The untold story of how elements of the first Conservative budget in 2006 encouraged big U.S. players such as AIG to make a push into Canada, creating our version of subprime mortgages
This type of reporting is getting hailed as fantastic investigative journalism.
Read the article.
It does have some interesting reports of how mortgage insurance lobbying plays out in Ottawa.
But come on.
Does anyone really think that when CMHC has a monopoly on mortgage insurance in a great market like ours that foreign companies wouldn't want a piece of the pie?
And they'll lobby our government to get into the game.
That is not a surprise. Not by a stretch. In fact, the surprise is that it took so long for it to happen!
I'm a fan of CMHC and think they are hugely responsible for the relatively VERY stable housing market here in Canada. This isn't a rant about CMHC.
This is a rant about the quality of reporting we're getting exposed to.
40 year amortization periods with 0 down is not subprime. Subprime mortgages are when you lend money to people that are not the most "prime" candidate. They are "sub" prime and can't qualify for a "conventional" mortgage.
These are mortgages that go out to people who qualify with low credit ratings and "stated" income. Meaning that they don't have to prove they make any income. They just "state" that they do.
And things went a little crazy when the mortgage industry in the U.S. lowered the bar so low that you basically just had to fog a mirror and sign your name to get a mortgage.
The bankers I've spoken with tell me that applications for Canada's 0 down, 40 year mortgages were solid.
You had to have a good credit rating and documented income. They actually think that some of the criteria used for these mortgages (good credit rating, good income) makes them more confident in getting paid on them than some of the other conventional mortgages in Canada.
To have the word "subprime" on the front page of the Globe and Mail associated with 0 down, 40 year mortgages is fear mongering.
I can only assume they did it to sell papers.
And if that's the case it worked, I bought.
For the record, 0 down, 40 year amortization mortgages are no longer available in Canada and the *may* have given the real estate run in Canada some legs for its last 12 months. But it was definitely not responsible for the housing market run since 1998.
To have this article applauded is hilarious.
It just gets Canadians pointing fingers at Harper or the Liberals or blaming things instead of taking a serious look at the issues at hand. It distracts from the real questions. And that's the problem.
A better article would have been explaining to Canadians the difference between Canada and the U.S. and the rest of the world.
1. CMHC gets all its insurance money up front, on the day of closing on a property. U.S. insurers like AIG get theirs in small monthly payments. CMHC is stable. AIG is not. CMHC has money in the bank. AIG does not.
2. Half of the U.S. has "non-recourse" mortgages. Meaning that you can WALK AWAY from your house and the bank can't come after your other assets. Imagine that. I wonder why so many Americans refinance and then walk. Most of Canada uses "recourse" mortgages. Except for Alberta I believe (someone correct me on this, please, I would like to know for certain). Again, a good thing, people take their mortgages a little more seriously here. Ever wonder why we don't see as many foreclosure signs in Ontario as we see in the U.S.?
3. Americans were using interest only, reverse equity and adjustable rate mortgages like they were going out of style - and doing it with "stated" income. Canadians were using conventional mortgages with full documentation and amortization periods as low as 25 years. 30 and 35 year amortization periods only became common in the last 2 years in Canada. Canada has much more conservative mortgage practices than the U.S., the U.K. and Australia...and this has proven to be a good thing.
4. According a senior economist at CIBC, Benjamin Tal, the Canadian market has about 2% exposure to volatile mortgage products. While U.S., the U.K. and Australia have 5 times as much. Canadians have less debt per capita than the U.S., less mortgage debt as a share of income, less consumer debt as a share of income, higher net worth as a share of income and higher cash position as a share of financial assets.
But that's all in the past...
So what should we have our "investigative" journalists focus on now?
What about documenting to Canadians what happens when countries inject massive amounts of currency into the markets.
Let's do a historical analysis of that!
Going back to the 1930's would be a good place to start.
Currencies that are not backed by anything have had a history of doing strange things (in the U.S. Nixon removed the gold standard from the U.S. dollar in 1971). And removing it from the gold standard makes it really easy to print more greenbacks on demand!
Could printing funny money cause problems for Canadians in one year, two, ten?
Do you think putting all this money into the markets makes the dollars Canadians take home on their paycheck MORE VALUABLE or LESS VALUABLE?
And will all the talk of "deflation" shouldn't we actually be thinking about possible inflation in a year or two?
Will this mean that hard assets (property, gold etc.) go up in value? Or down in value?
There are some pretty big bets going on with the global economy right now.
I bet the smart money is pouring its way into hard assets.
The media is teaching Canadians about how to save a bit of tax using a new 5K savings plan that is coming into effect Jan 1, 2009. Sheesh.
Who cares about that when your $5,000 may feel like it's $2,000 in a couple of years.
We have bigger issues to be thinking about right now.
A study about how inflation acts like a "rubber band" pulling up prices with it would be great reporting.
Or, if how prices of hard assets rise too fast they tend to correct and fall back in line with the current rate of inflation.
I think that would be interesting stuff to learn more about.
But I guess there's no demand for that - too boring - wouldn't sell papers.
-- Rant ends here --
Wow, glad I got that off my chest, now I can go get a copy of this weekend's papers 😉
p.s. We're holding one of our free introduction real estate training classes in January. Our offices are in Burlington, Ontario. If you're interested swing on over and we can chat about the Globe & Mail together 🙂