CMHC's problems

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newguy
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Re: CMHC's problems

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kombat wrote:I think it's a non-issue. Canada doesn't have "jingle-mail" (read; no-recourse foreclosures). The lenders will go after any shortfall. The only escape hatch is full-blown bankruptcy, so no "strategic defaults" will occur in Canada. The only defaults will be those who legitimately absolutely CANNOT pay their mortgage.
I think that's a myth. Not every state has non-recourse mortgages and it didn't seem to make a difference. It was a while ago but I remember reading defaults only really correlate with % underwater.

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Re: CMHC's problems

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Absolutely correct. The four top states for foreclosures are California (non-recourse), Florida (recourse), Nevada (recourse), and Arizona (non-recourse). What they have in common is, of course, the biggest price declines.
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Re: CMHC's problems

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Yabbut there's a difference between a "foreclosure" and "strategic default."

I'm arguing that (particularly in the non-recourse states), "strategic defaults" comprised a significant portion of all foreclosures, and that in Canada, without non-recourse mortgages (apologies for the double-negative), they will thus represent a far smaller portion of any eventual foreclosures. I believe this will significantly suppress the overall foreclosure numbers, keeping us far below the peak levels seen in the US.

If you default in Canada, the bank forecloses and sells the home. If the proceeds of the sale are insufficient to clear the mortgage, then they sue you for the difference (and win). You either pay, or declare bankruptcy. If you declare bankruptcy, then your eligible assets are sold off to pay your creditors (meaning you can't just say you're bankrupt to get out of it - you have to actually be bankrupt). Finally, if all that isn't enough to cover the outstanding balance due, a claim is filed with CMHC to cover the remaining shortfall.
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Re: CMHC's problems

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Canada’s mortgage body moves to slow booming housing market
tara perkins, grant robertson AND bill curry
From Friday's Globe and Mail
Published Thursday, Mar. 22, 2012

"Canada Mortgage and Housing Corp. has signaled it will dramatically curtail its growth in the mortgage market in the coming years in an effort to cool Canada’s sizzling housing sector....the government aims to shift more of the onus for bad mortgages away from taxpayers and back to the banks as tensions rise between Ottawa and Bay Street over mortgage rates."

http://www.theglobeandmail.com/report-o ... le2378722/
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Re: CMHC's problems

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Jump in claims pinches CMHC’s insurance business
TARA PERKINS - FINANCIAL SERVICES REPORTER
The Globe and Mail, Aug. 29 2012, 10:05 AM EDT

Canada Mortgage and Housing Corp. saw profits at its mortgage insurance business fall sharply in the second quarter largely due to a jump in losses from claims. The rise in claims losses suggests that an increasing number of borrowers whose mortgages were insured by CMHC have been unable to make their payments and have lost their homes. Mortgage insurance pays the bank back when a borrower defaults.

http://www.theglobeandmail.com/report-o ... le4507242/
Last edited by randomwalker on 30 Aug 2012 19:41, edited 2 times in total.
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Re: CMHC's problems

Post by OhGreatGuru »

pitz wrote:...

Basically CMHC is a subprime mortgage insurer with 100:1 leverage ($9B in equity, $900B of outstanding guarantees).
...
By & large CMHC is not a sub-prime mortagage insurer.

See article on CBC: http://www.cbc.ca/news/business/story/2 ... arket.html

...Indeed, it’s fair to say the systemic risk is also somewhat limited because subprime activity is largely happening outside the purview of the taxpayer-backed CMHC anyway....

Sub-prime borrowers generally don't qualify for CMHC-insured mortgages.
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Re: CMHC's problems

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OhGreatGuru wrote: Sub-prime borrowers generally don't qualify for CMHC-insured mortgages.
Really? Basically the definition of "Prime" is that the banks are willing, able, and glad to take the loans, without insurance, without any sort of other credit enhancement. If a loan does not meet that bar, then it is, by definition, less than Prime, or abbreviated to 'subprime' ('sub' being Latin for below). CMHC, therefore, by definition, is a subprime mortgage insurer, since nobody would voluntarily pay CMHC's fees if they could hawk their loan to a bank without the insurance.

What some journalist at the CBC says, quite frankly, doesn't matter.
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Re: CMHC's problems

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kombat wrote: If you default in Canada, the bank forecloses and sells the home. If the proceeds of the sale are insufficient to clear the mortgage, then they sue you for the difference (and win). You either pay, or declare bankruptcy. If you declare bankruptcy, then your eligible assets are sold off to pay your creditors (meaning you can't just say you're bankrupt to get out of it - you have to actually be bankrupt). Finally, if all that isn't enough to cover the outstanding balance due, a claim is filed with CMHC to cover the remaining shortfall.
This is correct. However, to an unemployed person who is $200-$300k underwater (ie: GTA or GVR owner after a crash), spending a year or two as a first-time bankrupt, paying a minimal amount of non-exempt income into the estate, is a rather minimal burden compared to actually spending the next 10-15 years earning enough to make up the equity deficiency.

I personally believe that banks themselves will be counselling their CMHC-insured clients who are severely underwater, simply to file for bankruptcy. Implicitly promising them that once they go through bankruptcy, the bank will be glad to work with them and their cleaned-up balance sheets. After all, its much easier for a bank to extract fees from clients who have positive net worth, than those that have negative net worth over the long run.

AFAIK, the bank itself doesn't have to chase the borrower into bankruptcy. Once the note is defaulted on, the bank sells the house, files the deficiency claim with the CMHC, and the CMHC can then proceed with legal action against the borrower for the deficiency if the CMHC believes there are assets available to satisfy the claim. For most Canadians in the situation of defaulting, any assets are likely to be trivial (ie: clothing, personal items, etc.), exempt (ie: tools of a trade, certain equity in a vehicle, etc.), secured by liens (ie: leased cars, etc.), or sheltered (ie: RRSPs, life insurance, pensions). This system guarantees a rapid liquidation of the inventory in Canada which should help assist in fairly rapid price discovery once things get rolling downwards in earnest.
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Re: CMHC's problems

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pitz wrote:
OhGreatGuru wrote: Sub-prime borrowers generally don't qualify for CMHC-insured mortgages.
Really? Basically the definition of "Prime" is that the banks are willing, able, and glad to take the loans, without insurance, without any sort of other credit enhancement. If a loan does not meet that bar, then it is, by definition, less than Prime, or abbreviated to 'subprime' ('sub' being Latin for below). CMHC, therefore, by definition, is a subprime mortgage insurer, since nobody would voluntarily pay CMHC's fees if they could hawk their loan to a bank without the insurance.

What some journalist at the CBC says, quite frankly, doesn't matter.
You have created your own definition of subprime to mean any insured mortgage. According to you, anyone who puts down less than a 20% downpayment is a subprime borrower, therefore there is a "subprime crisis". Read the definition of subprime on Wikipedia, and Google subprime mortgages in Canada. The consensus of opinion is that CMHC has only limited exposure to subprime borrowers.
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Re: CMHC's problems

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OhGreatGuru wrote: You have created your own definition of subprime to mean any insured mortgage. According to you, anyone who puts down less than a 20% downpayment is a subprime borrower, therefore there is a "subprime crisis". Read the definition of subprime on Wikipedia, and Google subprime mortgages in Canada. The consensus of opinion is that CMHC has only limited exposure to subprime borrowers.
I most certainly have not created any 'definition'. And no 'consensus' exists that you claim.

Its really pretty simple, if the bank can take your paper as a prime loan, its a prime loan. If it can't be taken as a prime loan and needs some sort of credit enhancement, then its less than prime, or, shal we say, subprime. Any claim to the contrary sounds an awful lot like someone trying to hawk turds as some sort of nutritional substance.
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Re: CMHC's problems

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From The Journal of Structured Finance, Fall 2010, Volume 16, Issue 3 (you may need to register to read the full copy of this good paper):
http://www.iijournals.com/doi/pdfplus/1 ... 0.16.3.044
John Kiff, Steven Mennill, and Graydon Paulin, with my underline, wrote:Compared to their international peers, Canadian mortgage lenders have been more conservative in terms of underwriting and product offerings. Major Canadian mortgage lenders did not offer subprime mortgages. More generally, compared to their international peers, Canadian banks have been more prudent with respect to capitalization, leverage, and liquidity management.

Canada is also home to a number of small “monoline” lenders that specialize in mortgage finance and use warehousing and securitization as main funding sources. Prior to the financial crisis, several of Canada’s monolines operated outside the scope of federal banking regulation; since the crisis, given the freezing of certain private capital market and securitization funding options, some of these have become regulated banks so as to be able to access deposit funding.

[...]

An example is the economic difficulties in the early 1990s, which included a significant housing downturn. Canadian banks therefore entered the recent period of financial stress with better risk-management practices, focused on limiting credit losses, than in previous episodes. This helped to limit their exposure to some potentially riskier sectors and products. For example, subprime mortgages, as they occurred in the U.S. market, remained a relatively limited phenomenon in Canada.
John Kiff is a senior financial sector expert in the Global Financial Stability Division at the International Monetary Fund in Washington, DC.

Steven Mennill is the executive director of policy and research at the Canada Mortgage and Housing Corporation in Ottawa, Ontario, Canada.

Graydon Paulin is director of risk assessment and financial institutions in the Financial Stability Department at the Bank of Canada in Ottawa, Ontario, Canada.
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Re: CMHC's problems

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pitz wrote:
OhGreatGuru wrote:You have created your own definition of subprime to mean any insured mortgage. According to you, anyone who puts down less than a 20% downpayment is a subprime borrower, therefore there is a "subprime crisis". Read the definition of subprime on Wikipedia, and Google subprime mortgages in Canada. The consensus of opinion is that CMHC has only limited exposure to subprime borrowers.
I most certainly have not created any 'definition'. And no 'consensus' exists that you claim.

Its really pretty simple, if the bank can take your paper as a prime loan, its a prime loan. If it can't be taken as a prime loan and needs some sort of credit enhancement, then its less than prime, or, shal we say, subprime. Any claim to the contrary sounds an awful lot like someone trying to hawk turds as some sort of nutritional substance.
Wikipedia wrote:Although there is no single, standard definition, in the United States subprime loans are usually classified as those where the borrower has a FICO score below 640. The term was popularized by the media during the subprime mortgage crisis or "credit crunch" of 2007. Those loans which do not meet Fannie Mae or Freddie Mac underwriting guidelines for prime mortgages are called "non-conforming" loans.
Quite different from pitz's definition...

Many, if not most, of CHMC insured borrowers qualify for the bank's prime rate, ergo, they have prime mortgages.
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Re: CMHC's problems

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I'm with "Pitz" on this one. Clearly the definition of what is referred to as "sub prime" has changed over time. In my life time we have seen a constant lowering of the bar with respect to who qualifies for a mortgage. Up until recently this lowering of the bar was most evident in the reduction or the required down payment and the lengthening of the amortization period. Remember too at one point in this country we were effectively at "zero down and forty years to pay." Yesteryears deadbeats, "wouldn't touch you with a barge pole" have become last weeks new home "owner" thanks to one thing and one thing only the back stopping of theses loan by CMHC aka the tax payer. Without insurance these loans would never have been made in the first place therefore they are de facto "sub prime" if not in name certainly in spirit.

I don't much care how Wikipedia defines "sub prime" and the fact that "sub prime" loans were "Those loans which do not meet Fannie Mae or Freddie Mac underwriting guidelines for prime mortgages are called "non-conforming" loans." offers no consolation, all one has to do is look at what happened to Freddie and Fannie to see that they hadn't a clue at to what the real definition of" sub prime" was.
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Re: CMHC's problems

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There is no "real" definition of anything. There are such things as objective definitions, but "sub-prime" doesn't even meet that because it's not defined on the same criteria in the US and Canada.

What's objective is the numbers and in Canada we have seen the same trends in house prices versus incomes and rents, and mortgage debt versus incomes and GDP as the US saw up to its peak in 2006.

Which means that in objective terms our lending standards can't be any better than theirs were.
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Re: CMHC's problems

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Which means that in objective terms our lending standards can't be any better than theirs were.
I could argue the distribution of debt is different. And I have no idea if that's good or bad, or how comparable the speed/magnitude of loan distress would be.
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Re: CMHC's problems

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On BNN, Sherry Cooper stated that on an apples to apples comparison (supposedly the debt to income ratios and statistics are stated differently in each country) Canada and US ratios are about equal today, and Canada never reached the much higher US debt to income ratios pre crash.

I haven't been able to find any reference to this difference on my own, however.
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Re: CMHC's problems

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Canada and US ratios are about equal today
Could be, though I think debt ratios are a symptom of the broader overvaluation problems, the foremost being high price-rent ratios, especially in certain Canadian cities.
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Re: CMHC's problems

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jesse wrote:
Canada and US ratios are about equal today
Could be, though I think debt ratios are a symptom of the broader overvaluation problems, the foremost being high price-rent ratios, especially in certain Canadian cities.
Can we talk about price-rent ratios? Could these not be resolved by increasing rents? From what I have read, rents are actually 40% lower in real terms in Vancouver than in the 1970s. Civic and Provincial governments have spent a lot of energy to subsidize and legislate rents lower. Vancouver has more subsidized rental units than anywhere else in NA by proportion of population. Maybe rents are the problem?
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Re: CMHC's problems

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squid wrote: Maybe rents are the problem?
You are saying exactly the same thing as the people who said that earnings were the problem, not stock prices, during the dot-com bubble.

Rent controls in BC apply only to sitting tenants. Given that landlords can ask for any rents they want from new tenants, these controls cannot suppress rents in aggregate to any significant extent. Also, I don't think that non-market rents are used in the statistics that are used for price/rent comparisons.

If you still have a problem with the statistics, just compare asking rents for individual properties with the prices that these individual properties would sell for. They are just as much in orbit as the statistical measures.
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Re: CMHC's problems

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Can somone explain how taxpayers, via the CMHC, are on the hook if real estate dips significantly? Isn't the insurance funded by the insurance fees homebuyers pay? I assume the answer is that the CMHC has not collected enough to fund the insurance fee? So at that point, how are Canadians taxed to make up what's needed?
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Re: CMHC's problems

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Ottawa bails out CMHC (from General Revenues) and the taxpayers (eventually) bail out Ottawa with higher taxes to pay off the increased debt (eventually).
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Re: CMHC's problems

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AltaRed wrote:Ottawa bails out CMHC (from General Revenues) and the taxpayers (eventually) bail out Ottawa with higher taxes to pay off the increased debt (eventually).
What????

Why on earth would taxpayers face higher taxes? Didn't you get the memo? The solution to a shortfall in General Revenues - or expanded spending, or increased debt even - is always a CUT in taxes. Ergo, we (taxpayers) should be praying for the complete failure of CMHC. Get with the 1990's, man!
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Re: CMHC's problems

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REAL ESTATE
Potentially flawed data used by banks and lenders bump up house prices
GRANT ROBERTSON and TARA PERKINS

The Globe and Mail, Published Wednesday, Oct. 10 2012

laws in a national databank that helps determine the value of houses across Canada have helped fuel inflation in home prices, putting mortgage lenders and borrowers at greater risk, key players in the housing sector have warned. Documents obtained by The Globe and Mail detailing confidential statements from banks, appraisers and mortgage insurers show rising worry over the use of a database operated by the Canada Mortgage and Housing Corporation (CMHC). The documents suggest the data are flawed and help push home prices up.

http://www.theglobeandmail.com/report-o ... le4603237/

Also
http://watch.bnn.ca/#clip781384
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Re: CMHC's problems

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Money101 wrote:Can somone explain how taxpayers, via the CMHC, are on the hook if real estate dips significantly? Isn't the insurance funded by the insurance fees homebuyers pay? I assume the answer is that the CMHC has not collected enough to fund the insurance fee? So at that point, how are Canadians taxed to make up what's needed?
No insurance company collects enough premiums to pay off all policies (or even a majority of them) at once. They keep (and are usually required to keep) sufficient reserves to cover reasonably probable loss scenarios. If we had a sufficiently serious real estate collapse (probably coupled with a serious employment recession), the defaults on mortgages might exceed the insurance reserve funds. If this happens, the Government of Canada steps in to back CMHC's losses. The likelihood of this happening in Canada is a lot lower than in some other countries we could name, due to conservative lending practices and regulatory requirements. But it is not impossible.
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Re: CMHC's problems

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OhGreatGuru wrote: If this happens, the Government of Canada steps in to back CMHC's losses.
But as to how Canadians are taxed on this: the answer is...drum roll.... the income tax system. Just like all other spending out of General Revenue.
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