We're All Subprime Now

I have been continually hearing that Canadians and Canadian lenders have been more prudent in lending than their American counterparts. I was more than a little interested to read:

The Province: Tighter mortgage rules thwarting sales

Pauline Kendall owns three houses and a condominium but she couldn’t get financing this summer when she tried to add to her real estate holdings.
The East Vancouver resident says the federal government’s new mortgage rules have complicated financing for self-employed people such as herself and for first-time buyers.
“I was a little bit shocked,” says Kendall, 62, who put in an offer on a home she had her eye on in July but had to pull back when the only option was expensive refinancing of the home in which she lives.
Kendall sees it as the ”federal government trying to protect us from ourselves.”
“It’s interesting times to have four properties in East Vancouver and not having a bank interested [in financing a purchase],” said Kendall, who works as general contractor and as a landlord for her properties.
Her homes “average out” to be worth $1 million each and the condo is worth close to $500,000.
“Now, no matter what we own, how much equity we have, we just don’t fit under the new rules,” she said.

Apparently recent changes to income qualification and amortization lengths are throwing wrenches into fancy plans. Just throwing it out there, if Vancouver prices are indeed as high as American housing expert Robert Shiller is claiming -- the same message this and other blogs have been calling out for over five years now -- perhaps those mountains of equity local property investors claim to have may be a tad ephemeral, and loaning more money to one whose ability to service loans depends heavily upon the cut and thrust of the local real estate market may be somewhat against "prudent" risk management guidelines.

It certainly seems the federal government is "trying to protect us from ourselves".

(Note: title taken from Calculated Risk)

US Financials Falling Like Dominoes

Sept. 14 (Bloomberg) -- Lehman Brothers Holdings Inc. prepared to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm and Wall Street prepared for its possible liquidation.

Lehman and its lawyers are getting ready to file the documents for bankruptcy protection tonight, said a person with direct knowledge of the firm's plans. A final decision hasn't been made, though none of the other options being considered appeared likely, the person said, declining to be identified because the discussions haven't been made public.

Sept. 14 (Bloomberg) -- Bank of America Corp. agreed to buy Merrill Lynch & Co. for about $44 billion, a person with knowledge of the deal said, after shares of the third-biggest U.S. securities firm fell by more than 35 percent last week and smaller rival Lehman Brothers Holdings Inc. neared bankruptcy.

Bank of America and Merrill reached a deal in principle, according to the person, who declined to be identified because the deliberations were private. A final merger agreement hasn't been signed yet, the person said. The boards of Merrill and Bank of America approved the transaction this evening, the Wall Street Journal reported, citing unidentified people familiar with the matter.

Sept. 14 (Bloomberg) -- American International Group Inc., the insurer struggling to avoid credit downgrades, is seeking a $40 billion bridge loan from the Federal Reserve as it tries to sell assets, the New York Times reported.

The insurer has turned down a private-equity investment because it would have meant handing over control of the company, the Wall Street Journal said on its Web site, citing unnamed people. AIG may get access to the Fed's borrowing window in an ``extreme liquidity scare,'' Citigroup Inc. analyst Joshua Shanker said in a Sept. 12 research note.

Home of Insanity

Whalley seems to be the home of insanity this spring. MLS # F2800307 is listed at a delusional $1 Million for the not-so-prestigious Whalley address. Here is the description:

Executive lifestyle living in this spectacular Penthouse, featuring panoramic views from every room. The professionally designed formal dining/living room will capture the most discerning buyer. The elegant gourmet kitchen, complete with granite counter tops, stainless steel appliances awaits a "Master Chef". Relax and entertain on the top of the world, on your own private, one of a kind, 1000 SF rooftop deck, complete with new hot tub, water feature, lighting and a spectacular panoramic views.

I am not sure what kind of views you are expecting but I don't call looking down onto King George Highway, the local Canadian Tire, and homeless people living under tarps in the local park a "panoramic view."

I have no idea what kind of 'executive' would want to live there but whatever company he/she is running - I'm running away!

Compare this Whalley condo listing with MLS # F2802965 a home listed in the Fraser Heights area of Surrey for $100,000 less. If I were in the market for a $1 Million home I would buy 4300 square foot home in Fraser Heights and buy a very comfortable vehicle for the extra $100,000.

Both homes are grotesque displays of overconsumption but value for dollar is certainly lacking in the Whalley condo. This type of price compression is typical near market tops where realtors persuade their clients to list at ever more ridiculous prices and detachment from market reality becomes pervasive. I mean really how many Whalley 'executives' are there. Is he/she going to commute on SkyTrain after walking past the drug addicts and the local McDonalds! I seriously doubt it. I'm really glad that the Whalley area is being cleaned up and that more people are going to live and work in the area but no 'executive' in their right mind would choose the condo over the home in Fraser Heights.

Wall Street Owns Federal Reserve

In a move that basically puts central bank interest rates below the rate of inflation, the US Federal Reserve lowered their prime rate 75 basis points to 3.5% before markets opened this morning.

Just a reminder to everyone out there, this is exactly the stupid type of move that got us into the whole mortgage mess, housing bubble, credit crisis. Look for the next bubble to start anytime now with even more interest rate cuts left to come with the inflation beast lurking and about to be let out into the street.

What is your bet on the next bubble?

Here is my short list of candidates:

Infrastructure
Agriculture
Alternative Energy

Time to Start Buying? Maybe, Maybe Not

Update:
Trading was halted Tuesday on the Sensex after 9.5% drop in market value.
The Nikkei, Hang Seng, and other Asian indexes are also down dramatically in Tuesday trading.

Keep your powder dry.

The TSX is down nearly 5% this morning and down well over 10% year to date. We are back into 2006 territory for the level of the TSX and I am getting calls from clients now to sell everything. This is, from my past experience, the time to start buying. Most people are their own worst enemy to their long term financial health. They buy when they should be selling and the sell when they should be buying.

Cash Injection - Hello Inflation

By HEATHER SCOFFIELD Globe and Mail Update December 12, 2007 at 12:29 PM EST

OTTAWA — The world's major central banks, including the Bank of Canada, are launching a rare coordinated action to calm global credit markets and smooth out transactions over the end of the year.

The Bank of Canada, the U.S. Federal Reserve, the European Central Bank, the Bank of England and Switzerland's central bank made a joint announcement Wednesday, saying they were taking coordinated measures “designed to address elevated pressures in short-term funding markets.”

Investors applauded what was yet another step to deal with a severe credit crunch stemming from the tightening of bank lending standards. The Dow Jones industrial average was up by more than 100 points in midday trading, after rising more than 270 points in early trading, while the S&P/TSX composite index gained more than 120 points.

“At the very least these measures should tide the markets over the potentially awkward New Year period, and hopefully well into 2008 as well,” Capital Economics said in a research note. “They do not address the underlying imbalances threatening the world economy – notably the impact the U.S. housing slump will still have via conventional economic channels – but they should at least reduce the risk that the credit crunch tips economies into recession.”

For its part, the Bank of Canada will inject liquidity into short-term money markets, something it has resisted doing over the past few months despite widening spreads in short-term debt markets.

To date, the Canadian central bank has only concentrated on injecting liquidity into the overnight market to defend its target interest rate, which stands at 4.25 per cent. But spreads on credit for terms longer than overnight have been high and widening recently.

The central bank will enter into purchase and resale agreements with banks Thursday to the tune of $2 billion, followed by a minimum of $1 billion next Tuesday.

The Bank of Canada will also expand its list of collateral, something financial institutions have been begging the central bank to do for months.

Acceptable collateral for the term liquidity includes Government of Canada bonds and bonds guaranteed by the government, such as Canada Mortgage Bonds and securities backed by provincial governments, and bankers' acceptances and bearer deposit notes.

The Bank of Canada also said it would begin in March to accept some kinds of asset-backed commercial paper, or ABCP, as collateral for borrowing from its standing liquidity function, a pool from which banks can borrow at the bank rate, on an overnight basis, to help deal with temporary liquidity problems in their settlements.

To be accepted as collateral, the ABCP can not be the type that froze Canadian markets in August. Rather, it must be backstopped under global rules, not looser Canadian rules, the central bank said.

The fact that the Canadian central bank is taking measures it has resisted to date — making plans to accept ABCP as collateral, getting involved in term lending, and being more lenient in the collateral it accepts – suggests grave and urgent concern on the part of the central bank.

And the fact that it is coordinating credit-oriented action with other central banks suggests problems are deep and widespread, heading to a climax as the year draws to a close and demand for liquid cash spikes.

The liquidity measures are aimed at flooding money markets with extra readily-available cash at a price lower than the market is demanding now. The measures are meant to drag spreads back to more normal levels, and instill confidence in the markets.

While each central bank's measures may seem modest taken on their own, they are impressive if taken together and should be effective, said Mark Chandler, fixed income strategist at RBC Capital Markets.

“It's coordinated with monetary policy and it's coordinated with central banks, and it shows that they're listening,” he said.

Markets balked yesterday when the U.S. Federal Reserve cut its key rate by just a quarter of a percentage point, feeling the Fed was not sufficiently recognizing the pain felt from the credit crunch.

The Fed's response makes more sense now, with the news that it is coordinating with central banks to inject liquidity, Mr. Chandler said.

The action comes alongside interest rate cuts by the Fed, the Bank of Canada and the Bank of England, he pointed out, and as a package should ease problems in debt markets.

Mr. Chandler said it is wise for central banks to work together, since the problem of widening spreads in credit markets is globalized – more expensive borrowing conditions in one country has sent borrowers scurrying to other countries in search of better rates. But the pressure of their demand made for more expensive borrowing in other countries too.

So a problem in England quickly became a problem in Canada and the United States.
“We've all been fighting for the same thing, which is a pool of liquidity,” Mr. Chandler said.
That pool is now larger and easier to access.

In a statement timed to occur before the start of trading, the Fed said it planned to offer $40 billion (U.S.) in emergency funds to banks next week through an auction process.

The Fed said that it was creating a temporary auction facility to make funds available to banks and was also setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.

The first two auctions of $20 billion each will be next week on Dec. 17 and Dec. 20.
Analysts said the use of auctions to try to get more money into the banking system was an acknowledgment that efforts to spur direct loans from the Fed to banks through the Fed's discount window had not worked as well as hoped because of banks' fears that investors could become worried if they started utilizing the Fed's discount window to any large extent.

The Fed said it was also setting up lines of credit with the European Central Bank and Swiss Central Bank that could be used for additional resources.

The Fed said the new auction process should “help promote the efficient dissemination of liquidity” when other lines of credit were “under stress.”

It said that the temporary swap arrangements being set up would provide up to $20 billion in reserves for the European Central Bank and up to $4 billion for the Swiss National Bank. The reserves would be available for up to six months.

Since the global credit crunch hit with force in August, central banks have been injecting massive amounts of money into the banking system in an effort to keep credit flowing.

However, those efforts have only been partially successful. Many businesses and consumers report rising trouble in obtaining loans as banks become more fearful about extending credit in the wake of a surge in bad loans stemming from the U.S. housing crisis.

But I thougth these problems were contained to the United States and only affected a few deadbeat borrowers called subprime!?!?!

Check out Calculated Risk on this topic.
Or Floyd Norris' comments at the NY Times.

Nucking Futs

A word of wisdom "Never hold your farts in. They travel up your spine and into your brain . . . that's where the worst ideas come from." I am sure that is where this idea came from. Just when you think things couldn't get any nuttier, CMHC has gone to the dogs. Yes that is right, our national taxpayer funded subsidy to the banking and mortgage business is doing stuff that is . . . well . . . Nucking Futs.

Latest in their 'brilliant' financial innovations is a splendid no-down-payment-required 'investor' mortgage insurance so that lenders need not worry and extend credit in even the craziest of situations. CMHC gets a gigantic cut of the purchase price at 7.25% to shield them from the risk of default by the borrower.

Why would a borrower ever default you ask? After all our real estate market is bullet proof and prices only go up and we are hosting a two week long sporting event in a couple years and rich celebrities and asians and drug dealers will buy all the property in the province in a couple years with their endless wealth. Why not borrow all the money you can get your little speculative, gambling hands on and bet the (taxpayer funded) farm on some shoebox condos made by drug smoking, ill-qualified construction workers and marketed by a delusional multi-millionaire with a marketing budget so big it dwarfs the construction costs?

That's it . . . I give up . . . I am going to nominate the CMHC economics department, Bob Rennie and Cameron Muir for the Nobel Peace Prize in Economics for rigging an industry that is immune to rational thought and behaviour and is immune to the vagaries of the business cycle.

Hat tip to freako and CMHC for inciting this rant.

Homes of Insanity Comparison

I haven't had the stomach to do another instalment of "Home of Insanity" for a couple months now but I thought I'd give it a shot. Lately, I have noticed extremely divergent asking prices for homes of similar quality and likewise have noticed similar prices for homes of extremely divergent quality.

Featured here, our Home of Insanity is located in 'Langley Meadows' subdivision near Willowbrook Mall and other Langley shopping. When I was growing up, in the area, Langley Meadows was affectionately known as "Langley Ghettos" because the homes are on small lots and they are typically of a somewhat substandard quality and were inhabited by the lower income strata at the time. They were largely built during the late 70s and early 80s. Many of the builders who built the homes went bankrupt during the 1981 crash as the homes they built, at the time, were selling (pre-bust) for $150,000ish and sold only a couple years later for $75,000ish (post-bust). The homes were aimed at the first time homebuyer and were built with affordability in mind - clearly that isn't the case any longer.

Let's have a look at one of the more pricey homes in the neighbourhood.

MLS# F2722600 - 2825 WOODLAND DR, Langley, BC - Asking Price = $459,900

Small lot, unfinished basement, moderately updated but nothing special and all for a monthly mortgage payment of $3000 + $200 / month property tax + $200 / month maintenance. Why buy when you can rent the whole thing for less than $2000 / month.

The divergence here exists between the least expensive home in the neighbourhood with MLS# F2716966. 2610 WILDWOOD DR, Langley, BC - Asking Price = $389,900

Same size lot, slightly larger house, finished basement, why is the asking price $70,000 less?

A couple blocks away we can find some new construction on simlar sized lots for a houe that is 50% larger and brand new. How much more is the larger, brand new house compared to the 30 year old house? $50,000, $75,000 or $100,000?

How about $30,000 more and that'll get you a new house with new appliances, a warranty, and a lot less maintenance for the first few years? Albeit with a jungle of a lawn to start! I think the developer is having a difficult time unloading these units.

MLS# F2708200 - 19930 73A AVE, Langley, BC - Asking Price = $489,900

Truly insane.

Home of Insanity - Renfrew V643849

This morning we are featuring MLS V643849, a classic stucco covered Vancouver bungalow in the lovely Renfrew neighbourhood, situated between two larger homes (people with low self esteem need not pursue this listing). Buying this listing as a rental property would mean that you have some cajones and a big bank account. You can show off to your friends by telling them how much more your mortgage is than the rent.

Yes, this home with a 'low basement ceiling,' looks like the yard hasn't been maintained, and really needs a coat of paint, some new steps, and windows, is currently rented out at $1050 per month. The cost buying this property at list price by borrowing money and paying it back over 25 years is $3,259.84 per month. Add on some property taxes and basic upkeep and yes that's right you can subsidize your renter to the tune of $2500 per month.

Home of Insanity.