“Canada Mortgage and Housing Corp. has signalled it will dramatically curtail its growth in the mortgage market in the coming years in an effort to cool Canada’s sizzling housing sector.
Documents released by the Crown corporation this week show CMHC expects to increase mortgage insurance over the next few years at only a fraction of the pace seen recently.”
- from ‘Bank regulator proposes heightened scrutiny of mortgage market’, G&M, 19 Mar 2012 [hat-tip Derp]
This ‘signal’ has been widely discussed across various blog sites.
Headlined here for the chronological record.
This could be enough to crash the Vancouver market.
A soft landing (a ‘cooling’) will not occur, as buyers will not step in at stratospheric high price levels without the expectation of abnormally large price gains going forward.
- vreaa
are you running a pool on when they burn through reserves?
They won’t. They are cutting off portfolio insurance to preserve the retail which they expect will be fine. BUT, banks will have to adjust their capital and risk based on lack of access to cheap easy insurance for securities.
if they’re hitting the $600B limit, they must be levered something like 20-30:1. i can’t see them not going through their reserves. am i missing something?
The don’t own many mortgages outright, so I’m not sure what you mean by leverage. They have capital requirements, but they are holding almost 2x those. (Although the capital requirements seem laughably low).
Basically 75% of their current ~500-550billion of insurance is held on bank portfolios, purchased by the bank itself as a requirement for securitization. Retail to consumers is only 25%. So, they are saying they can easily continue to cover consumer demand by cutting off new issues of bank portfolio coverage. Which, given the ratio and churn (old mortgages getting paid off and leaving their books freeing up more of the cap), seems believable.
Where this impacts the market is liquidity at the bank. If it gets more difficult to securitize they have to start cutting down on new mortgage amounts. In theory. Or go with a 3rd party insurer. I really don’t think it’s going to make too much of a difference. This is bread and butter for these guys, they’ll work something out. It does make great headlines though about how insanely indebted Canada is.
i pretty sure they’re 1st in line to guarantee the mbs on default. did that change? so, you are saying they have sidestepped already pushed those onto the bank of canada? the last $100B of issuance occurred this past 1-2 yrs during the worst phase and the banks only need them on the worst contracts. i recall them having $20B-$30B of reserves. that against the $600B of insurance in force is what I meant by lever. if the market turns as we expect, just the fallout from this last $100B alone may wipe out reserves.
it’s a faulty model. the underwriting does not account for the systemic risk, most of which they themselves introduce.
G&M went into more detail on this a couple of days ago: http://tinyurl.com/89wen4g
From the article:
CMHC’s insurance portfolio has soared by hundreds of billions of dollars in recent years, and is expected to be well beyond $500-billion this year. The government raised the cap on the amount of mortgage insurance that CMHC can have outstanding twice since the end of 2007, from $350-billion to $450-billion and then to $600-billion. It forecast growth of just $30.8-billion from 2011 to 2014.
CMHC spokesman Charles Sauriol said it is giving priority to insurance for individual homes. “The allocation of CMHC’s portfolio insurance does not affect the availability of CMHC’s mortgage loan insurance for qualified home buyers and will not impact the cost of buying a house”
Get ready for rationing. It sounds to me like they’ll be happy to insure “qualified” borrowers to purchase a house, so does this mean they’re pulling the rug out from under condo buyers? Because someone isn’t getting CMHC insurance anymore.
Banks will lend, but they will demand a higher spread. I do believe Basel3 requires higher capital reserves on certain asset classes, which banks would try to avoid. It’s now more a question of who and what, not how much.
The rationing of excessive credit.
Here’s a very well written article about what can happen to a stable, two-income couple who bought in at the top of a bubble. The road to this particular hell was paved, as it often is, by good familial and societal intentions.
Housed
By Aimee Phan March 2012
Is homeownership, despite three presidents’ best efforts, out of reach for the sinking middle-class? Good riddance, says one former homeowner.
http://www.guernicamag.com/features/3577/phan_03_15_2012
Inevitable.
Remember bear adage: magnitude certain, timing is not.
Timing just became more certain.
If anyone’s interested in the devilish details that has prompted CMHC to make this move: http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/sound/guidelines/b20_dft_e.pdf
Page 13 has interesting proposals regarding down payment and HELOCs. Lots of statements regarding amortizations, and GDS/TDS calculation and verification also.
It’s almost sad that this stuff wasn’t in place before. It’s funny the way people trumpet Canada as the world’s most secure banking regime. It’s true in a way with all this risk off-loaded onto CMHC.
Canadians bitch about social services/welfare, etc. and don’t acknowledge the massive boon of the CMHC.
OSFI has in effect found banks being vewy vewy bad with Her Majesty’s blanket guarantee. But the reaction should not be one of “Shock!”.
The big ones to watch to see if they make the cut are:
1) HELOCs capped at 65% LTV
2) Required income declaration (many simply roll it over without income)
3) Region-dependent risk buffers
The devil’s in the details but as it stands more than a few marginal unfortunates in the Lower Mainland will be dropped faster than the John Carter ad campaign.
Also very important: “should” for the Big 5 is a “shall”, just like one’s spouse hinting one should shave. One shaves or, well, you know.
The other big impact is that 5% down better be the real deal.
That and the HELOC lower LTV.
Those are going to start disqualifying new entrants immediately.
These new guidelines only go part of the way on the downpayment issue. The other problem is gift downpayments. Those need to be banned as well. The builder gives the buyer the gift and just jacks up the price of the house to make it up again. Profit all to the builder, risk all to the taxpayer.
“One shaves or, well, you know.”…
Science to the rescue!
[AskMen] – Stubble: 5 Things Men Should Know: 5 Insane Facts About Stubble
”
According to a widely cited study by psychologists at England’s Northumbria University, women looking at photos of men’s faces in various phases of hair growth from none at all to full beards far and away preferred the look of some stubble. Researchers hypothesized that the reason for this is because stubble represents the best of both worlds in a man: evident masculinity without the reclusive mountain-man look.”
http://tinyurl.com/7pvaj4a
So lets do a recap of the major hazards. This rough list is not compete.
We now have major OSFI changes pending.
CMHC is cutting back on its basic business. Reducing insured volumes.
Banks closing up shop on sub-prime lending- exiting market.
Signals from economists that interest rates will rise this year.
Possibility of Federal budget containing mortgage rule changes.
Credit tightening amongst financial institutions all of a sudden.
Mortgage brokerages being sold off.
Banks asking government for protection from their own business methods.
Massive media exposure on the problems in Canadian housing markets highlighting its myriad of risks. All of this has happened in just the last few weeks…………
Does anyone else think this is just a little too much all of a sudden? This is a God-damned disaster in the making. It is overkill and virtually guarantees a hard landing if not an outright crash in some markets.
Even the real estate bulls are turning bearish and Realtors themselves are becoming contrite and admitting problems exist. What planet does that happen on where everybody turns negative at once? This is a major shift in sentiment and the tide has turned inevitably (even violently) towards an imminent correction.
So hold onto your asses and thank your lucky stars if you are a renter and did not sell your soul at the pagan altar of Real estate. The top has now been breached, we have rolled over and we are almost certainly in for a rough ride over the next 24 months.
The crazy part???
Here we have all being waiting for a few minor adjustments to lending or some policy tweaks to let it all down gently. Instead we suddenly get an avalanche of action and all of it is negative for housing.
The “look out below” moment has arrived. (look out below!)
I have decided to take stock in all these recent moves. As I mentioned above, the devil’s in the details. I don’t think Vancouver is even on the radar for receiving consideration that things might go a bit “overboard”; rather most of the country, while inflated, is the real target of these policies.
If the average debt-to-income ratio is to change Canada-wide, that necessitates certain areas (cough BC cough) having their leashes pulled a wee bit harder than other areas.
Other stuff that would suck:
1) Population growth remains tepid
2) China experiences a significant slowdown
3) Interest rates increase
4) Governments refuse to spend
All happening at once would be nothing short of inconceivable.
5) Another Deleverage wave hits stock markets and commodities
6) ….
I think commodity prices have a good chance of slowing down significantly, though my #2 covers it by extension. (I don’t know much about the medium-term direction of stock markets! If you have an inside scoop let us know.)
It is going to get worse Jesse. Your points are good ones. We are also hearing that here will be immigration changes in the upcoming budget. What next?…..a commodity crash due to China’s deflating property bubble? Oh God, that really will hurt us.
I kinda have a bad feeling about this correction.
6) earthquake
7) famine
8)…
Farmer: “What planet does that happen on where everybody turns negative at once?”
–
Planet SpecMania
Seems we are living in it. This is a market shock. Words fail.
“Soft landing” is such a misnomer.
Angelo Mozilo
Housing markets are flown by navy pilots.
BPOE never ceases to amaze me. Be it RE or anything else.
Really; what is everybody smoking?
http://ca.news.yahoo.com/blogs/daily-buzz/jasmin-klair-b-c-caught-smuggling-cocaine-car-163719932.html