CIBC, CMHC, Tap The Brakes (While On Black Ice, At 112mph)


“CIBC’s wholesale mortgage arm, FirstLine, quietly announced Tuesday that it will no longer accept new applications from “stated income” homebuyers who can’t prove they have the annual net income to qualify for home loans.
FirstLine also set a $1 million cap on what it will lend for a home purchase.
The major change in policy, which is bound to pique the interest of other major lenders, came on the same day it was revealed that the Canada Mortgage and Housing Corp. could be forced to cut back on the mortgages it insures.
The moves are seen as among the clearest indications yet that Canada’s hot housing market and record levels of household debt are a concern far beyond just the Ottawa offices of Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. …
“The signs are there that everyone is worried, with the exception of BMO. It’s not like there is just one person saying there is a problem with the housing market,” said Jason Friesen, a mortgage consultant with the Callum Ross Team.
“It’s impossible to know, given all the doom and gloom in the rest of the world, what will happen over the next three months or the next six months, but lending institutions are looking for ways to protect themselves.”

‘Self-employed, new immigrants may find getting a mortgage tougher’, Toronto Star, 1 Feb 2012

The Canada Mortgage and Housing Corp. said Tuesday it “has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.”
“To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established, which has caused some delays.”…
“The federal government, which ultimately must cover the Crown corporation’s mortgage guarantees, has imposed a $600-billion cap on how much liability the CMHC can take on.
Ottawa increased that from $450 billion in 2008, as the global financial crisis led banks to increase focus on their cash reserves.”

‘CMHC curbs mortgage insurance offerings to banks’, CBC, 31 Jan 2012
[hat-tip allen]

Our bubble/’balloon’ doesn’t need a ‘pin’ to prick it before it implodes, but any nudge could help it past its tipping point. -vreaa

52 responses to “CIBC, CMHC, Tap The Brakes (While On Black Ice, At 112mph)

  1. This is the lunacy of our system.

    The CMHC SHOULD be insuring mortgages when there is a crisis and no one will lend and prices have dropped – to support the market.

    they should not be insuring record amounts at the top of the market, with all time low rates, when there is tons of liquidity and lenders falling over themselves to lend.

    they are providing insurance when no-one really needs it and will be going bust and unable to provide insurance (and adding to the crisis) when the drop finally comes.

    • I agree with you, Fish, but remember: in CMHC’s eyes, there is NO bubble. It simply doesn’t exist. So their insurance isn’t helping to goose a hot market into a bubble– it’s just keeping things stable, the way it should be.

      In my eyes things look very different, and I’m looking to scrape the housing splatter off the floor, but hey, the CMHC has deemed us to be in a normal, balanced market.

      Incidentally, I have a friend who works for a private mortgage lender. They mostly sell their mortgages to institutional funds– pension plans, mutual funds, that sort of thing. Whenever possible, they unload whatever they can onto CMHC, so that they can get back to funding mortgages ASAP. My friend agrees that housing (locally) is ridiculously-valued, but even so, he mentioned without any hint of concern that they hang onto the B-rated tranches of their mortgage securities.

      I wanted to bug my eyes out, but I didn’t want to freak him out– this is what the US banks were doing that crapped them out. But hey, as long as the music’s playing, you’ve got to dance, right?

      • Quite often the lender is required to hold on to the lower quality tranch like B rated tranch, equity tranch, etc, either because no one will take it or as a demo of good faith that the mortgages are of high quality.

        Off course if you bunch a lot of B tranch MBS into a CDO, then suddenly all those B tranch becomes AAA rated through the magic of modern finance and diversification (along with some good old money grease).

    • The CMHC and the FHA in the US started out doing exactly that. As a supposedly temporary backstop to enable banks to start lending and people to start buying homes again. The problem is, temporary assistance inevitably becomes institutionalized. Remember, income taxes were also a temporary measure to fund the war effort during WWI. After the war, they were still considered temporary, to pay off the war debt you see. Then to pay for government programs during the Great Depression. Then to finance WWII. After WWII, we just sort of forgot they were temporary and quit pretending they were.

      I’d prefer no mortgage insurance at any time. Lending rules should be tight enough that banks don’t need it. After WWII, a 1/3 downpayment was pretty much standard. Mortgages lasted a maximum 5 years. People bought little boxes and raised large families in them. The kids shared bedrooms. Mortgage insurance came along and allowed us to dream big and build bigger. As there is no such thing as a free lunch, we will pay dearly and long for our house porn addiction. Perhaps an entire generation will be lost to it, as was the case with the Great Depression. I know, I’m all sunshine and rainbows today.

  2. There be the curbs I’ve been waiting to be discussed in the MSM. The screws are turn’d another quarter.

    I’m not too familiar with the quota system but given the government’s stance on debt accumulation raising the cap too much won’t play well to the base.

    Now the fun begins.

  3. Love the heading of this post.

    • What no ABS braking? Inflation sucks the savings dry while we unload the national debt, and when the profits have all been taxed, we will walk down the hill and raise interest rates, said father bull to son bull.

      Curious if anyone has calculated that actual value of a Vancouver SFH in real dollars. Let’s see, when gas was 30 cents a litre… and a bag of chips was 25 cents… omg we need a pipeline, pronto!

  4. Think of it this way:

    Right now, the CMHC is backing mortgages worth more than the entire federal government debt. Worse, banks are often applying for mortgage insurance even for loans worth less than 80% of the value of the underlying asset. Why? So they can more easily securitize and sell the debt and get it off their books so that they can remain within their capital requirements. Does that little process not sound eerily familiar? (ABCP crisis anyone????) If someone can explain to me how this can possibly end well, I’d sure appreciate it.

  5. BTW, the January 2012 numbers, care of yattermatters.com:
    Average price FLAT YOY (0% across all housing types)
    Inventory UP YOY (+28% detached, +15% attached and apt)
    Sales DOWN YOY (-16% detached and attached, -7% apt)

    .
    This is what a topping process looks like.
    Volume leads price.
    .
    The average 2011 buyer is flat or underwater.
    Given transaction and transfer costs, the average 2011 buyer is underwater.

  6. Back to the balloon / bubble metaphors. If you fill up a balloon and then let go of it, doesn’t it just fly around the room whacking into all sorts of unexpected things?

  7. comments from CMHC president Karen Kinsley:

    “The Canadian mortgage model “withstood the test of the economic downturn, when housing markets in the U.S., United Kingdom, and Ireland failed.”
    “The average home equity within (CMHC’s) insurance portfolio is 45%” (“That’s a far cry from the five per cent or less that has been widely — and wrongly — reported in the media,” said CMHC President, Karen Kinsley, in this November speech.)
    CMHC “operates at no cost to taxpayers” and, in fact, has earned $12 billion for Canadian taxpayers over the last decade. (This is after setting aside the necessary reserves.)
    “CMHC has almost twice the minimum level of reserves” required by OSFI, Canada’s federal financial system regulator”

    • Royce McCutcheon

      Too many mistake the relative Canadian sobriety of a few years ago for evidence of restraint when really it was just a product of arriving late to the party.

      Perhaps 2011 was Canada’s ‘last call’.

    • The fat checks to the Canadian treasury are one reason the government has had no interest in reining in CMHC’s mission creep.

      The taxpayer isn’t in the red on this until they’ve had to fork back over that ~$20 billion from the last few decades, by my read on this anyway. Having the taxpayer as a backstop lets CMHC operate cheaply. Not that their mission isn’t far and away out of control or anything and in fact actually undermines the goal of affordability, just sayin’ that the taxpayer has a bit of a cushion in overpayments.

      Why didn’t CMHC keep that money in their own reserves? That would eliminate it being a bribe to the government that makes the government act stupid. Something to think about when CMHC gets an overhaul.

      • The tax payer is already in the red. I would have to ask you: who do you think those profits came from? The CMHC doesn’t insure loans on properties outside Canada. The CMHC allows canadians to borrow more, which leads to increased property prices which leads to increased borrowing, which leads to more property price increases which reduces the value of the money you have in the bank relative to housing and requires you to pay for insurance on the huge loan you now need to buy a house. 50K was not much harder so save 10 years ago but was closer to 25% down. The same 50k is now only 10% down or less in a lot of places. Now you need a bigger mortgage and have to pay to insure it creating “profits ” at the CMHC. Every penny of those insurance premiums charged would not have been necessary if the CMHC hadn’t allowed property prices to get so out of control in the first place. Thet 20B is a TAX, and no matter how you look at it the tax payer is worse off.

    • The (current) average amount of equity is unlikely to be the problem – the really problem is going to be the extreme cases. After all, it’s still quite possible (likely?) that there are many folks out there with only 5% equity. or 10%. or 15%. A 10-20% drop puts all of those folks underwater, and if they flood the market, prices will be pushed down further, putting those who have a bit more equity at the edge, who will then join the market, etc…

      That’s how a bursting bubble looks 🙂

    • Ah Karen Kinsley, don’t expect anything other than guarded PR statements from this person.

      The problem is a macro one and CMHC’s role is not looking at macro (though it should be), it’s business-focused micro because that’s how it’s been set up in the past 15 or so years. This was initiated under Cretien and Martin — continued by their successors — who instilled private sector practices in an organization that was historically looking at the big picture of housing and cognizant of credit risks.

      The wheels turn slowly but there are deliberate and concerted efforts to change CMHC.

    • Two more things:

      45% equity is based on bubble prices. Those assets will not be liquidated at current value, they will be liquidated at 25-40% off from current value. That leaves 5-20% equity.

      CMHC does not operate at zero cost to the taxpayer. By shifting risk off those making funding decisions and freeing up capital by greasing securitization, which increases available credit and leverage, they have increased the cost of housing for every Canadian.

  8. If you read the book “all the devils are here” about the housing bubble in the US, you will notice the similarities with what’s happening in Canada.

    The fact is, to reach 70% of ownership, you have to approve mortgages to people that shouldn’t be approved. We’ve made all the same mistakes as the US: liar loans, teaser rates (aka subprime), zero down, etc… This is a recipe for disaster and we’re only witnessing the tip of the iceberg right now. The shit is only starting to hit the fan. I suspect that the finger pointing will start very soon, and people will try to walk away from their responsibilities like rats leaving a sinking ship.

    Pathetic.

  9. Don’t worry. It’s different here. This is the Best Place On Earth ™.

    Right?

  10. The CMHC should not exist in the first place. Think of it, no bank will touch a mortgage with less than a 20% downpayment without the backing of CMHC. The banks know these mortgages are too risky.

    The CMHC was created to allow people who could not afford a large down payment to own a home. The result has been the CMHC has helped make owning a home unaffordable! CMHC insures buyers who would never have have access to the housing market in the first place creating artificial demand. Fannie Mae and Freddie Mac did the same thing in the U.S.

    Just think of how much more affordable homes in Canada would be without the CMHC. CMHC is yet another government program that achieves the very opposite of its objective yet continues to operate in blissful ignorance. Like Peter Schiff says, “The government breaks your leg, hands you a crutch and says ‘See, without me you couldn’t walk.’ “

  11. Ah but it’s all a good argument to advance the petrol state agenda of our very own oil pimp PM. Tar sands, pipelines, tankers on the west coast… a full on sale of our natural resources and elimination of those pesky social programs. All we need is a really good financial crisis to debt slave the majority population so supporting the Cons hard right agenda will look like the only option. Perhaps a little dire for a Wednesday morning?

    • Sorry, that type of absurdist rhetoric belongs on the rabble.ca. Financial crises DO NOT aid the re-election prospects of any politican. Therefore, to suggest they are intentionally pusuing one is ridiculous. As I often remind people, never assume a deliberate conspiracy when basic short-sightedness and human nature will suffice to explain what it happening. Mortgage debt has been inflating since long before the present government took charge. They just embraced the trend.

      • Well the comment was little tongue in cheek but… IMO I don’t think the Cons are intentionally pursuing a financial crisis but I do think they have no problem taking advantage of one to advance their own agenda. No conspiracy, just political opportunism.

      • It is something to behold, the grassroots western Conservative movement has a healthy appreciation for 1) Protestant work ethic and admonishment of debt and 2) the fact that big city eastern Liberals cannot always be trusted.

        Back to the way it used to be in a calculated and monotonous trajectory. More to come!

      • Bingo.

      • Actually Terminalcitygirl is more right than wrong. The Cons hate this sort of Crown Corp, see how they eviscerated the Wheat Board over the objections of Farmers.

        However they very cynically turned to the CMHC and throwing caution to the wind.

    • Tar sands are for dinosaurs and commies – the resource is called oil sands because the upgraded product is indeed oil and much of it is not mined, it’s pumped from the ground just like every other oil well around the world (but with steam assist).

  12. I got that email fom FirstLine this morning too.
    You need to take FirstLine’s policy change with a grain of salt. Ever since CIBC bought FirstLine it’s been obvious to everyone if the mortgage industry that CIBC was slowly going to close up FirstLine. They recently closed their Halifax Underwriting Centre and have been uncompetitive on rates for a long time. I wouldn’t expect other lenders to follow suit on this move, it’s just a incremental move by CIBC to shoe away new business from FirstLine so they can absorb it completely in the future.

  13. Great article in The Tyee today… an excerpt re Van property bubble:

    She recommends that people begin recognizing this bubble and preparing for it immediately.

    “I would tell people to get out from under debt if you possibly can. For many people, that will involve selling a property they own. If you sell a property you get out of debt, and by cashing in equity, you also hold liquidity. This is critical to riding out a depression, which is what we’re on the verge of. Rent is not throwing money away; rent is paying somebody else to take the property price risk for you, which is a very good bet in the current circumstances.”

    To those who say the city is different, Foss has a message.

    “Vancouverites should beware. It is never different here; it is never different ‘this time.’ One rationalizes all sorts of reasons why property prices are justified.

    Prices are undermining the economic and social vibrancy of the city enormously, she goes on to say. “It’s such a sad situation, that’s built up to this pinnacle of financial lunacy and speculative mania. It is a shame if people don’t see it in time to do anything about it.”

    Nicole Foss speaks at Langara College on Feb. 2 from 7-9 p.m. in Theatre 5 (Room A130).

  14. “FirstLine, quietly announced Tuesday that it will no longer accept new applications from “stated income” homebuyers who can’t prove they have the annual net income to qualify for home loans.”

    But there hasn’t been any sub-prime lending in Canada. Canadian banks are prudent. Right?

    • offloading all their mortgage risk to the Canadian public, while absolutely disgraceful, is also prudent

    • I actually applied for a FirstLine a long time ago- both they and CIBC I found were the worst (or best depending on how you look at it)- for asking paperwork and income verification. I have never got a mortgage where I did not have to jump through hoops. -Just my experience with them.

  15. I thing it was a CGA ad last night during global news that caught my eye, they were promoting talking to an accountant to learn how to shelter savings during a bankruptcy. Timely ad? It might have been CA but no matter, their all joining (CMA’s too) to become CPA certified professional advertisers, ha! Sorry, I actually do respect accountants…a hell of a lot more than realtors

  16. The gears are probably turning at the CMHC since they’ve finally realized the extent of moral hazard imposed by the banks – a problem likely compounded by the inevitable adverse selection of getting everyone and his dog to buy a house regardless of price.

    Who the hell takes out a million $ mortgage to buy a property? If it’s that expensive, pay cash unless you plan on skipping the country.

    • Who takes out a mortgage that big? Someone who expects RE to keep going up 20 percent a year — the mortgage is a fiction that allows him/her to convert a minimal down payment into a significant profit within a few years. There is no way in the world the federal government should be insuring the risks in such a transaction.

  17. “If I had a million dollars”

    I don’t recall The Barenaked Ladies following the above line with “I’d buy you a run down 100 year old house converted into 6 suites with 3 bathrooms in East Vancouver”

  18. Prices on point grey road are slowly dropping. A brand new house just went on the market at 8.9 million, the owners paid 5 million for a teardown 5 years ago. Its a really nice house built by keystone with a glass elevator inside, constructions costs would be at least 2.5.If this was 2009 it would have sold in days for 10million+. Now if they sell for 8 million theyd be lucky to break even.

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