Entries from January 2011 ↓

Emili

It’s 2005. The real estate market in Canada is entering a bull phase, just as the American one’s hitting its crescendo. Within 12 months, the government in Ottawa will carelessly toss gas on the fire by introducing 40-year amortizations and 0% down payments, just as the housing market Stateside falls to bits. The rationale: it’s different here. We don’t do sub-primes.

Or do we?

I walk into the inner sanctum of one of the largest mortgage operations in the country – the heart of a major bank’s originations and approval centre. This one institution has more than $90 billion in residential mortgages outstanding, and is doing new business hand over fist. The big new thing in 2005 – variable-rate, below-prime loans.

So, I ask the executive in charge of the mortgage business (who makes $750,000 a year and just spent over $200,000 renovating his kitchen in mid-town Toronto), how do you guys manage such a flood of new loan applications? He’s proud to answer. “Streamlining,” he says, “we just get real efficient.”

And then he tells me one way of doing this has been to eliminate appraisals. So, I wonder aloud, if no actual bank person ever visits a property to have a look at it, assess it and determine if the bank should risk loaning big bucks against it, on what basis do you approve the loan? How do you know if it’s a risk worth taking?

“Postal codes,” he says. “That’s all we look at.”

In other words, billions in new mortgage loans were being approved for houses which the lender would never see, never walk through, never inspect – and never care about, especially if they were high-ratio and high risk. Those were the homes for which buyers had scant down payments and took maximum financing. As I said, between late 2006 and the autumn of 2008, that might have meant no down payment at all.

Why would a so-called conservative Canadian bank be so reckless? Simple answer: CMHC.

The Canada Mortgage and Housing Corporation actually encouraged faltering due diligence and a growing appetite for risk by backing every high-ratio loan with insurance, even when the buyers had absolutely no money. Today that continues, but people buying houses now need 5% down (even though that can be borrowed or gifted).

Okay, so banks loan money to people without means to buy real estate at historically high prices. Sounds dodgy, especially when you learn they do it so cavalierly. Now the risk is shifted onto CMHC which insures the loan in the case the buyer rolls over. Thank goodness for that, eh? We can’t have the banks going down if Canada suffers a housing plop like the one chewing up the USA.

So what safeguards does CMHC have in place to ensure a property is not being over-mortgaged and the house is proper security for the loan being backstopped by the taxpayers?

Surely, with Canadians on the hook for about half a trillion dollars in CMHC-insured residential mortgages, the process is exhaustive and at least makes up for the slam-bang practices of the big banks. How long, for example, does it take the agency to review an application, match it against the property being financed, and then make a determination?

Seven seconds. Or less.

As a poster pointed out on this miserable blog yesterday, the agency is actually bragging to the mortgage industry that it, too, no longer bothers to appraise real estate. Using a fast-track system called “emili”, it all but guarantees a rubber-stamped loan in less time than it takes for a good whiz. In fact, we have a new national real estate slogan: “At CMHC, we love to say ‘approved.’”

Here it is, in their own pitch to mortgage brokers:

With more than 5 million transactions processed, emili is Canada’s leading online Mortgage Loan Insurance approval service.  We understand how saving time is important to you –  emili approves the majority of applications in seven seconds or less.
Relying on it’s extensive property database when assessing an application for mortgage loan insurance, CMHC is able to process an overwhelming majority of applications without requiring an appraisal, including applications for properties in rural locations and new construction, saving lenders both time and money.
At CMHC, we love to say “approved”. That’s why we consider every application on its own merit – there are no auto-declined applications. If your application requires further attention, our knowledgeable and experienced Underwriters located across Canada are dedicated to providing quality service and fast turnaround to try to make your deal work.
Applications can be submitted on emili Monday to Friday 6:30 am to 11 pm (Eastern Time), Saturday 8 am to 8 pm (Eastern Time) and Sunday 12 pm to 8 pm (Eastern Time).

Don’t you feel more reassured?

As I said here yesterday: We know mortgage rates will be rising, since they can’t fall any further. We know that already 70% of Canadians own real estate, so there is no big pent-up demand. We know taxes will only increase in a country with an historic deficit and an exploding debt. We know  idiot 5/35 rules have allowed armies of people without money to buy houses. We know household and mortgage debt is extreme. We know the cost of living is rising and salaries aren’t. We know the Boomer geezers are house-rich, in need of retirement cash, and will soon dump.

And now you know more about Canadian lending standards.

It’s different here (IV)

As you can readily see, I need all the friends I can get. There’s something about a bearded boy with cowboy boots, a camo Hummer and a financial blog full of indelicate pictures and too much underwear that distances people. I have no idea why.

So what a thrill yesterday when somebody here asked about my Facebook page, and a mess of people went there and signed on as my friends. I’m now planning a sleepover at the Bunker. Bring your own udder cream. If you want to befriend me, hurry. There’s some sort of contest, and the prize involves a condo in Richmond, 72 virgins and MissyBunny. I’m only eight thousand friends short.

While you’re doing that, a little update on our potential future.

The kind of bizarre behaviour I described here yesterday, with squads of newbie buyers rushing to sign up for 35-year mortgages, bringing back multiple offers and mindlessly driving up prices before F-day on March 18th, ain’t a good sign. Mortgage brokers and bank loans officers are busy doing pre-approvals and new life has been breathed into the cheapo end of the real estate market.

Not because houses just got any more affordable, mortgage rates fell or the government’s giving away money. In fact, the opposite – F’s murder of 35-year ams is actually increasing what sellers are getting and creating more unsustainable long-term debt. Therefore it might just be the perfect government strategy. There were optics of restraint and caution. The minister flummoxed about debt and crisis. Rules were brutalized. Then the result was a borrowing and buying frenzy, giving F evidence to boast that the economy is thriving.

In reality, the feds want house lust. A cynic might say changing the mortgage rules but giving two long months’ notice was entirely intentional. News raced through the Twittersphere and soon young hormones everywhere were raging. The irony is this burst of juices and the resulting higher real estate values will do the most damage on those stupids who think they are ‘beating’ some kind of deadline. If they’d only wait a few months, they could buy the same property for less money and lower debt.

But, alas, all reason is now gone from real estate. We’re back to fear, greed and herds.

So let’s get a fresh glimpse of where this goes.

Between 2000 and 2006, the price of a home in 20 of the largest US cities doubled. This, as you know, is what has happened over the last seven years to SFHs in places like Vancouver, Saskatoon, Winnipeg and Toronto. But between 2006 and April of 2009, US house prices crashed 33%, which put the value of real estate back to 2003 levels.

In other words, the average person buying the average house from 2003 to 2006 – the boomiest years – was creamed. Chances are if they still own, they’re underwater, owing more in debt than their houses are worth.

That’s scary enough. But it gets worse.

This week’s numbers show real estate is still collapsing, dropping in November by the most in a year, with 16 of those 20 cities in decline, and fresh lows being hit in nine markets. Still to come is a new wave of foreclosures, since it’s expected more Americans will lose their homes in 2011 than any previous year – the fifth anniversary of the bust.

Thus, it’s reasonable to expect a further price drop, according to Morgan Stanley, of about 11% over the next few months. That means a double-dip – a rare occurrence in which a new post-peak low is set without the faintest glimmer of a real estate recovery. It’d also mean a peak-to-trough decline in the value of a house of 36%, spread over half a decade.

Could that happen here between, say, late 2011 and 2016?

Well, of course. We know mortgage rates will be rising, since they can’t fall any further. We know that already 70% of Canadians own real estate, so it’s not like there’s a big pent-up demand. We know taxes will only be increasing in a country with an historic deficit and an exploding debt. We know that idiot 5/35 rules have allowed armies of people without money to buy houses. We know household and mortgage debt is extreme. We know the cost of living is rising and salaries aren’t. We know the Boomer geezers are house-rich and need of retirement cash.

So what is it, exactly, that stands between us and them? Where’s the lift for houses? Is it not obvious what probably comes next?

Well, it is to me. But I’m just a lonely guy. And Richmond seems so romantic this time of year.