In the shadows of the financial crisis two years ago, Ottawa quietly allowed for more than a hundred billion in toxic mortgages from Canadian banks to be sold to Canada Mortgage and Housing Corporation. Not long afterward, CHMC – accountable to the taxpayers – was allowed to raise its debt ceiling to $600 billion. Without this body there would be no housing bubble today. Mortgage rates would be higher. Lending more restrictive. Young couples without money would not be buying homes. No bidding wars. And boring houses in Leaside and East Van would not cost more than a million dollars.
Days ago Barack Obama took the first steps towards dismantling the state’s role in insuring, subsidizing and pimping mortgages. Five years after the real estate apocalypse hit, it’s clear house values were inflated by the existence of cheap credit and quasi-government agencies ready to suck off the risk from bankers, making them crazy fearless.
Some people in Canada say it’s impossible for home prices to plunge here, merely because the feds now back half a trillion dollars in high-ratio loans. But if it did not work in the States, then why here?
Any person buying a house in this country with less than 20% to put down must purchase mortgage insurance. This does not insure the owner or the house, but it protects the lender against loss if the borrower defaults. The homeowner pays the premium – as high as 2.75% of the mortgage – and the lender gets the coverage.
The fact such insurance exists means the lender does not charge more interest to dodgy borrowers, or reduce the loan amount when down payments are tiny. Why should a bank care, when the insurance company is taking the risk? So is it any wonder that 90% of all new mortgages in Canada last year were to people who had just 5% to put down? Does this make us incredibly vulnerable to the next financial shock? Can Lady Gaga start fires with her bra?
That insurer is CHMC. There is no other single institution more responsible for runaway house prices. State-owned mortgage insurance is, as Barack Obama has decided, a real bad idea.
While this pathetic blog has been saying such unpatriotic things for a couple of years, recently others have joined the chorus. CMHC is now fighting back with a letter defending its practices. The big argument that its vice-president of policy and planning, Doug Stewart, is making is this: “Most importantly, the Canadian model withstood the test of the economic downturn, when housing markets in the U.S., United Kingdom, and Ireland failed.”
To which I would say, wait. Our housing downturn is just licking at our shorts. And when factors like higher rates and exiting Boomers bring the inevitable, the fact CMHC even exists could turn a correction into a rout. Those who bought with scant deposits and hefty insurance premiums over the last couple of years could be underwater in just weeks. And while taxpayer money may save the banks who made the loans, nothing will save the value of all homes.
She’s a Scottish lass who came to the Big Smoke more than a decade ago and found herself working for a swanky North Toronto real estate operation. That part of the godless metropolis, as you may know, is where you’ll find whole neighbourhoods of seven-figure houses and matching attitudes. So it may be a sign of the times that a seasoned agent like Valerie has decided to go into the no-money-down business.
She just fired off this email blast:
Subject: TIRED OF YOUR CHILDREN LIVING WITH YOU WHILE THEY SAVE FOR A DOWN-PAYMENT?? A CASH BACK MORTGAGE MAY BE THE ANSWER!
Buying a Home with Little or No Down Payment
Do you find yourself wondering how your children will ever be able to take their first step onto the property ladder? Maybe a Cash Back Mortgage is right for them.
With a cash back mortgage the financial institution gives you the money to be used as a down payment for your home purchase. So if you get a cash back mortgage for $250,000 the lender will provide you with the minimum 5% down payment needed, in this case $12,500. You then pay back only the remaining $237,500. In exchange for the down payment, the lender will typically charge you a mortgage interest rate that is 1.0% to 1.5% higher than the traditional mortgage rates available at the given time. Once the initial term on your mortgage (typically 5 years) ends however, you are free to shop around for the best mortgage rates available like everyone else.
There are many considerations that should be taken into account when deciding whether a cash back mortgage is right for you. Your ability to save for a down payment; how quickly house prices are rising in the neighbourhood you are looking to purchase a house in; and how likely you are to stay in the house for at least 5 years. There is no question however, that for those with little or no down payment, cash back mortgages can provide a viable solution for making dreams of home ownership a reality.
Of course, buying real estate anywhere – but especially in a pricey place like Toronto – with 100% leverage is a high-risk venture. There’s no guarantee that, as Val says, home prices will only rise. In fact, if they fall even slightly, the young ex-property virgin is nicely screwed. And you’d think after we all watched the sub-prime, teaser-rates, NINJA, liar loans thing happen in the States we wouldn’t allow inexperienced buyers to jump without chutes.
You might even think an experienced realtor working for a big company like Royal LePage would be unethical putting this stuff in writing. Or that the firm itself would be negligent. Or the major banks who offer cash-back mortgages as a way around federal guidelines would be incredibly irresponsible. Or the parents who encourage 100% financing for their kids are epic tools.
But I’m sure we can all agree the shareholders of the company that insured this fool and suicidal transaction from loss are the greatest fools.