Canada's Housing Bubble

Apr 11, 2010 Jeremy Thompson catharticranter.blogspot.com

Is it really any different here?  Are our banks more prudent?  Are they wise?  Do we have a good banking "system"?

Ask the bankers, and you'll get a resounding "Yes, of course we do!  We didn't need government bailouts!"

Why?  Because they've managed to offload all of their credit risk through lending loads of cash to sketchy borrowers so they can buy houses that they can't afford.  The Canadian banking system is less risky...for the bankers! Risk doesn't magically disappear.  If you lend money to someone who cannot pay it back, and then securitize and sell that debt to someone else...you've just transferred that risk to the bondholder.  And who would that be?  CMHC, ie. the Canadian government, ie the Canadian taxpayer.

So while the banks themselves are safe, everyone else is not. The Canadian government is already running a massive budget deficit, and this doesn't take into account future spending committments the aging boomers for health care.  Nor does it factor in the costs of covering all these bad mortgage bets for when the housing market corrects. When the MBS's stop generating the returns they're supposed to be providing because the borrowers can't pay...the taxpayer is left holding the bag.

And they aren't giving up that taxpayer gravy train without a fight.  They're worried about global financial reforms that don't take into account "Canada's unique banking system" (ie. Canadian banks mortgages are safe, because the Government is backing them via CMHC - sound familiar? Fannie? Freddie?)

Under Canadian law, mortgage insurance is mandatory if the down payment is 20% or less, in an effort to protect lenders from default. As it happens, the dominant provider of coverage is Crown-owned Canada Mortgage and Housing Corp. Further, the federal government backstops the coverage in the event of a default.

"But there is no credit given to that under the proposed rules," said Don Drummond, senior vice-president and chief economist at Toronto-Dominion Bank. "That's got all the Canadian banks agitated."

As a result, Canadian banks would be forced to have the same amount of capital against their mortgages as a bank in another country operating in a riskier environment.

"Our unique Canadian mortgage market was one of the important reasons why we did so much better than others, and this now may be in peril due to several proposed rules that go over and above the requirements for more capital," Mr. Waugh told shareholders at the bank's annual meeting in St. John's.

Hmm...so the much vaunted Canadian banking system, wasn't a result of prudent lending but more about having the government back your assinine mortgage bets? This doesn't sound familiar at all does it?

Mr. Poschmann said the marketplace likes the current setup in Canada, citing that Royal Bank of Canada is able to sell so-called covered bonds to fund a pool of uninsured, but good-quality, mortgages.

Of course, Canadian banks have also benefited from the setup between Ottawa and CMHC. Industry analysts say the mortgage insurance setup has led to relatively low credit risks for Canadian lenders. It is estimated that almost half of mortgages held on bank balance sheets are insured.

Also, CMHC plays a major role in mortgage securitization. Under its Canadian Mortgage Bond Program, established in 2001, financial institutions originate mortgages, pool them and sell them as packages in the form of mortgage-backed securities to an entity called Canadian Housing Trust. The trust, advised by CMHC, issues bonds that pay interest similar to Government of Canada bonds, using the cash flow from the mortgage-backed securities to make the payments.

Gee, duh, I wonder why the banks like this setup where they can take virtually no risk, and can sell overpriced mortgage securities to someone that is guaranteed to buy the shit?   Will the taxpayers like the Canadian "system" when the MBSs blow up and the government is forced to either slash spending (not likely given the spenthrift Keynesian idiocy going in Ottawa), run bigger deficits (welcome to higher interest rates), or increasing taxes (GST back to 7%+). 

To close...let's look at how well this worked out for Fannie:

US housing prices began their fall in 2005.  And delinquencies are still skyrocketing (even though Fannie imploded long ago and has already been seized by regulators).  We haven't even hit our bubble peak yet, as such the CMHC (Fannie North) crisis may be another 5 years out (or more).  This will not end well.