Baby, we got a bubble!?

[hodgkinsken]

I was going through the CMHC financials (here: http://www.cmhc-schl.gc.ca/en/corp/about/anrecopl/index.cfm) and came across this table in their risk management section which I found interesting.

Insurance-in-force
Insurance-in-force in 2009 was $472.6 billion. The following table shows
the vast majority of mortgages have outstanding balances which have
a loan to value ratio of under 80 per cent when based on the original
lending value. If the lending value is brought up to current value of the
properties, then the distribution shows an even greater percentage in
the lower loan to value ranges. Equity build-up occurs through regular
mortgage pay-downs and through accelerated or additional lump-sum
payments, as well as through property value appreciation over time.
These all contribute to lowering risk over time.

Insurance-in-force outstanding balance

Loan to value ratio based
on original lending value
(%)

Loan to value ratio based
on updated lending value
(%)

95.01% and above 2.9 4.5
90.01% to 95% 14.0 8.5
80.01% to 90% 21.4 15.8
80% and lower 61.7 71.1

Percentages may not add up to 100 due to rounding.

So basicaly, based on current home values, 71.1% of mortgages that CMHC covers have equity positions greater than 20%. More importantly, less than 5% have less than 5% equity. Now this is only of the mortgages that CMHC covers. But an interesting picture non the less.

More fuel to the fire...

 

[daveto]

I was going through the CMHC financials (here: http://www.cmhc-schl.gc.ca/en/corp/about/anrecopl/index.cfm) and came across this table in their risk management section which I found interesting.

Insurance-in-force
Insurance-in-force in 2009 was $472.6 billion. The following table shows
the vast majority of mortgages have outstanding balances which have
a loan to value ratio of under 80 per cent when based on the original
lending value. If the lending value is brought up to current value of the
properties, then the distribution shows an even greater percentage in
the lower loan to value ranges. Equity build-up occurs through regular
mortgage pay-downs and through accelerated or additional lump-sum
payments, as well as through property value appreciation over time.
These all contribute to lowering risk over time.

Insurance-in-force outstanding balance

Loan to value ratio based
on original lending value
(%)

Loan to value ratio based
on updated lending value
(%)

95.01% and above 2.9 4.5
90.01% to 95% 14.0 8.5
80.01% to 90% 21.4 15.8
80% and lower 61.7 71.1

Percentages may not add up to 100 due to rounding.

So basicaly, based on current home values, 71.1% of mortgages that CMHC covers have equity positions greater than 20%. More importantly, less than 5% have less than 5% equity. Now this is only of the mortgages that CMHC covers. But an interesting picture non the less.

More fuel to the fire...

Hodgkinsken, I think you intended your post as evidence that the market is stable. However I think the figures you provided show the opposite. Transaction costs for a seller are in the range of 10%. Thus, with a 10% drop in prices 29% of CMHC insured mortgages will be underwater if they want to sell.

Another thing to keep in mind is the number of active listings compared to total properties. Currently there are about 20k active listings in the GTA. I'm guessing we have more than 1 million privately owned properties. In the same way the prices can increase quickly when demand exceeds supply, the converse is true.

 

[LordWanker]

Come on guys; first it was Brampton sales are down 70-80%. This was quickly dispel with actual facts. Now you are saying the figures were extrapolated?

So anyone can start some crazy rumour and you all run with it? That's nuts.
Next you going to hear that Priests loves little boys. Oh wait, they do.....

This is a public forum and the contents should be taken with a grain of salt since they are:
-anonymous-based
-biased

Take care.

 

[daveto]

Come on guys; first it was Brampton sales are down 70-80%. This was quickly dispel with actual facts. Now you are saying the figures were extrapolated?

So anyone can start some crazy rumour and you all run with it? That's nuts.
Next you going to hear that Priests loves little boys. Oh wait, they do.....

Ric,

Paperchopper also said that the BREB hadn't posted figures in 4 months. On that point he was correct.

I agree with you that comments without verifiable facts should be viewed with caution. As such, I'd place more value on your characterization of the possibility of figures being extrapolated on TREB for the BREB disticts due to a lack of BREB reporting as "some crazy rumour" if you could provide some support for that characterization. As a realtor, perhaps you could contact either TREB or BREB and get a quick confirm or deny response?

Or you could just continue to make tasteless jokes about child abuse. Whichever you prefer.

 

[hodgkinsken]

Hodgkinsken, I think you intended your post as evidence that the market is stable. However I think the figures you provided show the opposite. Transaction costs for a seller are in the range of 10%. Thus, with a 10% drop in prices 29% of CMHC insured mortgages will be underwater if they want to sell.

Another thing to keep in mind is the number of active listings compared to total properties. Currently there are about 20k active listings in the GTA. I'm guessing we have more than 1 million privately owned properties. In the same way the prices can increase quickly when demand exceeds supply, the converse is true.

I wasn't trying to prove one way or the other. I just like to ensure that when I talk about numbers I've verified my facts. There tends to be a habit on forums to spit out made up facts to bolster an arguement. People can come up with statistics to prove anything. 14% of people know that.

 

[interested]

I do believe that Hodgkinsken's numbers do accomplish one thing Dave and Paperchopper. While I agree still that a correction is likely and it will be bad, it does provide some evidence that it may not be as bad perhaps as Paperchopper has suggested. Don't misunderstand me please: I am not saying it wouldn't be catastrophic as clearly however we interpret the numbers, Dave has correctly shown that 10% drop would result in a huge default, but not the total meltdown of every mortgage but certainly enough to start a cascade.

My question would be who has CMHC insured the $472 billion with? Lord help us if it is AIG for example. Is it meaning the Canadian taxpayer because I read this to suggest that there is/are an Insurer(s)/Reinsurer(s) and I would want to know the capability of those companies to withstand the huge losses that could potentially be triggered.

 

[daveto]

My question would be who has CMHC insured the $472 billion with? Lord help us if it is AIG for example. Is it meaning the Canadian taxpayer because I read this to suggest that there is/are an Insurer(s)/Reinsurer(s) and I would want to know the capability of those companies to withstand the huge losses that could potentially be triggered.

It is insured by the CMHC. They hold approx $10b of reserves, and they are further backed by the Canadian taxpayer.

For further insight into the figures at CMHC, the below link contains some good analysis (noting that it reachs very bearish conclusions)
http://americacanada.blogspot.com/2009/07/cmhc-and-our-government.html

For simplicity, here are links to the tables referenced in the article linked.

Residential Mortgage Debt 1982-2009
http://1.bp.blogspot.com/_0YOsyi5Wb...0-h/Mortgage+Credit+Outstanding2+(June09).Bmp

Equity by month of Purchase, as at Dec 2007
http://2.bp.blogspot.com/_0YOsyi5WbLY/SmTDnZtunCI/AAAAAAAAAFs/Ry833Eeho_0/s1600-h/Home+Equity+5%.Bmp
note: I'm not sure this one is accurate

Mortgage Credit by Provider
http://1.bp.blogspot.com/_0YOsyi5Wb...00-h/Mortgage+Credit+Outstanding+(June09).Bmp
Note that 90% of mortgage growth since 2007 has been funded by securitizing (ie bundling) the mortgages and selling them to investors.

CMHC Financial Highlights
http://2.bp.blogspot.com/_0YOsyi5Wb.../s1600-h/CHMC+growth+in+insured+mortgages.Bmp
Note that the 2009 plan calls for 85% of the CMHC insurance in force is supported by securtization. This contrasts with a plan of 50% in 2008 (actual ended at 60%), and an actual of 33% in 2004.

Correlation between Sales-to-Listings Ratio and Price Movements
http://2.bp.blogspot.com/_0YOsyi5Wb...AAHE/tB3k1ImiFZo/s1600-h/mortgage+credit5.jpg
Note that the activity of the small amount of active listings (2% of the market?) is driving the valuation of the full 100% market. A sellers market results in a drastically increased market valuation. A balanced market results in a stable valuation. And the effect of a sustained buyers market can be clearly seen.

 

[Roy G Biv]

My question would be who has CMHC insured the $472 billion with? Lord help us if it is AIG for example. Is it meaning the Canadian taxpayer because I read this to suggest that there is/are an Insurer(s)/Reinsurer(s) and I would want to know the capability of those companies to withstand the huge losses that could potentially be triggered.

We are backing that 472 billion. AIG is one of three mortgage insurance options, with CMHC and Genworth being the other two.

EDIT: ok, DaveTO pointed this out.

 

[CN Tower]

I do believe that Hodgkinsken's numbers do accomplish one thing Dave and Paperchopper. While I agree still that a correction is likely and it will be bad, it does provide some evidence that it may not be as bad perhaps as Paperchopper has suggested. Don't misunderstand me please: I am not saying it wouldn't be catastrophic as clearly however we interpret the numbers, Dave has correctly shown that 10% drop would result in a huge default, but not the total meltdown of every mortgage but certainly enough to start a cascade.

My question would be who has CMHC insured the $472 billion with? Lord help us if it is AIG for example. Is it meaning the Canadian taxpayer because I read this to suggest that there is/are an Insurer(s)/Reinsurer(s) and I would want to know the capability of those companies to withstand the huge losses that could potentially be triggered.

Looks like actual number is more like $600b:

In March, CMHC was allowed to insure up to C$600 billion in mortgages, up from C$450 billion the year before, said a CMHC spokesman today.
“Last year alone, CHMC did 919,780 deals worth a staggering C$148 billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to C$600 billion, or about double what it was two years ago,†wrote author, former MP Garth Turner.

Read more: http://network.nationalpost.com/np/...anada-s-freddie-and-fannie.aspx#ixzz18IULddIO

It's the pace of increase that worries me.

 

[interested]

Great post. Thanks DaveTO.

Let me just understand what I am reading. The investors who bought the securitized loans would likely be wiped out rather quickly if there was even a 10% drop in prices assuming that would result in those with mortgages in the past 2 years defaulting. Then CMHC is also going to have to make up money; i.e., the taxpayers will have to fund. Some of that risk has been spread with "investors" and insurers such as AIG and others.
I am assuming this would trigger an IMF or similar type bailout or the country would have to severely raise taxes and pay much higher interest rates presumably on borrowed capital.
What is most frightening is your conclusion that 90% of the mortgages in the last 3 years are CMHC insured and those are sitting with about 7% equity at present assuming no adjustment if we assume the 2007 figures of 7% still holds.
Am I overstating this and have I made some logic errors.
Thank you.

 

[Ric]

Ric,

Paperchopper also said that the BREB hadn't posted figures in 4 months. On that point he was correct.

I agree with you that comments without verifiable facts should be viewed with caution. As such, I'd place more value on your characterization of the possibility of figures being extrapolated on TREB for the BREB disticts due to a lack of BREB reporting as "some crazy rumour" if you could provide some support for that characterization. As a realtor, perhaps you could contact either TREB or BREB and get a quick confirm or deny response?

Dude, Hodgkinsken gave you the numbers from TREB for Brampton (W23 & W24). What else is there to confirm from TREB?

TREB numbers covers all the GTA boards (Mississauga, Brampton, etc.). I don't need to know why Brampton hasn't published as long as all the numbers are included in the TREB report.

 

[daveto]

Great post. Thanks DaveTO.

Let me just understand what I am reading. The investors who bought the securitized loans would likely be wiped out rather quickly if there was even a 10% drop in prices assuming that would result in those with mortgages in the past 2 years defaulting. Then CMHC is also going to have to make up money; i.e., the taxpayers will have to fund. Some of that risk has been spread with "investors" and insurers such as AIG and others.
I am assuming this would trigger an IMF or similar type bailout or the country would have to severely raise taxes and pay much higher interest rates presumably on borrowed capital.
What is most frightening is your conclusion that 90% of the mortgages in the last 3 years are CMHC insured and those are sitting with about 7% equity at present assuming no adjustment if we assume the 2007 figures of 7% still holds.
Am I overstating this and have I made some logic errors.
Thank you.

I'm not an expert on this, but my understanding is as follows.

The securitized loans are marketable because they are fully backed by the CMHC, which itself is a crown corporation.
In the event of mortgage arrears or defaults, the CMHC is 100% liable.
Thus, the investors will sustain no negative effects whatsoever. Even their cashflow will not be affected, and they will continue to receive all scheduled payments as if the underlying mortgagees were making regular payments
In the event the CMHC can't meet its liabilities with its $10b in assets, then the Federal Gov't steps in. (or 99.9% likely steps in)
None of this risk has been farmed out to other investors/insurance companies.
I think it is very unlikely Canada would need outside help. Even a worst case scenario (which I personally think is likely) would probably be less than $50b in costs to the CMHC/Fed Gov't over several years.

I think maybe you mistyped, but it is not true that 90% of the mortages in the last 3 years are CMHC insured. Rather, 90% of the growth in total mortgage inforce has come from the CMHC expanding its balance sheet.

Actually, about 50%+ of mortgages don't need the CMHC because the buyers have 20% plus downpayments. But the total dollar amounts of that part of the market has been stable.

Another way to look at this...

Total mortgage inforce has been increasing by 10% a year for the last several years.
House prices have been increasing by about 5% for the last several years.
Housing stock increases in value by approx 1.5% a year.
Mortgage debt is a subset of total housing valuation. (let's say 2/3 of total housing valuation is mortgaged)
So basically, 100% of the increase in the nominal value of all housing (before inflation) is funded by borrowed money.

Conclusions?

1. Housing values are not increasing, but rather are sustained entirely by increased mortgage debts.
2 .The entirety of the increased mortgage debt capacity (or about 90% of it) comes from the CMHC.
3. Note that from Q3 08 to Q1 09, the CMHC mortgage backed securities increased by 30%, at a time when banks reduced their mortgage amounts by 10%. This was the infamous CMHC "buyback" of mortages from banks, originally capped at $125b although only about half of that was used.

 

[cdr108]

I was going through the CMHC financials (here: http://www.cmhc-schl.gc.ca/en/corp/about/anrecopl/index.cfm) and came across this table in their risk management section which I found interesting.

...

Insurance-in-force outstanding balance

Loan to value ratio based
on original lending value
(%)

Loan to value ratio based
on updated lending value
(%)

95.01% and above 2.9 4.5
90.01% to 95% 14.0 8.5
80.01% to 90% 21.4 15.8
80% and lower 61.7 71.1

Percentages may not add up to 100 due to rounding.

So basicaly, based on current home values, 71.1% of mortgages that CMHC covers have equity positions greater than 20%. More importantly, less than 5% have less than 5% equity. Now this is only of the mortgages that CMHC covers. But an interesting picture non the less.

More fuel to the fire...

i find it odd that the % of Loan to value ratio 95.01% and above went from 2.9% up to 4.5% ?!?
shouldn't that have gone down to less than 2.9% supposedly with rising property values, paydown of principal, etc?

and since they've gone that far, why is there no further category for under 80% like 60-65%, 65-70%, 70-75%, 75-80% because in reality CMHC does insure as low as 65% LTV but typically the banks don't charge the CMHC fee if one has at least 20% down payment ... and it was only recently that CMHC reduced the down-payment minimum from 25% to 20% in April 2007 to require CMHC Mortgage Loan Insurance.

 

[interested]

From your quote: I think maybe you mistyped, but it is not true that 90% of the mortages in the last 3 years are CMHC insured. Rather, 90% of the growth in total mortgage inforce has come from the CMHC expanding its balance sheet.
You are absolutely correct Daveto, that is what I meant to say: that the 90% increase in the last 3 years of the total mortgages came from CMHC's expansion.
Your conclusions in the above post are very enlightening and worrisome.
So basically the taxpayer and not those who buy CMHC bonds (essentially Gov't of Canada bonds) would receive full payment unless the government defaulted which will not happen certainly at 50 billion dollars but it will mean government cutbacks, austerity programs, and increased taxes; much what we see in Ireland, Greece and England at present causing all the social unrest it brings with it.
Not a pretty thought.
thank you though for taking the time to walk me through the reasoning/logic of what you posted.

 

[interested]

i find it odd that the % of Loan to value ratio 95.01% and above went from 2.9% up to 4.5% ?!?
shouldn't that have gone down to less than 2.9% supposedly with rising property values, paydown of principal, etc?

and since they've gone that far, why is there no further category for under 80% like 60-65%, 65-70%, 70-75%, 75-80% because in reality CMHC does insure as low as 65% LTV but typically the banks don't charge the CMHC fee if one has at least 20% down payment ... and it was only recently that CMHC reduced the down-payment minimum from 25% to 20% in April 2007 to require CMHC Mortgage Loan Insurance.

I initailly wondered about that too but I think I may have an explanation: Not sure if it is correct though.
More mortgages were recently taken out with very little down; perhaps like the figure of the friend of paper chopper. As well, remember that we did have a period from Sept 2008 to March 2009 when prices dropped at least in Toronto around 10-15% so while they may have recovered in the last part of 2009 and to May 2010 (the peak) and then gone down a bit, could that explain the reason for the numbers? (i.e. those mortgages taken out late 2008 which are only now coming back in the black or neutral position by the beginning of 2010?)