Banks Back-Off; Others Accept The Risk – “I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble. Economists predicting a collapse in Canada have been wrong for years; my prediction is that they’re going to be permanently wrong.”

Banks are paring back loans to below prime borrowers amid signs that housing prices are starting to fall. The Canadian Real Estate Association said April 16 that prices in Canada dropped 1.7% in March from the previous month, led by a 3.1% decline in Vancouver. Finance Minister Jim Flaherty said he’s “encouraged” by signs of a housing correction in Vancouver, preferring the market to “correct itself” without government intervention.

Toronto-Dominion Bank, the country’s second-largest lender, stopped originating non-prime residential mortgages as of March 31, spokesman Mohammed Nakhooda said. …
“This decision was based on a number of factors, including a regular review of our secured lending risk management strategies,” Nakhooda said. “To remain competitive in the business in the current environment would require us to increase our risk profile, something we concluded was no longer in our risk appetite.”

Canadian Imperial Bank of Commerce, the country’s fifth- largest bank, said in March it was considering the sale of its FirstLine Mortgages broker. …
Increased risk management has led some banks to reject loans, Reid said.
“Two years ago, they wouldn’t have turned that deal down,” said Reid, 52.

An influx of non-prime lending will benefit Home Capital, Chairman and Chief Executive Officer Gerald Soloway said. The company is expected to earn $1.50 a share before one-time items in the first quarter, up from $1.24 a share a year earlier, according to the average estimate of six analysts surveyed by Bloomberg News.
“We have had a very good first quarter,” said Soloway, who has been CEO for 25 years. “There’s not going to be any surprises, up or down.”

“There is an opportunity for the company to increase its market share without lowering its standards for credit quality,” said Bryan Brown, an analyst at Macquarie Capital Markets in Toronto. He rates Home Capital shares neutral.

“I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble,” said Soloway. Economists predicting a collapse in Canada “have been wrong for years; my prediction is that they’re going to be permanently wrong.”

– from ‘Canada’s big banks flee nonprime market amid signs of housing downturn’, Bloomberg via FP, 20 Apr 2012
[hat-tip Deuces]

There never was sub-prime lending, but now we’re stopping it.
Worthy of a Cold-War memorandum.
Also, Home Capital will get BBQ’ed.
– vreaa

44 responses to “Banks Back-Off; Others Accept The Risk – “I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble. Economists predicting a collapse in Canada have been wrong for years; my prediction is that they’re going to be permanently wrong.”

  1. HCG was backing away from Vancouver with a barge pole a year ago. I wonder if they’re back in the saddle…

    Soloway should learn to keep his mouth shut. That’s a quote that has the potential to make him the laughing stock with little upside if by some miracle Canada doesn’t retrench in the next 5-10 years.

    • For those of you wanting to look a bit deeper into HCG.TO:

      “HCG uses relatively high cost brokered deposits to satisfy its funding needs, reflecting its modest branch network. HCG also exhibits a significant reliance on Canada Mortgage and Housing Corporation (CMHC) mortgage securitizations for funding purposes. HCG has historically benefited from access to funds through securitization markets and insured deposits. Continued access to these funding sources will be an integral component of the company’s liquidity strategy as well as an important consideration in Fitch’s evaluation of the company.

      Insured mortgages are securitized through CMHC-sponsored transactions. Securitized mortgages previously reported off-balance sheet under Canadian GAAP are now included on balance sheet under IFRS. This, combined with margin compression, has led management to de-emphasize the origination of insured mortgages. However, insured mortgages still represent a significant portion of the mortgage book at approximately 56% at YE11. Mitigating credit risk further and providing some cushion against credit deterioration are the company’s sound levels of capitalization. Although, HCG’s increased balance sheet, associated with the transition to IFRS, has pressured tangible capital. At YE11, Tier 1 and Total Capital ratios stood at 17.3% and 20.50%, respectively.

      Looking ahead, factors that could pressure the ratings include deterioration in the overall housing market, adverse credit performance within HCG’s market niche or decreased operating efficiency. Additional downward pressure could come from increased exposure to the condominium market particularly in the Vancouver area, or a significant shift away from the company’s core expertise in residential mortgages towards higher yielding and potentially higher risk commercial and personal lending products. Positive rating momentum is constrained considering the company’s limited product mix, geographic concentration and franchise.”

      • Futher to Jesse’s point, the catalyst for Fitch’s ratings action on HCG was not really company specific (They’ve been doing really well). Fitch is simply freaked out by the housing market in Canada: “The revision of the Outlook to Negative is based on emerging concerns regarding home price valuations and household debt levels in Canada”

      • True, Zero. HCG’s correlated exposure worried the ratings agency. I have been trying to understand whether HCG is continuing to back away from Vancouver and parts of Toronto, as it claimed it was going to do last year.

  2. “I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble,” said Soloway.

    Clearly the quote of the month. Is this guy a boldfaced liar or incredibly ignorant? Must be the latter.

  3. Ralph Cramdown

    I could be wrong, but HCG might do OK, you don’t make money in subprime without rigorous underwriting standards — none of this “Computer says yes, here’s your cheque!” There’s a difference between a B lender and an A lender doing B loans by convincing itself that they’re A.

    • “you don’t make money in subprime without rigorous underwriting standards”

      On the contrary, you make a buttload of money in subprime with poor-to-nonexistent underwriting standards. Until you don’t.

      Google “New Century” or “Countrywide Financial.”

      • Ralph Cramdown

        The originate to distribute model is a different thing. Who cares if it’s a good loan if you’re going to bundle and sell it to investors in six months?

      • Sounds familiar….

  4. “Finance Minister Jim Flaherty said he’s “encouraged” by signs of a housing correction in Vancouver”

    What housing correction? Benchmark prices for East and West were up in March. For the year Van west is up 5.5% and East is up 2%.
    Methinks Flaherty is just jawboning.

    • Flaherty obviously doesn’t cover the market closely. Last I heard his “industry experts” were advising him that things were cooling off, so obviously no need for further amortization clawbacks.

    • reality check

      I think he was talking the whole lower mainland not just the city proper and the suburbs are dropping a bit

  5. More letter exchanges on East v. West:

    Poor Rebecca. I for one got what she said, others insist on interpreting things in their own way.

    • # Assaults per neighbourhood, in 2010

      Where Neighbourhood Assaults
      West Shaughnessy 9
      Neither Stanley Park 11
      West Kerrisdale 14
      West Dunbar Southlands 17
      West South Cambie 22
      West Musqueam 30
      West West Point Grey 30
      West Arbutus Ridge 31
      West Oakridge 34
      West Riley Park 66
      East Killarney 69
      East Victoria Fraserview 82
      West Kitsilano 86
      West Marpole 88
      West Fairview 134
      East Hastings Sunrise 169
      East Sunset 201
      East Renfrew Collingwood 204
      East Mount Pleasant 216
      East Kensington Cedar Cottage 222
      East Grandview Woodlands 355
      Neither West End 378
      East Strathcona 660
      Neither Central Bus. Dist. 1795

      The east-west divide is pretty clear to me.

      Data source:

      Click to access 2010.pdf

    • I, for one, will be happy when the stupid idea that “noticing the overprice” == “vast personal entitlement to granite and west side addresses” is finally laid to rest. It is utterly irritating, given that leaky, tiny condos are wildly expensive, pretty much anywhere in Vancouver, for my family with a down payment and yet we can rent a house.

    • reality check

      I just read Rebecca Kovac’s rebuttal to Louise Lee’s letter and I still am in shock. She clearly stated that she wouldn’t lower herself to live in the “less than perfect” neighbourhoods of Vancouver’s east side.
      [Two obnoxious and verbally abusive sentences removed. Any more of these kinds of posts will result in suspension, rc. Kindly keep it civil. -ed.]

  6. Photo Op ‘O The Day…

    Jiabo coyly ‘gooses’ Angela as they discuss their assorted SubPrime portfolios… Angela, clearly, is in love… [Warning To Premier Wen – those GermanGirls are notoriously fickle]…

    [ChinaDaily] – Wen, Merkel jointly open Hannover trade fair

  7. Renters Revenge

    A bit old, but not really outdated:
    Ottawa: The biggest sub-prime lender in the world

  8. Had a conversation with a Realtor today. She told me things were “really slow” for this time of year and that the market was “dead”. She sells mainly on the West Side and mainly to Chinese buyers. She also said she’d seen a slight increase in activity over the last couple of weeks so, who knows, maybe we’ll have another year of insanity. In any case it certainly seems to be a difficult time to be a Realtor…what a shame.

    On a related note my previously bullish colleague (“HAM! Running out of land! Everyone wants to live here!”) has started making bearish comments and now believes prices will go down over the next year. He thinks it’ll only be a 5% drop but I was surprised how fast he changed his opinion.

  9. whack a ham mole game

    “The Gold Coast views increasingly mean that “a lot of unskilled or trade jobs don’t pay enough (often $30,000 to $50,000 a year) for those workers to live in Anacortes anymore,” Richardson says. Everyone has a story about children of long-time families who can’t afford to live there. ”

  10. Here’s the link:

    Red Maple Park 是由著名开发商 Polygon 在兰里 Willoughby 社区兴建的大型城市屋住宅,毗邻风景优美的 Yorkson Creek,被绿茵公园和儿童游乐场环抱,环境清新怡人。社区生活多采多姿,信步可达购物商店、食肆、咖啡厅、康乐中心,以及Willoughby小学。 Red Maple Park 位于名校 R.E.Mountain 的学区内,R.E.Mountain 是BC 省排名前10名的著名公校。

    以优雅温馨的工艺风格建筑,Red Maple Park为您提供二及三睡房的城市屋选择。室内设计时尚雅致,开放式的间隔,配以优质层压木地板,家的和暖感觉悠然而起。厨房设有花岗石台面和亮丽的不锈钢家电;宽大的私人平台让您尽情享受室外活动的乐趣。此外,每户均设有双车房,细心顾及您的需要。

    Red Maple Park 住户更尊享 The Maples Club 的一切华丽设施。这所 8,400 平方尺的私人会所位于社区的正中央,在儿童游戏区之旁。设施包括露天庭园台阶、度假式游泳池和按摩池、健身室、曲棍球室、影视室、设有壁炉的活动室、外来宾客套房,及住户礼宾服务等等。


    Red Maple Park 的售价仅从$299,900起,而且Polygon 目前正为该楼盘的买房者提供5年固定利率 1.99%,机会难得,该优惠即将结束,请尽快填写团购表单,或直接联系我们的特约经纪,以了解更多详情。

    Sorry for the Chinese, but it says Polygon is offering 5 year fixed morgage at 1.99% to encourage people to buy Red Maple Park in Langley. Incredible!

    • That looks like a straight developer incentive. They will give discount on the rate similar to car dealers offering discounted loan payments. For developers this is preferred because they don’t want to drop the price and face the ire of existing owners who overpaid.

  11. HCG said they are totally out of Okanagon because it’s “really bad there”. I wondered how quickly you can “get out” of a territory given these are 5 year loans. Maybe they meant no new business?

    On the plus side their geographic strategy story works like this: asses valuations and determine an acceptable LTV for the region. For example: Vancouver 55%, Toronto 60%, Guelph 70%. That might mean no one uses them in Vancouver, so be it.

    • Can these LTVs be taken as their guesses as how to far the market might fall in each of those places?

    • Really they don’t have much of a choice in the matter. Analysts are telling them to limit their exposure to “high cost regions” and no better way than requiring a healthy equity ratio on the loan.

      HCG does provide an interesting proxy for regional risk. It looks on the surface like they’ve priced in about 40% downside.

  12. Everyone knows there’s a RE bubble, even the powers that be know it. No one wants to take the blame for creating it or for putting an end to it. And no one wants to see the mayhem that will arise when it comes to an end. All bubbles end the same way.

  13. “There never was sub-prime lending, but now we’re stopping it.”

    Subprime and nonprime have different meanings.

  14. Pingback: “Had a conversation with a Realtor today. She told me things were “really slow” for this time of year and that the market was “dead”.” | Vancouver Real Estate Anecdote Archive

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s