Entries from July 2011 ↓

On Friday she had her rural property appraised, just days after she signed a lease with a tenant for $1,588 a month. “I have been investing in RE for the last 10 years and had been such a strong believer it was the best investment,” Wendy wrote me yesterday. And the good news is she has about $220,000 in equity. The bad news, the property is too far away to commute to her job.

So, here’s her plan. Or, at least, the one cooked up by a mortgage broker and her realtor friend: “She has me pre-approved to refinance the acreage home, withdrawing $120k through a new mortgage at 40 yr amort. at 2.85 variable. Then with a minimum 20% down payment I am pre-approved for a new home mortgage at $370k with 40 yr amort. at 2.58%, both on a 5yr term.”

In other words, Wendy is about ready to borrow $490,000 at variable rates (soon to rise) on a 40-year amortization (just renting money) to buy a home in which she’ll have no equity. She has no savings, and no investments, other than the soon-to-be-mortgaged rural home.

Welcome to our sub-prime nation. 100% financing. Teaser mortgage rates. Excessive buying. Tomorrow’s failure. With funds courtesy of a major Canadian bank.

But there is hope. “I was recommended to talk to a relative that knows a lot about the market,” she says. “Spoke to him and he referred your blogs and I couldn’t believe what I was reading. But I believe it now.  I would sooo greatly appreciate some kind words of advice and recommendations.”

Ignorance, if not stupidity, surrounds us. As this era ends, there is no doubt millions of people will find themselves trapped in real estate illiquidity. Those who continue to goad folks into catching a falling knife will have to live with the consequences.

Like Sano Stante, the ebullient prez of the disingenuous Calgary Real Estate Board. On the weekend CREB talked to media about a resurgence in the local housing market, where prices peaked four years ago. This, he said, is because young people are flocking to buy condos. Specifically, these were his words: “Improved housing demand is being fueled by a younger demographic and, with the affordability of homes in Calgary, we are continuing to see young Calgarians pursue ownership over rentals.”

The statistical evidence backing this no-qualifier statement? Well, er, there isn’t any. Seems nobody keeps numbers on the age of buyers, and Santo’s pronouncement came (as the Calgary Herald reported) through “anecdotal evidence from the Calgary Real Estate Board, showing such buyers are back in the marketplace.” Anecdotal is a New Age word for making-it-up.

However, we do know these things. Last month 581 condos sold in Calgary. That was a drop from the 738 units which changed hands two summers ago. We also know any property virgin who bought the average-priced condo in Cowtown last summer has lost money – values are down about 3%, despite $100 oil supposedly bringing all those juicy new energy jobs to town.

Ignoring this, Stante soldiers on: “Historically, Calgary’s average family income has been higher than the national average – and a younger, more mobile demographic has been attracted to good-paying professional jobs in Calgary. As the economy continues to build momentum, we expect this same trend to support a balanced and healthy housing market in the second half of this year and into 2012.”

Is there a whiff of Alberta fumier-de-vache in the air? Are realtor guys like Stante, and slithering nothing-down mortgage brokers setting folks like Wendy up for HouseAgeddon?

Ha. And I a stud?

Now, here’s a bit of context for you. Trading in Dow Jones Index futures started at 6 pm last night. In five minutes they’d dropped 127 points. The US dollar fell, gold increased and bonds yelped. Markets were reacting in a knee jerk fashion to the monumental game of political chicken being played out in Washington.

Incredible as it seems, Tea Party wackos in Congress, hijackers of the Republican Party, may force a temporary and partial (and meaningless) default on US government securities. What does this mean? Short-term interest rates may rise a half point, long rates jump 1% and the States see its AAA credit rating downgraded. Why is this happening? To hobble Barack Obama and set the stage for the 2012 presidential election. It is 100% politics and 0% economics. Also stunning to see a major political party sacrifice the common good on the altar of ambition.

Nonetheless, there will be ramifications in the coming weeks. If you are an investor, get out your chequebook. This is not a financial crisis because a quasi-bankrupt, spent America is staggering. It’s a buying opportunity since some rabid neocons are foaming. Soon their brains will explode.

If you’re Wendy, however, it’s a disaster.

The last thing the real estate market needs, with most families tapped out, indebted, devoid of savings and over their heads, is turmoil. The manufactured debt ceiling crisis shows us in spades the anti-Obama forces will do anything to win. By refusing to allow a long-term borrowing fix for America, they are guaranteeing this crisis reignites right in the middle of the coming campaign. At that time they will hang the deficit, the debt, the housing crisis and the decimation of the middle class around his neck.

The scariest thought? Middle America elected these guys.

So run, Wendy. Fast. God’s army approaches.

Four years ago when the federal government initiated the housing bubble by allowing 0% down payments and 40-year mortgages, it also opened the door wider to Genworth. Today those insane mortgage provisions are gone, despite the damage having been done. Genworth, however, remains – the leading private provider of mortgage insurance in Canada.

Of course, CHMC is the 800-pound gorilla (actually, a 600-billion-dollar monkey) of the mortgage insurance business, underwriting the lion’s share of high-ratio, high-risk mortgages on houses bought by people who have no money. Because CMHC stands behind lenders like BMO or CIBC, it takes away their risk in the case of default. That means banks have no reason not to give money to people they’d otherwise laugh out of the branch.

Behind CMHC, which is an agency reporting directly to the federal government, stands you. If CMHC, which last year had its lending authority extended to six hundred billion, a number roughly equivalent to the national debt, were ever to stumble, Ottawa would bail it out with tax dollars. At least, that’s the theory.

Of course, that was the logic in the US, as well, when its quasi-governmental mortgage insuring and securitizing giant, Fannie Mae collapsed in the housing bust. Well, $164 billion later, it is still an orphan of the state, bleeding from a million sores as the foreclosure crisis continues and defaults mount.

Now, like Canada, the US also has private insurers of high-ratio mortgages. Surprise, surprise, one of the majors is Genworth Financial, based in Virginia. So here’s the news: this week the company said it just lost another $100 million thanks to “worsening trends” in the mortgage business. Genworth has about 40,000 mortgages which have been non-performing for at least a year. Yes, that means the families who took the money and bought houses with it are no longer making payments.

Things are dire enough that Genworth has to take $375 million from other activities (it sells life insurance, for example) to shore up the mortgage-guarantee business. Says the company, prospects are getting bleaker along with the residential housing market. In response, its shares were hammered to a two-year low Friday on the stock market.

In this country, Genworth Financial Canada (a division of GE) is still making money, headed by the sunny Peter Vukanovich. In fact, if it weren’t for profits from subs in Canada and Australia, the whole enterprise would be on  shakier ground. Genworth in Canada, as proven by its own promotion, provides insurance for mortgages handed out to self-employed people who can’t (or won’t) verify their income, recent immigrants, buyers without any savings and people who want to purchase a house with 0% down.

Several of those practices are now either illegal or unknown in the United States.

My point is simple. We are far down the financial path that led to the housing bust in the States. Our government supports an agency which supports high-risk lending. We allow private insurers to promulgate even more risk. And by insuring loans to people who have no resources or no financial discipline, we court an inevitable outcome.