Financial Crisis

[Hydrogen]

If a person puts five percent down they are making a significant investment, and that shows intention. Zero down is essentially paying rent to the bank with the option of walking away without a penalty.

Five percent down and a twenty-five year mortgage was the norm before the new regulations. Hardly over-regulatory in my opinion.

 

[cacruden]

I don't agree with stricter timelines or higher minimum downpayments. These are extremely beneficial practices if the creditworthiness and the ability to handle debt, of the applicants is assessed properly. In the US, this was not the case. Lenders routinely assessed the individuals ability to pay based on the ARM teaser rates. That was the unsound decision.

There is nothing wrong with giving an individuals with a steady job and good credit a 0 down, 40 year mortgage. Why make him pay rent for another 2-3 years just to meet some artificial bar for home ownership? What is wrong is assessing his ability to pay based on an artificially low rate, not taking into account his ability to pay if the already low rate doubles, basing his ratios on the payment for an interest only mortgage, etc.

Let's not react to improper and lax regulation with poor over-regulation. That would do us no good either.

When I got my mortgage - just a little more than 10 years ago.... the requirements were just loosened to 95% (was 90%) applicable to first time buyers. These were requirements for CMHC insurance (required for any mortgage over 75%). If a slight bubble is created, and property values across Canada (i.e. more than just regional) deflate.... and people start walking away from their houses.... CMHC is on the hook. Guess who owns CMHC? Us.

When you are investing on margin - you actually have much stricter regulations on how much you can borrow to finance it.

 

[kEiThZ]

When I got my mortgage - just a little more than 10 years ago.... the requirements were just loosened to 95% (was 90%) applicable to first time buyers. These were requirements for CMHC insurance (required for any mortgage over 75%). If a slight bubble is created, and property values across Canada (i.e. more than just regional) deflate.... and people start walking away from their houses.... CMHC is on the hook. Guess who owns CMHC? Us.

When you are investing on margin - you actually have much stricter regulations on how much you can borrow to finance it.

Yes but the premiums for 95% and 100% mortgages are quite high. And you are paying those premiums for a reason. Mortgage insurance exists exactly for times like this when there are higher rates of default. And your line of reasoning can also be applied for mortgages where people paid 25% down. What if the downturn saw price drops greater than 25% like we are seeing in parts of the US now? In any recession, people will make financial decisions based on their circumstances. The system's job is to ensure that they are best setup to withstand the downturn.


I hardly doubt a comparison exists between here and the US. It's much harder to commit fraud with mortgages up here because of the way our credit reporting is set up. The requirement to have mortgage insurance and the generally higher credit standards also limits the potential for similar problems here. And like I stated before, the problem was the way banks issues credit. Basing someone's ability to pay an interest-only mortgage on a low teaser rate is hardly proof that they can handle a regular mortgage. That right there was the problem. Many were paying interest only, essentially rent for them on huge houses. When the interest rate doubled over their mortgage term, so did their 'rent' (mortgage payment) and all of a sudden they couldn't afford it. Many were also using their homes like ATMs using home equity to get luxury items or do renovations, then selling the home and paying it off from the rise in value. Combine that with a slowing market and you have a recipe for disaster.

CMHC's standards are fine. And they still offer 100% mortgages. The high premiums usually deter most people. My broker told me that something like only 1-2% of people get these. What CMHC/Canadian banks should never offer are interest only mortgages and home equity loans that exceed 25% of the home's value.

 

[Glen]

I don't agree with stricter timelines or higher minimum downpayments. These are extremely beneficial practices if the creditworthiness and the ability to handle debt, of the applicants is assessed properly. In the US, this was not the case. Lenders routinely assessed the individuals ability to pay based on the ARM teaser rates. That was the unsound decision.

There is nothing wrong with giving an individuals with a steady job and good credit a 0 down, 40 year mortgage. Why make him pay rent for another 2-3 years just to meet some artificial bar for home ownership? What is wrong is assessing his ability to pay based on an artificially low rate, not taking into account his ability to pay if the already low rate doubles, basing his ratios on the payment for an interest only mortgage, etc.

Let's not react to improper and lax regulation with poor over-regulation. That would do us no good either.

I disagree. Such mortgages allow for the purchase of homes with insufficient equity to protect from declining prices in unstable markets. Potentially casing the need for a large number of forced sales if equity becomes negative. It also skews the market upon the initial commencement of such lending standards. Home prices have more to to with the monthly payment amounts than the absolute price. Lowering the payment gives elastic values an incentive to fill the void.

 

[kEiThZ]

I disagree. Such mortgages allow for the purchase of homes with insufficient equity to protect from declining prices in unstable markets.

That's the reason that mortgage insurance particularly for low downpayment scenarios is not cheap. It's supposed to account for such scenarios. Like any other insurance, they charge higher premiums for higher risk. Would it be fair that they charge the premiums and they not provide the service? Or are you advocating that CMHC just not involve themselves in such mortgages. Of course that does not mean that Genworth or other financiers won't take up the mantle. Would you also advocate that insurance companies stop offering insurance to older patients, or young male drivers, etc.? Of course not, you would simply require that they charge premiums that are in line with the risk. Mortgage insurance is no different.

Potentially cauing the need for a large number of forced sales if equity becomes negative.

Potential does not equal reality. The only reason a bank would force a sale was if they needed capital. That's never been the case in Canada in previous recessions.

It also skews the market upon the initial commencement of such lending standards. Home prices have more to to with the monthly payment amounts than the absolute price. Lowering the payment gives elastic values an incentive to fill the void.

Actually, the higher the mortgaged amount the higher the monthly payment. Highly leveraged buyer's will probably be buying relatively less house to begin with because of the tighter conditions of their mortgage. And we are only talking about an initial period here anyway. In five years, they'll have equity, not a 100% mortgage.

Again, IMO what caused the crisis in the US was the use of low teaser rate ARMs, interest only mortgages, and the use of home equity for personal consumption. We don't have any of those practices in Canada.

 

[Tewder]

There is nothing wrong with giving an individuals with a steady job and good credit a 0 down, 40 year mortgage. Why make him pay rent for another 2-3 years just to meet some artificial bar for home ownership?

...because when interest rates go up, or his/her job is outsourced to China it is just far too easy for that individual to walk on the house as there is nothing personal invested in it, no equity.

They were Republican policies and Republican bills that Clinton should have put a veto on. Clinton was hardly an enemy to big business.

I'm not sure what the numbers were at the time but the President cannot veto if the party that controls congress has more than a two thirds majority.

 

[kEiThZ]

...because when interest rates go up, or his/her job is outsourced to China it is just far too easy for that individual to walk on the house as there is nothing personal invested in it, no equity.

Anybody's job can be outsourced to China, and everyone suffers from interest rate rises. It does not make a lick of difference if you have 5% or 20% in equity if you are in those straits and can't make the payments.

The defaults risks you cite are just as true of someone putting in 20% down if prices drop more than 20%. That's reality for any recession. Are we now going to make home buying policies based on the absolute highest risks during a downturn?

 

[Glen]

That's the reason that mortgage insurance particularly for low downpayment scenarios is not cheap. It's supposed to account for such scenarios. Like any other insurance, they charge higher premiums for higher risk. Would it be fair that they charge the premiums and they not provide the service? Or are you advocating that CMHC just not involve themselves in such mortgages. Of course that does not mean that Genworth or other financiers won't take up the mantle. Would you also advocate that insurance companies stop offering insurance to older patients, or young male drivers, etc.? Of course not, you would simply require that they charge premiums that are in line with the risk. Mortgage insurance is no different.

The risk is marginal, and thus the premium. And yes, I don't think that the CMHC should be insuring 0% or even %5 down mortgages. You cannot compare mortgage insurance to other types as the the object of insurance is elastic in demand.

Potential does not equal reality. The only reason a bank would force a sale was if they needed capital. That's never been the case in Canada in previous recessions.

Reality in complex systems acknowledges that growth is never linear. Banks in Canada have required mortgagees to come up with additional equity come renewal time before.

Actually, the higher the mortgaged amount the higher the monthly payment. Highly leveraged buyer's will probably be buying relatively less house to begin with because of the tighter conditions of their mortgage. And we are only talking about an initial period here anyway. In five years, they'll have equity, not a 100% mortgage.

Again, the insurance itself act as a form of leverage, at least initially. Do you think that real estate prices in the US would have gone up as much if it were not for making it possible for marginal borrowers to buy? Your equity after five years point is only valid if the market does not decline.

 

[cacruden]

The risk is marginal, and thus the premium. And yes, I don't think that the CMHC should be insuring 0% or even %5 down mortgages. You cannot compare mortgage insurance to other types as the the object of insurance is elastic in demand.

Reality in complex systems acknowledges that growth is never linear. Banks in Canada have required mortgagees to come up with additional equity come renewal time before.





Again, the insurance itself act as a form of leverage, at least initially. Do you think that real estate prices in the US would have gone up as much if it were not for making it possible for marginal borrowers to buy? Your equity after five years point is only valid if the market does not decline.

The insurance (similar to what AIG does in the US - which had to be rescued) goes to cover the Mortgage Backed Security in case of default on the mortgage.

In my opinion,
The more you loosen credit (above 95%), the more risky the insurance is. The problem is not with a localized "bubble" -- it is more of a problem with a wide-spread bubble. Loose credit above a certain level (say 95%) that is sustainable - leads to an increase in the likelihood of a widespread bubble being created - pushing up prices further than the market can handle. When the bubble pops, then defaults rise substantially. A large number of defaults at the same time - and it overwhelms the financial system. CMHC should not be in the business insuring abnormally high risk.

 

[Mot]

...I'm not sure what the numbers were at the time but the President cannot veto if the party that controls congress has more than a two thirds majority.

Excellent catch Tewder. Phil Gramm (McCain's Financial Advisor) is the reason the industry was deregulated through the Gramm-Leach-Bliley Act and it was in fact veto proof and sadly after committee both parties supported the act. So Clinton had no veto on this.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

"Congressional history of the Act
The bills were introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA). The bills were passed by a 54-44 vote along party lines with Republican support in the Senate and by a 343-86 vote in the House of Representatives. Nov 4, 1999: After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90-8-1 and in the House: 362-57-15. This 'veto proof legislation' was signed into law by President Bill Clinton on November 12, 1999[1]

The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.[2]"

 

[cacruden]

Glass-Steagall repeal was a truly bipartisan affair.

But then I still don't think that is the source of problems. Banks would still have loaned money the same way, they still would have created MBS, AIG would still have insured it, and the mess would still exist. The diversified banks seem to be actually weathering the current storm a little better. Investment Banks - they are all gone (but they were a seperate beast).

 

[cacruden]

Basically, the removal of Glass-Steagall made the US financial industry more like Canada - with National Banks (Citibank and Bank of America). I would have expected if this was the cause - Canada would have been screwed first

 

[Mot]

Basically, the removal of Glass-Steagall made the US financial industry more like Canada - with National Banks (Citibank and Bank of America). I would have expected if this was the cause - Canada would have been screwed first

But didn't the act lead to sub prime mortgages which sparked this crisis and Canada has stricter regulations that do not allow this type of mortgage on a grand risky scale like the US.

 

[kEiThZ]

But didn't the act lead to sub prime mortgages which sparked this crisis and Canada has stricter regulations that do not allow this type of mortgage on a grand risky scale like the US.

The act had nothing to do with sub-prime mortgages.... it had to do with allowing banks to merge. Cacruden is right, it simply created a more 'Canadian' feel to the US financial industry. It was the US fed during both the Clinton and Bush years that allowed the glut of capital to build up, allowed backs to create MBS and allowed re-insurers to insure said securities. One could even be cynical and argue that Clinton and Greenspan left a time bomb for Bush and Bernanke to defuse....though I'd say there's enough blame to go all around.

 

[Mot]

I am curious, if American Banking became more like Canadian banking then why do we not have the sub prime mortgage mess here?