canada's Reckless Banks Inflate Housing Bubble",  Dobbin once again makes excellent observations in a column well worth reading.

When all is said and done, it is writer's like Dobbin who will have captured the full story behind the destructive housing bubble which we are currently travelling through; specifically that infamous Conservative direction to CMHC to approve more high risk mortgages back in 2008 (and if there was ever a story that warranted much more investigation, that's it).

Here is Dobbin's latest editorial in full:

The whole issue of the housing bubble, its extent and whether there will be a soft landing as predicted by many wishful thinkers has resulted in many interesting headlines in recent weeks – including some high on the delusional scale. One suggested that house prices are a mere 20% overvalued (if you believe that, I have a bridge to sell you). Another that Marc Carney, having solved the housing bubble issue, was now moving on to an allegedly different issue: economic growth. Into this mix rode the cowboy of the big Canadian banks, the Bank of Montreal (BMO), with a replay of its irresponsible low interest rate of 2.99% for a five year mortgage. The last time it did this, for a couple of months in early 2012, it scooped $7 billion in mortgage business.

BMO’s reckless move was preceded last January with its self-serving report prepared by free market diva Shelley Cooper suggesting that “…alarms about Canada’s housing market by international observers, from the International Monetary Fund to The Economist magazine, are exaggerated or simplistic.” Referring to Canada’s housing as “somewhat pricey” the gamblers at BMO felt no compunction last week in risking another mortgage war. Did I say gambling? Well, yes, gambling – with taxpayers’ dollars and the future of the Canadian economy. Virtually every housing loan is insured by you and me with the Canadian Mortgage and Housing Corporation sitting on $600 billion of loans it has guaranteed.

The story suggesting house prices were overvalue by just 20% was based on a report from Fitch ratings – a company which rates mortgage backed securities. A less sanguine and more objective estimate of the overvaluation comes from a report by The Economist – which says the figure is 78% as against rents (the highest in the OECD) and 34% (second only to France) as against income. The US is undervalued by 7% and 20% respectively – which gives you an idea of how bad things can get when a bubble bursts, or even if a balloon deflates – the favourite analogy of the wishful thinkers.

That 78% over-evaluation means that every new loan the banks make – and the deliberately seductive 2.99% rate – go to people who are going to be saddled with houses that on average are overvalued by 78%. BMO is like a pusher offering cheap drugs to people who apparently can’t resist. The rate offer comes at a time when there seemed to be a smidgeon of rationality creeping into the market. Not if the banks can help it. They know the real story on over-valuation as does the Bank of Canada and Finance Minister Flaherty. That’s why Flaherty chastised BMO for its new low rate. The reckless loan practices of the banks have given Canada the distinction of having the fastest growth of home-ownership of any OECD country – tracking the over-valuation notch for notch.

But the big banks in Canada listen to no one, not even governments which are pathologically pro-free market and who have bailed all of them out with billions in taxpayers’ dollars (more on that in a moment). They almost always get their way (amalgamation being the only important exception) and have no intention of sacrificing excess profits just because it threatens tens of thousands of home owners and the Canadian economy.

Could interest rates increase by 1.5 percentage points five years from now? Who knows? But if they did 17% of Canadian households would be facing unaffordable mortgage rates, according to estimates of the Canadian Association of Accredited Mortgage Professionals. Those defaults represent a big chunk of the $600 billion Canadians are on the hook for through CMHC.

Why would the banks listen to any word of caution when the CMHC guarantees virtually every mortgage they sell and eliminates the risk that most people imagine lenders assume? The collective profits of the big banks just hit a record in the first quarter: $7.33-billion, 11% more than the same period last year, and driven largely by the mortgage bingeing of Canadian consumers.

Another recent headline suggests none of this is worth worrying about. The Globe and Mail told us: “Carney shifts from housing bubble to sluggish growth.” The story reflects on Mark Carney’s claim that he has the mortgage bubble under control and he can now turn to economic growth. But just how Carney, limited to using the crude tool of interest rates, is going to do that is unclear.

And the problem is that housing is still the only source of real growth in the economy. While most people would assume, from all the talk about the stupendous wealth of the tar sands, that we are a “resource driven” economy, the truth is that resources pale in comparison to housing and related financial services. According to the Conference Board of Canada, the resource sector (energy, forestry, mining, agriculture) accounted for a mere 7% of GDP in 2012 while housing (finance, real estate, construction) accounted for 27%. If the housing market goes south, just what sector does Mr Carney think is going to replace it as a growth driver? He has now given “certainty” that rates won’t rise til late 2014 – something that is supposed to spur business investment.

But the additional certainty was minuscule and will not have the desired effect. No one expected Carney to touch the rate and even with a 1% interest rate the economy grew by a pathetic annualized rate of .6% in the third quarter and .5 % in the last quarter of 2012. Over two thirds of the economy is domestic and Canadians are amongst the most indebted people in the world (personal debt is at 160% of annual income compared to the US at 110%) – maxed out on credit and borrowing like mad on their slowly devaluing houses (home equity loans total $206 billion, equal to 12% of Canadian GDP. In the US the figure is 4%). Exports are down and staying there so just why would business (which is already sitting some $600 billion in cash) go to the banks to borrow when there is no prospect for new demand?

The fact is, neither Flaherty nor Carney have a clue what to do about the housing market or sluggish economic growth. Flaherty’s dilemma is that he dare not deal any more decisively with the mortgage madness for fear of driving the economy into recession. Housing sales are already down across the country due to his credit tightening but building continues at a rapid pace in places like Toronto (with some 50,000 units in the pipe). So just as re-sales slow, tens of thousands of new units will come on the market in 2013 creating a new glut and pushing prices further down. Is a recession by the fall on the way?

No one can fix this. Carney will leave the mess to someone else in July. Flaherty fundamentally believes that the government shouldn’t do anything to create growth except cut taxes so there will be no industrial policy option on the table where real investment in new stuff (like renewable energy) could be promoted. There will be virtually no new public investment with the possible exception of infrastructure. And the banks will continue their rogue and reckless behaviour because they can. They will not give up the goose that continues to lay golden eggs. 

Talk about ungrateful. Have the banks forgotten that it was taxpayers’ money that saved their bacon in the great recession (the great bail-out is still unknown to most Canadians)? According to conventional wisdom, carefully crafted by the Harper government and rubber-stamped by the media, “our” banks did a great job of dealing with the economic crash and we didn’t have to put up a cent to help them. The implication is that they deserve to be left alone to make obscene profits.

But as David MacDonald, chief economist with the Canadian Centre for Policy Alternatives reported last year, the big banks actually got billions of dollars in backing from the government – $114 billion (7% of our GDP) at its peak in March 2009. According to MacDonald: “At some point during the crisis, three of Canada’s banks—CIBC, BMO, and Scotiabank—were completely under water, with government support exceeding the market value of the company. Without government supports to fall back on, Canadian banks would have been in serious trouble.” They were receiving support through financial programs of the Bank of Canada, the US Federal Reserve and, of course, CMHC. The latter provided cash by buying up $50 billion in the banks’ mortgage-backed securities over just a four month period starting in October, 2008. Over the next twenty-one months while receiving financial backing, the big five made $27 billion in profits.

Responsibility for the intractable mortgage dilemma can be laid decisively at the feet of Mr Flaherty and his own recklessness back in 2007. That’s when he opened up the CMHC’s mortgage business to US competition. We soon had the same lunacy here as they did south of the border: no down payment, 40 year, sub-prime loans. That year and a half experiment (Flaherty finally got scared smart and started to rein it in) is what spurred the irrational drive by so any Canadians to own a home. That rash action haunts Flaherty today and will ultimately ruin his legacy. It could even lose the Conservatives the next election.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fortunately for us, the Internet never forgets.



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Email: village_whisperer@live.ca
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Panic?

So much going on.

BBC Newsnight held another great financial round table discussion which brought together Hugh Hdenry, Gillian Tett and Jeffrey Sachs.

Hugh Hendry is a Scottish fund manager who has become prominent in the UK for his commentary on the financial crisis and is known as the most high-profile Scot in the controversial Hedge Fund sector.

His take on what is going on in Europe? "I would recommend you panic. The European banking system is in a crisis... Let's purge this system of its rottenness. Let's take on a recession. It's going to be tough, people are gonna lose their jobs. They are going to lose their jobs anyway. We can spread this over 20 years, or we can get rid of it over 3 years."

You can see the full segment here.

Speaking of banks, Murray Dobbin has another excellent post on his blog about the Canadian banking system which you can see in it's entirety here (hattip to the faithful reader who posted the link in the comments section).

Dobbin succinctly summarizes how Canada has subsidized it's banking system making Canada the third worst of the G7 countries (behind the US and Britain) in terms of financial stabilization costs.

I highly encourage you to read Dobbin's article.

It outlines exactly why Canada has a housing bubble and shows how we are simply a pinprick away from it all blowing up.

As Hugh Hendry says, I would recommend you panic.

Time is running out to prepare for what is coming.

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Email: village_whisperer@live.ca

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Please read disclaimer at bottom of blog.