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Charting the growth of Canada's mortgage monster: What now, Mr. Flaherty?

JULY 21, 2011

Another look at CMHC:

Canada Mortgage and Housing Corporation (CMHC) has finally released their 2010 annual report.  There is a great deal of information in it, and I am trying to wade through it, but I thought I would take a moment and chart out the growth in CMHC insurance.

For those not familiar with this government entity, please check out these posts:

CMHC- The enabler to Canada's housing addiction

Another look at CMHC: 'Canadian Moral Hazzard Corporation'

CMHC's stated mandate is to "...help Canadians access a wide choice of quality, affordable homes, while making vibrant, healthy communities and cities a reality across the country. CMHC works to enhance Canada's housing finance options, assist Canadians who cannot afford housing in the private market...".

In a nut shell, CMHC's approach to helping people access quality, affordable housing is to intervene in the mortgage market to ensure that riskier borrowers are able to get an artificially low interest rate.  They do this by guaranteeing the mortgage so that in the event that the borrower could not pay, and if the house had lost value, the banks wouldn't have to suffer any loss on the loan.  In other words, they transfer the risk from the banks to the Canadian tax payers in exchange for the banks giving interest rates that are lower than they otherwise would.

In a normal market, a bank might balk at giving someone with virtually no equity a loan for 30 years at many multiples of their income.  At the very least they would ask for a higher interest rate to compensate for additional risk.  Instead, property virgins can take the leap into home debtorship with rock bottom rates while putting very little of their own money at risk.  Heck, if they take advantage of an offer like this, they will put none of their own money at risk.  This is not how a normal market would work. 

"But wait"..you may say..."if CMHC guarantees these mortgages, and if all it does is lower monthly payments and introduce more mortgage debt into the system, won't the unintended consequences be artificially high house prices?"

Why yes.  I suppose it would.  And it's the very reason why I have stressed numerous times that CMHC's mandate is inherently self-defeating. 

 

Nagging questions...

CMHC is by far the most dominant player in the mortgage insurance industry...an interesting fact given that they are a government agency and there are private insurers willing to offer insurance in the market.  And since they are a government agency, it means that taxpayers by extension are the ones backstopping these loans.  We can debate how risky CMHC really is, but the much bigger question is why in the world do taxpayers have to face any risk if there are private entities willing to take the risk themselves?  I have yet to hear a convincing argument on this one.

And while we're at it, perhaps an astute reader can answer one of these question from a previous post, which have not yet received any sort of answer:

In 2003, the maximum mortgage amount that CMHC would guarantee was removed.  Why?  We can debate whether or not we even need an entity like CMHC, but I think we can all agree that there is a huge difference between trying to help people who are down on their luck get into decent housing that they can own, and guaranteeing mortgages so that house horny property virgins can have 3000 square of granite, stainless steel, and glossy hardwood.  Last I checked, the right to own such a dwelling was not enshrined in the Charter of Rights and Freedoms.

It should come as no surprise that mortgage debt has exploded since that time, both in nominal terms and when compared to GDP:

CMHC has maintained that mortgage insurance is extremely important to the healthy functioning of the housing market in Canada.  And since the housing market has a huge impact on the economy, the government should be involved.  Or so they say.   Yet are there not more fundamental needs than guaranteeing the banks their profits?  Food comes to mind.  If the rationale for nationalizing a service is because it is important to us, when should we expect Zehrs, Loblaws, Metro, etc. to be nationalized?

 

Charting the growth of the monster...

With all of that as a backdrop, let's see if there is actually anything to be concerned about.  Maybe I'm making a big deal about nothing.  Let's not speculate.

Below we see the total amount of mortgage debt that CMHC insures.  As of 2010, that total was roughly $520 billion.  You can see how that total has grown over time.

total cmhc insurance mortgage

 

Next we see the total securitization guarantees in force.  Note that this is a subset of the chart above.  However, we may also note that some have criticized the securitization process as being an inherent moral hazard.  It was the securitization of mortgages in the US that allowed the predatory lending and fraudulent practices to thrive.  This is not to suggest that this is happening here.  It's not.  However, we should also not gloss over the arguments against securitization, particularly that it encourages less stringent underwriting standards on the part of the banks who originate the loans, as they know there will be willing buyers in the secondary market and they can immediately recoup their capital while pocketing a fee. 

Certainly I don't see anywhere near the issues the US experienced with their securitization processes, but should we be concerned about this?

total cmhc securitization

Interestingly, the report indicated a total securitization guarantee in force of $397 billion at the end of 2010.  Yet the planned guarantee in force for 2011 is $310 billion.  I'm very curious how they plan to reduce their securitization guarantees in force by a whopping $80 billion in a year.  In fact, I'm totally stumped.  Any thoughts?

Now if we plot those same two graphs against GDP, we find the following:

cmhc insurance mortgage percent GDP

cmhc securitization percent gdp

My question is, how much is too much?  As a nation, are we comfortable with the current exposure we have to the Canadian real estate market, particularly with fundamentals as shaky as they are?  What about 50% of GDP?  100%?  How much is too much?  Where do we draw the line?

And with that, I have sent an email to Finance Minister, Jim Flaherty, asking this very question.  At what point does the government get rightfully worried about taxpayer exposure to the Canadian mortgage market?  For those interested in echoing my question and concern, Mr. Flaherty's email can be found below.

flaherty.j@parl.gc.ca

Cheers,

Ben

Posted in:

Ben Rabidoux
By Ben Rabidoux

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55 Comments

  • Joe Q. said:
    • 2 years, 9 months

    In 2003, the maximum mortgage amount that CMHC would guarantee was removed.

    What was that maximum mortgage amount?

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  • Ben Rabidoux said:
    • 2 years, 9 months

    It was a regional cap, as far as I understand. I believe the maximum mortgage was $380,000, meaning the max house one could buy was $400,000 (with 5% down payment).

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  • Fiduciary said:
    • 2 years, 9 months

    From the post: "In 2003, the maximum mortgage amount that CMHC would guarantee was removed. Why?"

    I posit that the CMHC simply wanted more revenue, so they removed restrictions on what they would insure. I wouldn't be surprised if their analysis showed that the rate at which they actually had to pay out the insurance was so low that they simply wanted to stock their coffers. Could this be a case of Occam's Razor?

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  • Dave Rhydderch said:
    • 2 years, 9 months

    Hi Ben,

    I've been reading your posts for a while. As both Realtor and an investment property owner (Calgary), I don't necessarily agree with your thoughts, but I respect and appreciate your approach.

    I do agree price increases in Calgary are unlikely, and Vancouver and Toronto are fundamentally out of whack and prices their must decrease. However, from what I can read you do believe Calgary prices will also go down.

    My question is what will cause them to go down? At some point, someone must be ok with the price they sell their home for. With strong employment in Calgary, it is unlikely someone has to sell because they can't find a job.

    Now interest rate increases could necessitate a need to sell if the person can't afford their property. However, assuming the equity isn't there to cover costs and pay out the mortgage, foreclosure is the only option. Foreclosure is a extreme measure for a lot of people, and from my experience, most people will move heaven and earth before losing their home this way (even if it economically makes sense to do so).

    In 2007, prices went down as people bought before selling, and then were ok selling for less as they still had big equity gains (assuming they had bought at least 2 years earlier). However, now most people don't have the equity to do this, and must sell at a certain price or just not sell. It's why the market is slow (total inventory/sales) but prices are stable.

    Back to my original question, what will cause the prices in Calgary to go down?

    Thanks for this blog. I will continue to read it going forward as I do learn something everytime, and also it helps spur discussion.

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  • Ben Rabidoux said:
    • 2 years, 9 months

    Hi Dave

    Thanks for the comment. Some of my resident trolls could learn how to have a respectful conversation with someone they disagree with by reading your post.

    Let me say that Calgary MAY experience a soft landing IF commodity prices stay very firm, construction paces demographic demand, and demand for/availability of credit remains robust.

    It's this last point that concerns me. As I've posted before, Calgary real estate is very close to its all-time highs when priced against personal disposable incomes.

    http://www.theeconomicanalyst.com/content/house-price-and-income-ratios-...

    It therefore stands to reason that the demand for credit and availability of credit must remain quite strong to support house prices at these multiples. Any number of factors can throw a wrench into this scenario:
    Variable OR fixed rates could rise
    Consumers could max out and face a forced reduction in credit demand
    Consumers could willingly tap out
    New legislation could reduce credit availability
    Etc.

    I discussed this at length in a recent post:
    http://www.theeconomicanalyst.com/content/revisiting-most-important-grap...

    I think the debt demand/availability dynamic is the most significant macro factor that makes a nation-wide housing correction a significant threat. It is also the most under-appreciated as people overwhelmingly focus on regional dynamics like supply/demand balance, regional GDP and income growth, etc.

    The reality is that house prices in the vast majority of large centres in Canada simply cannot be sustained if there is a deceleration in debt demand.

    Hope that helps.

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  • Chad said:
    • 2 years, 9 months

    Hi Ben

    One thing to keep in mind in regards to commodities that has really changed since the boom in 2004-2007 is the increase in supply of natural gas due to fracking and the corresponding decrease in the price. This new supply may have really changed the long term economic outlook for both Calgary and Alberta. Royalties to Alberta from natural gas and its byproducts are larger than royalties from crude oil and bitumen.

    Oil prices, debt and government policy (CMHC, interest rates)are holding up prices in Calgary currently. If or when any of these change to be less favorable to propping up prices is when you will see housing prices fall. It is telling that with emergency low interest rates and historically high debt levels that prices in Calgary are only moving sideways.

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  • Sams Mango said:
    • 2 years, 9 months

    Ben, why did you ignore the TREB numbers published the other day?

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  • Ben Rabidoux said:
    • 2 years, 9 months

    Sam, I have to ignore a ton of data every day. I'm one guy. With a blog. And a job. I also 'ignored' the Bank of Canada Monetary Policy Report, which is far more important than a mid-month TREB release.

    I get it: Sales were quite strong given a weak July in 2010, buoyed primarily by the condo sector, which is no shock given what I've posted recently on investor participation.

    Not news-worthy. Sorry man.

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  • Sams Mango said:
    • 2 years, 9 months

    CHEEKY

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  • Joe Q. said:
    • 2 years, 9 months

    Sams, TREB mid-month data does not include info about listings and active inventory, and as Ben correctly mentions, July 2010 was a weak sales month to begin with.

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  • Ron B said:
    • 2 years, 9 months

    To Dave R - I have been doing a lot of reading over the past couple of years about how prices of all market items act and react over time, and I have found there is a huge amount of history that supports the concept that when prices are over-priced, or under priced they always, eventually return to their mean value. However the people who are aware of this and have been predicting price declines for Canadian real estate have had their reputations and patience tested. When you follow Ben's very articulate and well researched information, it is impossible to argue the fact that Canadian Real Estate, including the real estate in Calgary is far over-priced.

    So what will cause it to change course?? Who knows. For my money I simply accept that there is a risk to it falling in value and I am positioning myself so that I don't get hurt and can retire and have a comfortable life. It makes absolutely no sense to try to swim upstream against the mountain of data that says we are very over priced.

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  • Brad Mitchell said:
    • 2 years, 9 months

    I agree with Dave. Other than high debt levels in Calgary, I see no other reason why house prices must come down here. Affordability has been well documented to be better in Calgary than most Canadian cities. Employment is strong. Commodities should continue to be strong (I don't see how commodity prices can materially fall considering the increase in money supply, particualy U.S. money supply)...
    Ben makes valid points, as he always does, but he's heaviliy on the demand side of the equation (e.g. availability of credit could weaken demand)... whereas I am of the opinion that even if that proves to be true, there has to be some sort of catalyst on the supply side. e.g. they lose their jobs
    If that catlayst doesn't exist, they pull their listing, prices keep drifitng sidways, and in the meantime the ratios continue to improve, and people have time to get their debt under control...

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  • Ben Rabidoux said:
    • 2 years, 9 months

    "Commodities should continue to be strong (I don't see how commodity prices can materially fall considering the increase in money supply, particualy U.S. money supply)..."

    If all credit market debt was marked to market, I believe the broad monetary aggregates would be falling hard. The game to watch is in China. If it slows, it doesn't matter too much what the US is doing.

    You can see that if demand for new debt or availability of credit is constricted by, say, 10% across the board, you can see that it doesn't matter one bit what happens on the supply side. There is a finite upper boundary that people can pay.

    I don't think the probability of Calgary experiencing a soft landing is zero. But I think it would require the 'stars' aligning and staying aligned for the better part of a decade to pull it off. I think the odds of a more rapid realignment with fundamentals is more likely, though not assured.

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  • Appraiser said:
    • 2 years, 9 months

    You sound an awful lot like Garth Turner when you use expressions like "house-horny property virgins" and "stainless steel and granite" references et.al. Sad.

    I realize that you are both basically real estate bears with firmly held theses that are supremely unshakeable, despite much evidence to the contrary, however, you could at least try to sound different.

    Your latest rant about the CMHC is in a similar vein to GT's diatribes on the subject. Yet you and he consistently fail to mention that it is the borrowers who pay the insurance premiums, NOT the taxpayers. The insinuation from the likes of writers like you and GT is that there will be a catastrophic property crash that will result in all of the reserves of CHMC to be overwhelmed and the tax-payer will be left on the hook. Nonsense!

    Fanciful, fear-mongering hyperbole and nothing more. Where are the mortgage defaults? Where are the CMHC losses? Oh yeah, that's right - somewhere in the future.

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  • Ben Rabidoux said:
    • 2 years, 9 months

    "with firmly held theses that are supremely unshakeable, despite much evidence to the contrary"

    ...like? Please, have a go at debunking some of the posts I've made under the primer articles. Look at house prices vs. incomes, rents, inflation, GDP. I look forward to your 'evidence' that shows that house prices are not significantly overvalued in most parts of the country.

    "you and he consistently fail to mention that it is the borrowers who pay the insurance premiums, NOT the taxpayers."

    As an expert on CMHC insurance, I'm sure you can tell us what the borrower pays as a premium and then what is left over after all administration fees are factored in. Say, who's on the hook if that narrow margin disappears? Sorry bud. This comment reveals your ignorance of how CMHC operates. We can debate how likely it is that CMHC will burn through its margins, but who is on the hook once those margins are gone is indesputable.

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  • ATP said:
    • 2 years, 9 months

    "Fanciful, fear-mongering hyperbole and nothing more."

    - They're not making more land ...
    - Buy now or you'll be priced out of the market ...
    - Real estate value only goes up ...

    HA. HA.

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  • Jim said:
    • 2 years, 9 months

    Appraiser,

    I'm not getting a sense that you know much about how insurance operates. Pure insurance schemes rely on a number of assumptions in order to work properly. A pool of similarly situated insureds who face similar but independent risks of loss.

    Insurance schemes fail when the independence assumption is violated. Examples include catastrophic weather damage (hurricanes that flood out entire communities). In many cases, insurers who have been hit with such an event will withdraw offerings from the market. The mechanism works by pooling contributions in order to indemnify those participants who have suffered losses. Even if the contributions are invested wisely, if every participant suffers losses, the pool might be wiped out.

    Would this happen in a housing downturn? If a significant portion of borrowers began to default, what would CMHC do?

    I don't have the stats on this, but someone in the know can come up with a quick calculation or two. It would be interesting to see. My guess is that a trip into negative equity territory could result in enough losses to wipe out the contributions from borrowers, leaving the state to make up the rest.

    (As an off topic rant, I fail to see why the state should be backing mortgages in the first place. Why not car dealerships, office supply stores, online dating sites, etc?)

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  • Ben Rabidoux said:
    • 2 years, 9 months

    Hi Jim

    Thanks for your comments throughout this thread. Some great insight there!

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  • GenXer said:
    • 2 years, 9 months

    Ben - great site. Please keep up the great work!

    Question - do the CMHC numbers include the $75M in mortgages bought directly by the Government in 2008? If not, where are those mortgages today?

    Appraiser - can't say I agree with you. CMHC has very small reserves given the outstanding loan portfolio. If housing were to take a turn south, the taxpayer would definitely be on the hook for major losses. Have a look at the annual report. Even most of CMHC's investments are being held in mortgage-backed securities...

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  • Appraiser said:
    • 2 years, 9 months

    Since you asked:

    •Only 10% of CMHC insured properties have a value over $400,000
    •The average CMHC-insured homeowner has a $151,630 mortgage balance
    •87% of CMHC insured mortgages have a loan-to-value under 90%
    •Average equity of a CMHC-insured borrower: 46%
    •50% of CMHC-insured high-ratio borrowers accelerate their mortgage payments
    •Average credit score of CMHC-insured borrowers in 2009: 718 (the range is 300-900)
    •Only 5% of CMHC-insured borrowers have no score or a score less than 600
    •69% have scores over 700
    •25% have scores from 600 to 699

    Source: CMHC Corporate Plan Summary 2011.

    Your fear-mongering is clearly misplaced. The "debate' about the likelyhood of CMHC burning through its margins is clearly exaggerated.

    Pretending to be an expert in real estate by presenting multiple charts and graphs may dazzle a few, but without context it is merlely bloviating. After all, what does it matter regarding the percentages of GDP that various CMHC statistics represent? How are those metrics valid? What does it actually mean?

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  • Ben Rabidoux said:
    • 2 years, 9 months

    You didn't answer my question. Copying and pasting some non-relevant data doesn't hide the fact that you don't have a clue what you're talking about.

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  • The Masked Haranger said:
    • 2 years, 9 months

    Very interesting debate. I would like to clarify a point about CMHC. Saying CMHC guarantees the mortgage is a bit of a misnomer. If a borrower defaults, CMHC does not simply cut the lender a cheque. The lender must sell the property and CMHC covers the shortfall (if any) that is left over when all costs are paid. They are also specific as to what costs they will pay. Having had first hand experience I can say CMHC is particular when it comes to paying a claim. CMHC reserves vs the outstanding portflio should be considered with this fact in mind. Afraid I have no idea if the reserves are adequate or not!

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  • Joe Q. said:
    • 2 years, 9 months

    Appraiser, the total value of mortgages insured by CMHC has doubled in the last 4.5 years. Do you believe this is normal or healthy for Canada's economy?

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  • Jim said:
    • 2 years, 9 months

    Interesting. I would ask how many of those 'safe' bets (mortgages with a lot of equity and borrowers with good credit) were made recently.

    It seems to me that we have to look at the derivative here. The trend lines.

    Also, my previous comments about independence are also relevant here. If the economy as a whole suffers a downturn, and consumers are already strapped with debt, there is suddenly a type of coordination that makes it more likely for every borrower to miss a payment. Enough of those, and you start to see systematic defaults.

    The thing to do is to look at the US (UK, etc), and see what the stats were for US loans prior to the collapse.

    Also, I do recall widespread accounts of mortgage fraud, so perhaps the US loans also looked good on paper. You can't tell me that lenders and brokers in Canada are more honest than their US counterparts.

    My gut feeling is that a lot of recent purchases insured by CMHC aren't on solid footing. Perhaps that is only 10% of their mortgages, but is it enough to cause problems?

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  • Sid said:
    • 2 years, 9 months

    " Yet are there not more fundamental needs than guaranteeing the banks their profits? Food comes to mind. If the rationale for nationalizing a service is because it is important to us, when should we expect Zehrs, Loblaws, Metro, etc. to be nationalized?"

    Do you have any idea how many billions of dollars this government gives out in agriculture subsidies every year? According to this article, $8 billion a year.

    http://www.theglobeandmail.com/news/national/time-to-lead/global-food/th...

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  • The Masked Haranger said:
    • 2 years, 9 months

    Subsidies are the result of govrnment cheap food policies that have existed for years due to the whining of consumers who cannot afford to pay a fair price for food after paying ridiculous prices for homes and the resulting mortgages that come with it.

    Subsidies do not exist in supply managed commodities such as milk, eggs, chicken and turkey but Canadians pay substantially more then their US counterparts. How much are you willing to pay for hamburger?

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  • Jim said:
    • 2 years, 9 months

    True. And if you dig into where that money goes, you'll be shocked.

    This is just proof of the fact that we don't live in a capitalistic society with free markets. Mortgages, automobile manufacturing, food production... all manipulated and distorted to the needs of special interests.

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  • Gary said:
    • 2 years, 9 months

    Careful Ben, you have attracted Canadas biggest troll.

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  • Art said:
    • 2 years, 9 months

    Hi Ben,
    Unfortunately Canadians are not very smart people. Working in one of the banks I ask the same question you asked every single day. And the answer to your question (How much is too much? ) is until people, not the Gov, refuse to take mtgs. Everybody, meaning everybody, except the buyers, are happy when prices go up, so why would they stop this bubble? Are you out of your mind? Unfortunately I do not think the bubble is over, it will last a little bit longer but everything one day is over. It will be over too.

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  • Jim said:
    • 2 years, 9 months

    it is a bit funny to see people cheering on price inflation.

    no one would cheer if you paid more this year for the same car, or the same computer. We'd complain about rising prices and inflation. When it comes to houses, it's a wonderful development to have so much capital tied up in a non-productive sector.

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  • 604x said:
    • 2 years, 9 months

    Some interesting data on CMHC rule changes (generally right but not guaranteed):

    * 1954 25/25
    * 1999 5/25
    * 2003 remove the house price ceiling.
    * 2005 5/30
    * 2006 5/35
    * 2007 0/40
    * 2008 5/35
    * 2011 5/30

    sources:
    http://financialinsights.wordpress.com/2010/12/15/the-great-mortgage-amo...

    http://www.cmhc-schl.gc.ca/en/corp/about/hi/index.cfm

    Plus this from City of Calgary internal analysis:
    “Our analysis of CMHC rule changes on Calgary prices indicates that for every year that insured mortgage terms were extended beyond 25 years Calgary house prices rose by between $6,000 and $10,000. Between 40% and 70% of residential price changes in Calgary between 2004 and 2009 can be attributed to CMHC amortization rule changes.”

    http://www.calgary.ca/docgallery/bu/finance/economics/policy_analysis/br...

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  • 604x said:
    • 2 years, 9 months

    Shockingly CMHC have reduced Provisions for Claims/Losses in 2010 despite continuing wobbles in markets. Provisions for Claims dropped from $1.276-billion to $1.096-billion from 2009 to 2010 (per page 99 in the annual report). This on total loan exposure of $514-billion.

    http://www.cmhc.ca/en/corp/about/anrecopl/upload/2010AR_EN.pdf

    An even scarier comment in the annual report: "...an increase of 100 basis points in mortgage rates would increase the Provision for Claims by about $20 million over a one year horizon." (page 99).

    Didn't we just read that thousands of Canadians would be placed into severe headship with a 1% increase in rates? Yet CMHC backroom analysts reckon a 1% increase in mortgage rates would trigger only $20 million in loan losses. And they got auditors to sign off on this! I wonder how much the auditors made for that signature. The last time such ridiculous financial assumptions were approved was with Lehman Brothers....oh wait a minute, same auditor. Thanks Ernst & Young, I feel very safe about the security of tax payer dollars now.

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  • John in Ottawa said:
    • 2 years, 9 months

    What I consistently see in the comments on this blog is a naive reading of these financial statements, looking only at the face value of liabilities. What rarely gets mentioned is hedging. Look for terms like derivatives, re-insurance, hedge, credit default swaps, etc.

    CMHC employees are not the complete idiots posters to this blog would have us believe. Any discussion of loan loss provisions has to take hedging into account as loan loss provisions can go down in the face of increasing defaults due simply to an increase in hedging. Hedging is a cost of doing business.

    Bottom line. It is easy to look at raw numbers like debt to gdp and go "golly, gee, that looks scary," but it is a waste of time if you don't have a reasonable understanding of all of the factors in play. That takes one heck of a lot of financial training.

    When we get an executive vice president of investment banking for RBC of CIBC commenting on this blog that CMHC isn't risk managing its investment portfolio properly, then I'll get concerned. Until then, any one raw number taken out of its complete context is of little interest to me.

    This is all just an exercise in "truthiness."

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  • Ben Rabidoux said:
    • 2 years, 9 months

    Hi John

    Great to hear from you again. You can find info on the costs of hedging, but nowhere have I found any data that details the extent of their hedging strategy. As you have indicated, one has to be an expert in hedging strategies to even make sense of such information, and I don't claim to be that.

    But I do find it hard to believe that with total mortgage insurance in force having doubled in 6 years, hedging strategies could have entirely covered the increased liabilities. Not impossible, but I am skeptical.

    CMHC has been criticized for being too opaque in that it's difficult to get these answers. Ultimately, we're talking about an increase of $300 billion in 6 years. Even if they hedged a very modest 2% loan loss, that would still be $6 billion. Who would the counterparty be to such a hedging strategy?

    My real issue with CMHC is perhaps more philosophical: Does the government need to play a role in the mortgage insurance arena? And if so, should there not be a mortgage ceiling in place, as was the case before 2003?

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  • 604x said:
    • 2 years, 9 months

    @John in Ottawa:

    Some quick comments:

    1. An EVP of a big bank or institution will never go on record criticizing CMHC for a number of reasons (job security, future business loss being high on the list). It is easier for them to use anonymous blog entries on someone else's blog who is getting media coverage....

    2. CMHC = Canadian Moral Hazard Corporation. It is the ultimate hedge provider. It carries the risk. That is the reason CMHC exists, period. Now if you look deep into the financial statements you'll see flowery discussions of hedging and risk management however this only applies to interest rate changes and timing issues. It does not address the 800 lb gorilla in the room: a significant decline in real estate values and resulting mortgage defaults. CMHC will be left holding the bag in such a scenario (and all the banks have hedged by pushing the risk of this event onto CMHC). CMHC will make AIG look modest in this scenario.

    Disagree @John? I'm interested to know what principal loss hedges you know CMHC carries. How much, who takes the risk and what did CMHC pay for this risk hedge?

    3. CMHC is hanging its risk management hat on the concept of carrying retained earnings equal to twice the level required by OSFI. So CMHC carries $10-billion in retained earnings which translates into $6.5-billion in actual cash reserves. Better than a lousy $1-billion set aside for Loss Reserves but tiny when one considers the risk CMHC is carrying.

    4. $400 billion. That is an approximation of the amount of new mortgage loans CMHC has guaranteed since the bubble went wild in 2006. Most of these loans are very high ratio - probably over 90% loan-to-value - many 0% equity. By definition, anyone using CMHC has an LTV of at least 80% - the bottom of the risk barrel. These are the risky loans. A 20% average drop in home values would eat directly into this loan exposure. We could be looking at a $40 billion write-down at CMHC (after home owner equity evaporates). If housing reverts to its long-term mean price then we're facing hundreds of billions in write-downs. Given the Government of Canada has more to lose than anyone as a result of a housing melt-down they will try pretty hard to ensure it doesn't happen.

    CMHC will not provide adequate granularity on its loan portfolio to allow more detailed analysis.

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  • 604x said:
    • 2 years, 9 months

    @appraiser. I hope your bullish sentiment on real estate is not reflected too much in your appraisal work. You could be lining yourself up for a serious legal reaming when the crap hits fan. You should take a page from your US appraiser colleagues and cool it. US appraisers are incredibly cautious now and low-ball everything they write.

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  • Appraiser said:
    • 2 years, 9 months

    Let me spell it out for you Ben. It is the quality of a loan portfolio that matters in terms of risk, not the quantity. Residential mortgage defaults are less that 0.5% in Canada and there is no evidence to suggest that the CMHC default rate varies significantly from that figure.

    As for which of us knows what they are talking about, let's compare actual real-world experience and hands-on knowledge, shalll we?

    I have 25 years experience in the real estate business. I started out as a real estate salesman in 1986, I became the number one sales rep for my company by 1988. By 1992 I had purchased my first Re/Max franchise and by 1994 I bought my second. I had a ten-year exit plan that I realized by selling my successful company in 2002.

    Since then I have worked as an independent real estate appraiser and have personally completed in excess of 4,000 appraisal reports. In addition, I am a real estate investor and have bought and sold multiple properties over the years. I currently own five houses, including the one my family and I live in.

    I understand you rent, and recently wrote about how having a two-year lease provides stability - sheesh!

    That's right Ben, hands-on, boots-on-the ground, real-world experience. Your turn.

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  • Ben Rabidoux said:
    • 2 years, 9 months

    You continue to skirt the questions. I have posed several questions in this article, plus I have asked you to provide the 'significant evidence' that shows that we do not have an overvaluation issue in Canada. We're still waiting.

    Your argument that we should listen to you because you have more experience is hardly convincing. Instead of puffing up your chest and hiding behind your inflated sense of self, why don't you put your effort into giving us all some answers. We're all ears.

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  • Jim said:
    • 2 years, 9 months

    Hey Appraiser,

    Good for you. Sounds like your career worked out well. If I were after tips on how to be a successful realtor, I'd be knocking on your door.

    However, there's a difference between knowing your job, and knowing macro-economic trends. A fair number of realtors in the US likewise had great resumes and track records of success, but were unable to detect a very obvious asset bubble in properties.

    Similarly, corporate lawyers in Canada have done a ton of work on mergers and acquisitions recently. Very few of them have noticed that Canadian companies spend far more effort on merging and acquiring other companies, as opposed to developing new products or investing in process improvement initiatives. Most professionals have a single perspective on macro-economic trends, for the simple reason that they are not paid to think about macro-economics; they are paid to get a particular job done.

    Hence, experience in selling houses is probably not highly relevant to making predictions about market conditions, any more than experience in writing corporate contracts is not highly relevant to making predictions about macro-economic trends in the business world. It's not that either perspective is without value. Rather, they are just one perspective.

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  • Appraiser said:
    • 2 years, 9 months

    @604x:

    I assume you are referecning a report that came out recently indicating that a number of real estate transactions have fallen apart in the U.S. due to various factors regarding financing and appraisals. Nice thorough investigative work 604x (NOT!)

    Your level of knowledge regarding the appraisal business is barely worth acknowleding. Deliberately low-balling appraisal reports is no different than deliberately inflating them and constitutes fraud.

    Such practices will land an appraiser in hot water with not only his professional association, but the law as well.

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  • Joe Q. said:
    • 2 years, 9 months

    @Appraiser:

    Can you address Ben's questions head-on instead of resorting to appeals to authority?

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  • Gaut said:
    • 2 years, 9 months

    It's a luck that there will be less "Appraiser" in the future. People start to realize they don't need to give thousands of dollars to sell their home !

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  • Okok said:
    • 2 years, 9 months

    I may be diving into something here that will get me in some hot water......this morning my husband and I were discussing a fellow neighbor who is a realtor ..... And not a very good one....but he has made a lot of money over the past boom. However, of recent, he has been complaining of a slow market, not getting deals...bla, bla, bla.

    It is my opinion that the past decade has allowed many to succeed with very little talent. The boom has carried them. Not just in real-estate , but in many different fields ( including appraisals). In tighter times the weak fall and the strong survive.....I think that is what is going to happen.

    Listing ones resume does not impress me. Talking in relevant terms with back up impresses me. I don't care if you are a gatbage man or a wal street pro.....talk smart and I listen.

    Commenting on Ben renting.....well, that is just self promoting if you are in the business of selling......yet another person who is threatened by an alternative life choice...why go there??????

    Sorry, but can we not keep to the topic and avoid low blows?

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  • backwardsevolution said:
    • 2 years, 9 months

    Okok: "It is my opinion that the past decade has allowed many to succeed with very little talent. The boom has carried them."

    Zero talent. All you had to be able to do was fog a mirror, just like most of their clients. They are salesmen who appeal to peoples' greed. They use fear as in "they're not making any more land" or "you'd better get in before prices go up any more".

    A realtor who's made no-brain money wants to see this game end? I don't think so. He will do and say everything he can (as I have yet to meet one who is ethical) to keep the ball in the air.

    The whole FIRE industry must be snapped in half and then thrown in the garbage heap of history.

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  • Jim said:
    • 2 years, 9 months

    Well, what can you expect of a profession with such dismal entry requirements. I have a dim opinion of lawyers (used to be one), but realtors make the average lawyer look like a neuroscientist or quantum physicist. There are some smart ones, but it is not a profession that selects for intelligence or honesty. Charisma and salesmanship, yes.

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  • Appraiser said:
    • 2 years, 9 months

    You are asking me to provide "significant evidence" that real estate is not overvalued. It is not my position to comment on whether the market is over-valued, it is your postulation not mine. In essence you are asking me to prove that you are not correct.

    The question is irrelevant, especially when posed in such a manner. The market is determined by buyers and sellers, not your opinion or mine. Prices are a direct function of affordability and monthly carrying costs. Until that changes, current prices represent market value, as determined by actual market participants.

    If / when interst rates rise, then affordability will be affected and prices will likely change to a new level. That new level will then be defined as market value. Whether the new market value is still over-priced is once again a matter of opinion and not fact.

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  • Ben Rabidoux said:
    • 2 years, 9 months

    *Sigh*

    If you're not going to step up, don't bother posting here. You show up here, advance a strong position backed up by nothing, attack other posters, and claim you are more worthy of listening to because you are involved in the industry....

    You're wasting our time. YOU'RE the one who suggested that there is 'significant evidence' that my position is false. Let's see it. Post something to support the position that YOU advanced or don't bother posting any more.

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  • Appraiser said:
    • 2 years, 9 months

    Isn't the evidence obvious Ben? I thought I made it quite clear in my last post.

    It's called sale prices. They cannot be refuted. They represent the market, not what you think it should be.

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  • Ben Rabidoux said:
    • 2 years, 9 months

    That says it all, doesn't it. Your logic is iron clad. Thanks for stopping by.

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  • Fiduciary said:
    • 2 years, 9 months

    That's right ladies and gentlemen, in three sentences Appraiser just proved that since sales prices set the value, fundamentals mean nothing and bubbles are impossible. Quick, call everyone that lost money on Nortel and tell them that sales prices cannot be refuted!

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  • backwardsevolution said:
    • 2 years, 9 months

    Ben, thanks for providing Jim Flaherty's e-mail address:

    flaherty.j@parl.gc.ca

    Before I send him an e-mail, I will do some more research. What you have provided over the past several months has been great information re CMHC. Thank you for your very informative postings.

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  • Dave Rhydderch said:
    • 2 years, 9 months

    Good discussion. I think I understand what Appraiser is trying to say. There is a certain social part of home prices that needs to be considered yet is essentially impossible to quantify. You can only really understand these aspects when you're dealing with people and real estate daily. However, again I can't quantify this so I'm not going to debate the numbers/graphs, which are very convincing.

    I was wondering Ben if you had ever discussed what you believe should be minmum standards for buying (specifically % down, max amort)?

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  • Ben Rabidoux said:
    • 2 years, 9 months

    A good rule of thumb is to avoid CMHC insurance (put 20% down), amortize over no more than 25 years, and try to avoid a mortgage larger than 3 times your gross family income.

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  • Chris Horlacher said:
    • 2 years, 8 months

    Hi Ben! Great analysis. You may remember my CMHC article that was featured on Mises.ca. Since the 2010 financials came out I dove in to their guts as well and found a number of concerning items.

    Here's my 2 cents:
    http://www.mycfoweb.ca/2011/08/a-second-look-at-the-cmhc/

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  • ixion said:
    • 1 year, 7 months

    Ben

    Your analysis makes no mention that I can see of the use of 'portfolio insurance' employed by banks and other originators which constitutes a material portion of CMHC's insurance portfolio, and a very large component of the post-2006 growth that has everyone alarmed.

    Anybody who knows anything about portfolio insurance knows that this is a very low risk type of asset as these are all low ratio as at origination and we need not pretend that every such mortgage was originated at 79.9% LTV.

    Portfolio insurance has been exercised in large swaths by the banks to generate collateral for covered bond issues or the CMB program, or just for preferential capital treatment. From what I read, BNS did $17bn at once in November 2011 and I would estimate that such policies represent about one-third of CMHC policies in force.

    Combine these with mortgages that were originated as high ratio that have since amortized somewhat and also had the underlying collateral appreciate considerably and the CMHC portfolio seems a lot less risky than the $600bn headline number suggests.

    I guess my point is that you can take the most alarmist view possible - and maybe that makes you feel prudent - but that doesn't make it accurate.

    Thanks

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