Canada's proactive bank bailout

And they said we are different here. Of course, they were right: we bail our banks out before they need to be. Apparently, the proactive bail out program will continue:

The banking industry has been pressing the Finance Minister to extend the length of the program because they continue to benefit from it and because there is still the possibility that liquidity pressures could re-emerge.

I think we should make no mistakes about what is happening here. It is very clear that mortgage holders don't want to be lending at today's rates. There is tremendous risk for lenders with home ownership rates at all time highs, home prices at all time highs and interest rates at their lowest in history. There is no wiggle room, the banks would usually price in the risk with higher interest rates, but because they know if they did that, market prices would fall, they don't want to. Thankfully, they have the Canadian taxpayer.

I'd write more, but I came across a piece of writing that has already summed up the issue better than I can:

True, Canadian banks have avoided some of the sillier extremes, particularly those related to off-balance sheet leverage. But the key problem in Canada is precisely the same as it is in the other western countries now experiencing bank solvency crises. Home prices have grown to an abnormally high multiple of employment income, supported by a rapid expansion in mortgage debt.

The key difference between Canada and other markets is that in Canada the cost of bad home loans have been socialized in advance. In Canada, we didn’t need to disguise our sub-prime excesses within dubious mortgage-backed securities. Why create an alphabet soup of bogus AAA paper when our government provides seemingly limitless quantities of underpriced mortgage insurance? As a formula for creating housing froth it has been virtually unbeatable. Housing markets may be cratering throughout the world, yet one observes a perverse new high in Canadian real estate prices in May of 2009.

The key to Canada’s bubbly housing success been the CMHC . The Canada Mortgage and Housing Corporation writes guarantees on most Canadian mortgages originated at greater than 80% Loan-to-Value. This agency has been on a massive expansion binge of late. In 2008, a year of synchronized global recession, the CMHC expanded its mortgage insurance in force by a whopping 18%. CMHC now guarantees $407.7 Billion of high loan-to-value mortgages and an additional $233.9 Billion of securitized mortgages.

In all, the CMHC mortgage guarantees are equal to slightly more than half of Canada’s GDP. Against this total, CMHC has miniscule equity capital of $8.1 Billion. How is it that more than $630 Billion of dodgy mortgages can be guaranteed by an entity posting just over 1% in equity? This is a question that curiously appears to have escaped the notice of Canada’s top notch financial regulators.

The role of the Canadian banks has been to commit capital to CMHC-insured mortgages as quickly as they receive applications. It is not mortgage lending in the traditional sense, more like underwriting government bonds and taking a 150 basis point spread as compensation. In this way, the Canadian real-estate bubble looks a lot like its American cousin. Home loans are being written for those who likely cannot pay by lenders who pass through the credit risk to a third party. However, in the case of Canada, the third party is our own government and not the Chinese or Saudis who snapped up American mortgage paper.

All of the above was quoted word for word from Geoff Castle's blog. The comments over there, on this post anyway, seem to be very intelligent. Discuss away here if you'd like.