“Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.
“It just speaks to the general easing in lending standards, which has contributed to a booming housing market,” said David Madani, an economist in Toronto with Capital Economics, which estimates that Canadian housing prices may fall 25% over the next few years. “The problem is sort of baked in now, so I’m not sure there’s a way to prevent a weakening of the housing market.”
OSFI head Julie Dickson said in a Sept. 26 speech the agency is “very focused” on mortgages and home-equity lines of credit, which allow individuals to borrow against the equity in their homes. …
Home-equity credit lines without income verification have become “an increasingly popular option,” OSFI says in the analysis, adding that they “pose greater risk” than mortgages because the credit lines are offered at floating interest rates. …
OSFI officials assessed Canadian banks’ potential losses from defaults on home-equity lines of credit last year, the documents show. The results were blacked out under legal provisions that allow the government to withhold commercially sensitive information.
– excerpt from Bloomberg, via FP, 30 Jan 2012
[hat-tip to Makaya and Zerodown]
So, Canadian lending has perhaps been looser than previously celebrated. “Baked in” is the way we’ve previously described the coming implosion.
There is no way of deflating the bubble in an orderly fashion.
Those who propose such a hopeful outcome need to explain who they expect to be buying this year, next year, and the next. Which buyers do they propose now step forward, take out oversized mortgages to buy still extremely overpriced properties, to bail out the many, as the ‘balloon’ deflates in an orderly fashion? It simply isn’t going to play out like that.