(Yeah, the font is too small to read exactly, but, you get the idea.)
Massive and risky home loans are increasing in number across Metro Vancouver, while mortgage fraud cases are also on the rise, connected to the growth of so-called “shadow banking,” a Postmedia investigation shows.
The trend of increasingly risky loans underlying Metro Vancouver’s high home prices is illustrated by Bank of Canada figures that show the rapid growth since 2014 of large mortgages made to people with relatively low incomes.
This is a growing danger for Vancouver’s real estate market, because under new tighter lending standards introduced for banks in fall 2016, the Bank of Canada says that many of these big mortgages can no longer be insured, and won’t be issued again by federally regulated lenders.
As a result of the tighter federal lending rules, borrowers trying to buy million-dollar-plus properties in Vancouver’s market are increasingly taking out dangerous loans from shadow bankers in a fast-growing and poorly regulated financial market.
There is also evidence of growing links between shadow banks and traditional banks, according to the Bank of Canada’s June 2017 report, as people borrow large amounts from shadow lenders to use as down payments in order to qualify for lower-interest loans from federally regulated banks.
“Price increases in Vancouver and Toronto have an element of speculation to them,” Bank of Canada Governor Stephen Poloz said last week, while issuing the bank’s biannual financial system review. The review showed “riskier characteristics are increasingly evident” in new mortgages.
A December 2016 Bank of Canada report estimates shadow lenders now account for $1.1 trillion in debt — about half as much as the traditional banking sector — and that over the past decade “these new players have become more important and have changed the face of the Canadian mortgage market … (as) tightening bank regulation can lead to migration of activity from the traditional banking sector to the shadow banking sector.”
Postmedia’s review of over 30 regulatory or civil court cases shows a trend of allegations that home buyers and real estate professionals are involved in deceptive mortgage applications that include exaggerating the incomes of borrowers, forged documents of home ownership used by multiple borrowers to obtain mortgages, phoney claims of offshore assets used to back home loans, falsely inflated collateral accepted by subprime lenders to fund real estate development loans, and falsified CRA tax return documents.
For Hilliard MacBeth, an Alberta-based author and wealth manager, the Bank of Canada loan risk statistics and the related growth of shadow banking in Vancouver and Toronto herald a crisis.
“These properties in Vancouver are so expensive that you need people either laundering money or loan fraud or people borrowing such large amounts of money that should never be allowed, in order to keep it going,” MacBeth said. “If everyone is reporting their incomes honestly in Vancouver, there is no way that housing prices can stay where they are.”
– image and excerpts from ‘Risky mortgages, shadow bankers threaten Vancouver housing market’s stability’, Sam Cooper, Vancouver Sun, 16 Jun 2017 [hat-tip to The Auteur; and hats-off to Sam Cooper for pursuing this]
(* The author has exercised their right to poetic license in the writing of the title of this post.)
But, seriously now folks, notice how none of the mainstream players and commentators consider the option of a price crash as a solution to most of Vancouver’s housing problems.
A price crash, a real price crash, would flush out all speculators and all appetite for speculation for about two decades, perhaps even three. The price of accommodation in our fair city would drop to fair fundamental values (perhaps lower for a brief period). All housing would be used, as there would be no pie-in-the-sky jackpot for those who wanted to hold ‘units’ like poker chips. Lending would tighten to the point that one would have to be able to support a purchase with demonstrated income (novel idea!).
Sure, people would get hurt, but people are hurtin’ now, and who is to say who should be hurtin’ and who shouldn’t?
Real estate and related activity would drop from, what?.. its current inflated 30% of the economy to a more historically normal less than 10%. Kids would go to classes rather than smoking weed while tacking cheap shingles to roofs without harnesses. We’d be able to talk about things other than RE at BBQs (I know this may be difficult, but we can do it!). Our minds (and behaviours) would stop being blown and distorted by stories of professionals making more money via their modest house than that saved and invested from an entire 40 year career of honest earnings.
Homes would become homes again.
Vancouver would never be cheap, or ‘free’.. nobody’s expecting that. But ‘honest’ prices, determined by those who actually want to use properties and are prepared to fund them from their own actual funds, would be a very good thing for the longer term health of the city.