From the Globe and Mail:
Transparency would be an asset of great value to Canada as the country faces perplexing policy issues on home ownership and mortgage lending in the current recession. As things stand, however, the severity of the problems in question is largely a matter of anecdote and guesswork.
If financial institutions and other housing market participants supplied data to Statistics Canada, these issues could be lucidly discussed and resolved.
Canadians may congratulate themselves on a less troubled real estate market than that in the United States, but how much less troubled is unknown. The world economic crisis was triggered by inflated housing prices in the United States, but Canada and other countries had a housing bubble, too.
The number of subprime Canadian mortgage borrowers, for example, remains a mystery, as is the number of people who have lost their homes by power of sale and foreclosure; in the U.S., the equivalent figure is a matter of clear public record on a continuing basis.
Because of the credit crunch, some significant number of Canadians who are successfully meeting their mortgage payments, though their credit ratings show relatively high risk, are in danger of losing their homes when their mortgages come up for renewal. The lenders that accepted their mortgage applications in the first place would have to advance new cash, because they sold or “securitized” the original mortgage debts. Some of these non-bank lenders will now be unable to fund what amounts to a new loan, under present economic conditions. Moreover, the value of the security – the homes – has fallen.
From $3-billion to $5-billion in mortgages and as many as 25,000 borrowers may be affected, but these are only estimates.
Similarly, the question of whether mortgage-loan insurers should compete on a level playing field with respect to the federal government's complex guarantees in favour of insured mortgage lenders is obscured by the lack of information on its implications. Currently, the insurance policies issued by Canada Mortgage and Housing Corp., a Crown corporation, are 100-per-cent guaranteed, while the policies of private insurers, now principally Genworth Financial Inc., are 90-per-cent covered.
In July, the federal government wisely cracked down on mortgages with no down payments and long, 40-year amortization periods. But, again, the effects of the risky mortgages previously backed are unknown.
The government is rightly trying to keep credit flowing, in housing as in other sectors. It would greatly help if the size of the problem could be discerned.
"Because of the credit crunch, some significant number of Canadians who are successfully meeting their mortgage payments, though their credit ratings show relatively high risk, are in danger of losing their homes when their mortgages come up for renewal."
I believe CMHC has guidelines for this. In essence they have contingency in case the loan is negative equity; the lender is allowed to make the loan anyways with CMHC insurance.
It will be interesting to see if Canadian lenders in conjunction with CMHC consider preemptive cramdowns on some of the loans that will go into default. Also, if some of these lenders go belly-up, how will the companies that pick up the pieces treat the bad loans, especially the non-CMHC stuff? There may be less incentive for a workout.
The government is rightly trying to keep credit flowing, in housing
The government is wrongly trying to keep credit flowing in housing.
The fact that housing prices in relation to rents and incomes are far above norms, in BC and elsewhere in Canada, is evidence in itself that too much credit is flowing to housing. The end result of this is obvious - the greatest financial crisis since the 1930's. Yet our federal government is still enabling this gross miscallocation of capital.
The sooner house prices return to normal, the better.
As for cramdowns, I would guess if they were ever tried the cost in BC would exceed the rest of the country put together. In other words, they would be perceived as a bailout of BC by the rest of the country. I would like to see the reaction of someone like Gilles Duceppe to that.
Yes, I really find it quite interesting how we get those tasty little opinion pieces inserted in the news. One word 'rightly' puts so much more into the story than just leaving it out. There is a whole raft of issues that need to be discussed and thought about just to put that one word in and it eventually boils down to opinion. On that count, I fully agree with you.
"On that count, I fully agree with you."
Back to the middle ages.
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