Thursday, April 5, 2007

Mortgage Mania: how the bubble grows?

Interesting article on MSN today.

It's obvious that 'innovation' is necessary in the mortgage market place in order to finance "one-million dollar starter homes" in some of our cities.

So what does mortgage innovation look like? In 2003, Scotiabank launched its Free Down Payment Mortgage. The other banks quickly followed. But they weren't the first to do it. So-called alternative lenders like Calgary-based CanEquity Mortgage or Toronto's Xceed Mortgage Corp. have been offering no-money-down mortgages for some time.

As if that wasn't enough, car manufacturer GM had to get in on the deals and they now offer 107% mortgages: because it's always a good idea to leverage more than your property is worth.
"The Canadian cash back program can also be used by someone who already has a mortgage with a rate that is considerably higher than the current rate and is in a situation where it pays to break the mortgage and use the cash back to pay for the penalty costs," [Callum Ross, a Toronto mortgage broker] writes on his website.
I'm curious to know who would have those high rates, considering that rates were below 5% for at least 3 years before our current 6% figures kicked in in 2006?

So why would lenders take such risks? Apparently they're not. After all these aren't sub-prime offerings; you actually have to have really good credit ratings to qualify for what David Dodge of the Bank of Canada, in a written expression of dismay, called
products [that] contribute to inflation... and increase the risk of a housing bubble by excessively expanding the pool of potential buyers.
But more importantly, these 'alt-mortgages' get [clients] into the mortgage cycle earlier than they would otherwise and

Most importantly, such mortgages entail higher interest rates — typically one or two points above what you could negotiate on a conventional mortgage. And if you want to get out of the mortgage before the end of the term, you'll need to pay back at least some of the gift amount.

Sounds like a good deal to us. Where can we sign up? What's that you say? These 'innovations' have a catch?

The catch — and you just knew there had to be one — is, boy, will you pay down the road.

No sh$t, Sherlock. But that's OK, we live in the buy now do not pay for 18 months era of 'free money' and guilt-less purchasing. After all, if we spend more than we earn, we can just go and refinance our debts into our mortgages, can't we? No wait, we already owe more than our homes are worth and the market value was going up. What a great deal we got ourselves into.
with no equity in the home, you essentially start out in the hole by the amount of your closing costs... the mortgage has to be insured by the likes of CMHC or Genworth Financial... This insurance ups your cost, and the lower the down payment, the higher the insurance rate. With a no-money-down mortgage, you're looking at 3.5% or higher of the principal.
Wow. Think about that for a moment. You borrow 107% of the market value of your home. Then it costs you 1.5% in closing costs plus 3.5% or more in insurance, so now we're at over 112% of the value borrowed. I know, you could use that extra 7% to cover the closing costs if you are smart. BUT IF YOU WERE SMART YOU WOULDN'T BORROW LIKE THIS.

So there's a particularly good chance you wandered down to Chintz and Co to stock up on glam furnishings prior to hitting up the Mercedes dealership to finance that new C-class you've been eyeing for years, 'wrapping' it all into your mortgage which is a great idea in times of low interest and rising property values.

How can we assume these mortgages aren't smart? Don't take it from me; take it from the pros
No-money-down mortgages — along with long-amortization and interest-only varieties that keep your premiums low but keep you in debt longer — are much more pricey in the end, which is why they don't have many fans among financial advisers (emphasis mine)
Considering that most Canadians get their financial advice in their bank, and that in 2006 CIBC reported "that non-traditional mortgages are growing by 50% a year" I'd say this market's practices are gonna be OK...
"Over the next five to 10 years," [CIBC] noted, "innovation in the mortgage market will accelerate at a pace not seen before in Canada."


Anonymous said...

And they say that the US sub-prime fall out won't happen here. Anyone up for another thrilling roller coaster ride?


VictoriaREBear said...

"Over the next five to 10 years," [CIBC] noted, "innovation in the mortgage market will accelerate at a pace not seen before in Canada."

So, Canadian lenders are hell-bent on adopting the very products now causing a major flame-out in the American mortgage markets. Wait a minute - it's GMAC Financing that's backing most of these Canadian sub-prime and alt-A boiler-room operations like my oxymoronically named next-door neighbour Mortgage Intelligence. So, all the lenders seem to be doing is moving north to fleece our naive and ignorant flocks after having bled the US market dry. Looks like the only thing that will bring down our market is a real, honest to God hard-hitting US recession an the subsequent local effects, because Canadians have lost their minds in this RE frenzy. Sad situation.

hhv said...

We shouldn't forget that gov't regulation requires these mortgages to be insured... so now its not just the banks and the idiot mortgage holders that get fleeced, it's the taxpayer too.

VictoriaREBear said...

Yes, shameful but true. These people running CMHC are not stupid, and must realize that insuring zero down mortgages for unlimited amounts for 40 years can only add fuel to an already ravenous affordability fire. So, why are they doing it? Political pressure? Desire to ensure that the Baby Boom generation enjoys the boon of RE wealth and high position on the "property ladder"? Personal vested interests unfettered by regulations?

Or maybe they really are stupid, and truly think that their policies are helping buyers "get into the market" in a sustainable way. I wish we concerned citizens could actually have a dialogue with these people, but as usual the wall of bureaucracy blocks any attempt to get any real answers.

hhv said...


There's been a shift in most gov't institutions in the past 10-15 years to become more 'consumer focused' and less 'regulatory'. The CMHC would fall into this: they're an independent crown corp that operates at arms length from gov't, but their direction from gov't would be to serve their clientele, not regulate the market.

As a consequence, the board room would govern itself like any other business: What's our bottom line? growth. How do we do it? get more sales. How do we protect ourselves from unforeseeable issues? insurance.

You can see from the regulator's comments (Dodge) that he's not happy with the switch and 'innovation' in policies.

VictoriaREBear said...

Perhaps CMHC's mandate to provide "service" and product development within a framework of providing mortgage insurance doesn't take affordability issues into consideration at all, leaving that aspect up to the market to determine. I suppose that from a certain myopic point of view any asset is "affordable" as long as people are buying it (regardless of the risk and debt they take on to do so) and only ceases to be affordable when there is broad evidence that people are no longer buying and are in fact losing their recently purchased assets to foreclosure. At that point, I suppose new "innovations" will be introduced under the banner of sustainability, as appears now to be happening in the States. The amusing aspect of this is that the new innovations seem to include such concepts as down payments, confirmation of income/assets and reasonable amortization periods.

Vicguy said...

Think about it, there are all these overpaid Bay St banker boys whose job is to increase sales in mortgages and make the bank profit.
Creative financing buys them another few years of job security til the first wave of borrowers has to renew at higher rates such as what is happening now in the US. Question is how many suckers are there left out there ?

Roger said...

I have updated all the stats on the Needs Analysis Website with the March VREB data.

If you look at the graphs you will see things are not as dire as some posters have indicated. If you look at Victoria
this month
you will see that SFH average prices are below several of the monthly peaks of last year. Condos and townhouses are also below many of the previous peaks and are not showing much upward pressure.

vicguy is correct with his comment about spring surges. I suggest that all bears look at the trend and YOY graphs and be patient. Don't get jumpy based on one months data from VREB. Look ahead to September when there will be a pile of inventory and fewer buyers.

patriotz said...

CMHC's real mandate is not to make housing affordable, but to support the real estate and banking sectors and keep home prices high.

If the government stayed right of out the mortgage business the market would determine prices and rates. Housing would be affordable because sellers would have to settle for prices that people could afford to pay.

The talking heads are going to say that these mortgage products are going to support continued high prices. The reality, as we are already seeing in the US, is that they are signs of a looming crash.

Vicguy said...

"The talking heads are going to say that these mortgage products are going to support continued high prices. The reality, as we are already seeing in the US, is that they are signs of a looming crash. "

Good points patriotz,thats what gets me the most is this govermental support/CMHC/RE Boards constant comments that are telling you like a dictator from a 3rd world country that "you just better get used to it and accept these high prices cause they are here to stay" and don't even think that prices could ever go down. I am sorry but I have grown up knowing that inflation is part of life but there is a thing called fair markets and manipulated markets when it is in someone ele's best interest but it isn't yours and mine.
As in manipulated I am meaning the constant barrage of media ads never seen before that are telling you HAVE to buy now and if you don't you are a loser. A cetain amount of the population is gullible and sucked in by this media manipulation and those are the ones about to be slaughtered in the coming months.

Melanie McLister said...

Hi All,

Unfortunately there is a wee little inaccuracy here.

The GMAC 107% mortgage does not give you 7% cash back. It provides 3% cash back.

The other 4% is a lender fee. There is no extra CMHC insurance on this mortgage because it is self-insured by GMAC. (That's what the 4% is for)

The loan-to-value (LTV) of this mortgage is therefore 107% -- not 112% as the story suggests.

You can read more about this mortgage here:

Or feel free to email me at if you need more info.

Kind regards,