Inside Job

[Tom O'Donnell]

Re: Inside Job

... Also without CMHC insurance the risk would be higher for the lender and they would raise mortgage interest rates to compensate for this.

So let's connect the dots. Please tell me the point in my analysis where I am wrong or where you disagree with my conclusion.

- Without CMHC insurance the risk would be higher to lend to people who pretty much by definition are high risk.

- Higher risk = fewer loans, and greater interest rates.

- The ratio is something like for every 1% increase in interest rates the monthly payment goes up roughly 10% assuming the same amortization period.

- People are forced to buy "less" house.

- Demand goes down, housing prices go down.

Most major cities in Canada have housing prices that fail vs most of the affordability metrics: price to own vs renting, price vs gross income, price vs post-tax income, etc (see: Case/Shiller Index and commentary). The thing that encourages many people to buy is capital appreciation. We all know stories of X who bought in 1960 for $15K and sold in 2010 for $400K. Well for this story to continue does anyone think that they can buy for $400K and in 2060 the house will be valued at over $10 million?

Owning a home is not a right. No one is entitled to good interest rates. The government is trying to create an ownership society but there are literally millions of people who are way too reckless to be owning homes and millions of Baby Boomers whose homes are their primary financial "investment" (with price increases due in part to artificially low interest rates that artificially boost demand). What happens when these people en masse try to unload their homes? What happens to the price of their neighbours' homes many of whom are backstopped by you and me? Taxpayers are being asked to take huge risks without their informed consent.

Consider what would happen to the TSX if investors were allowed to put 5% down on purchasing stocks backed by the government. What would the index be? 100,000? More? Would this be good for the country? Would this be prudent lending and prudent speculation? What's different?

[Tom O'Donnell]

Re: Inside Job

...For example I know of one person who has a fully paid off house but is not able to get a mortgage because she is a full time student right now and thus has no employment income. ...

Is she a candidate for being backstopped by CMHC?

[Gary Ruben]

Re: Inside Job

You can only get money out of people who have it. A lot of people's wealth is tied up in their homes and pretty much only their homes. If their home value takes a hit, how is the government going to get the money back?

Last I heard with recourse mortgages in Canada, they are not giving mortgages to NINJA's. My understanding is if the mortgage holder walks away from the home and mortgage it gets sold. The balance can come from attached bank account, sale of automobile and/or other assets, garnishee wages, etc. Great for a credit rating.

Unless you can give us some figures on defaults of recourse mortgages and the amount the CMHC is losing this is a non issue. Last I heard even in non recourse provinces anyone getting a CMHC mortgage is stuck with recourse mortgage under the terms of the agreement. They protect themselves.

[Tom O'Donnell]

Re: Inside Job

At the moment the CMHC is turning a profit. That's hardly surprising. Fannie Mae and Freddie Mac produced profits in the late 90s. Now they are basically on the chopping block. Things look very good during a bubble. It's why bubbles inflate and people's expectations become unrealistic.

Consider the time bomb that is Vancouver real estate (the worst in the country, imo, but not the only bomb). Average price is a bit more than ten(!!) times the average income. How is this affordable? Well it is as long as:

1) Rates don't rise.

2) Values continue to climb.

But what if they don't? Ten years ago people in the US believed that housing was a safe haven and prices would never go down. They learned their lesson the hard way. As a taxpayer, I prefer to learn my lesson via their lesson.

[Zeljko Kitich]

Re: Inside Job

So let's connect the dots. Please tell me the point in my analysis where I am wrong or where you disagree with my conclusion.

- Without CMHC insurance the risk would be higher to lend to people who pretty much by definition are high risk.

- Higher risk = fewer loans, and greater interest rates.

- The ratio is something like for every 1% increase in interest rates the monthly payment goes up roughly 10% assuming the same amortization period.

- People are forced to buy "less" house.

- Demand goes down, housing prices go down.

Most major cities in Canada have housing prices that fail vs most of the affordability metrics: price to own vs renting, price vs gross income, price vs post-tax income, etc (see: Case/Shiller Index and commentary). The thing that encourages many people to buy is capital appreciation. We all know stories of X who bought in 1960 for $15K and sold in 2010 for $400K. Well for this story to continue does anyone think that they can buy for $400K and in 2060 the house will be valued at over $10 million?

Owning a home is not a right. No one is entitled to good interest rates. The government is trying to create an ownership society but there are literally millions of people who are way too reckless to be owning homes and millions of Baby Boomers whose homes are their primary financial "investment" (with price increases due in part to artificially low interest rates that artificially boost demand). What happens when these people en masse try to unload their homes? What happens to the price of their neighbours' homes many of whom are backstopped by you and me? Taxpayers are being asked to take huge risks without their informed consent.

Consider what would happen to the TSX if investors were allowed to put 5% down on purchasing stocks backed by the government. What would the index be? 100,000? More? Would this be good for the country? Would this be prudent lending and prudent speculation? What's different?

Your logic falls apart on point one. The people getting mortgages are not by definition high risk, its the fact that the CMHC insuance reduces the overall risk for the bank that reduces the risk of the loan portfolio. The number one reason for mortgage defaults are health issues and that's pretty hard to predict, especially when you don't have to get a medical to take out a mortgage, nor should you have to. It's the same as if I take out house insurance, it doesn't mean by doing so that I am high risk, it just means I am insuring the risk that does exist and thereby reducing the risk by pooling it with others that are insured. Insuring a risk does not mean I'm high risk.

It also gives the government the ability to cool off housing practises by for example reducing the maximum amortization period, requiring at least a minimum downpayment and increasing the required downpayment for multi-family rental dwellings.

Canadians should probably be buying more insurance, health insurance, mortgage insurance and life insurance. However if you tell them that they just think you are trying to sell them a policy. Then when they have to turn to government social assistance when they are ill they might in hindsight realize that insurance was a good idea. Even self employed people are underinsured for health and injury issues. If my income depended on me staying fit and healthy and injury free I'd sure as heck take out disability insurance. Life insurance not so much unless you have children that depend on you.

Any decrease in house prices would just increase the price of other things as we are a nation of spenders not savers or investors. More people taking personal responsibility and insuring themselves instead of relying on government programs like ODSP should be a taxpayer approved idea.

[Kerry Liles]

Re: Inside Job

Your logic falls apart on point one. The people getting mortgages are not by definition high risk, its the fact that the CMHC insuance reduces the overall risk for the bank that reduces the risk of the loan portfolio. The number one reason for mortgage defaults are health issues and that's pretty hard to predict, especially when you don't have to get a medical to take out a mortgage, nor should you have to. It's the same as if I take out house insurance, it doesn't mean by doing so that I am high risk, it just means I am insuring the risk that does exist and thereby reducing the risk by pooling it with others that are insured. Insuring a risk does not mean I'm high risk.

Many mortgage companies (including banks) strongly recommend life insurance for the signers - from conversations I have with two of my nieces who work at TD, people seldom take the offered insurance and I suspect likely don't have any specific life insurance from elsewhere that could cover the mortgage... Unfortunately, insuring against health problems is more problematic; most company-provided short term disability and long-term disability are nowhere near adequate for people - whether they have a mortgage to worry about or not.

[Tom O'Donnell]

Re: Inside Job

Your logic falls apart on point one. The people getting mortgages are not by definition high risk, its the fact that the CMHC insuance reduces the overall risk for the bank that reduces the risk of the loan portfolio. The number one reason for mortgage defaults are health issues and that's pretty hard to predict, especially when you don't have to get a medical to take out a mortgage, nor should you have to. It's the same as if I take out house insurance, it doesn't mean by doing so that I am high risk, it just means I am insuring the risk that does exist and thereby reducing the risk by pooling it with others that are insured. Insuring a risk does not mean I'm high risk.

The people getting mortgages can't pay 20% of the cost of owning a home. How isn't this high risk?

The logic that loans can be bundled and therefore the risk is lessened ... uh, isn't that what happened in the US? Tranches of loans bundled to look like they aren't risky but then once housing prices started falling the defaults took on a life of their own. Surely the reason the US housing market collapsed isn't because everyone suddenly all got sick at the same time, right?

If insuring a risk - a risk to the bank - doesn't mean you are high risk then why should you have to pay for the insurance? ;-)

Using a medical analogy: if I take a large group of two-pack-a-day smokers and bundle up their life insurance it's true I lessen the risk of the whole thing collapsing (since the actuaries can calculate roughly how many people are going to die in any year) but unlike real estate one smoker's death doesn't impact on the health of the smoker next door or even the non-smoker down the street. When I am forced to leave my home or can't keep up with the maintenance it impacts on the house values of my neighbours.

Maybe I am missing some subtle point in your explanation?

[Gary Ruben]

Re: Inside Job

B.C. has full recourse mortgages as far as I know. With CMHC, unless they changed it, they won't insure more than 60% of the value of a house if it's non recourse.

Back around 1980 when inflation was really high, the game was to buy as much house as a person could. In a couple of years wages would rise to make the payment affordable. And that's pretty much how it worked. Companies which didn't keep up with the wages lost employees.

[Zeljko Kitich]

Re: Inside Job

Many mortgage companies (including banks) strongly recommend life insurance for the signers - from conversations I have with two of my nieces who work at TD, people seldom take the offered insurance and I suspect likely don't have any specific life insurance from elsewhere that could cover the mortgage... Unfortunately, insuring against health problems is more problematic; most company-provided short term disability and long-term disability are nowhere near adequate for people - whether they have a mortgage to worry about or not.

True but short and long term can be more adequate than Ontario Works or Ontario Disability, which are even less adequate. Short term may be all you need if you are say a self employed contractor who is injured for a time.

[Zeljko Kitich]

Re: Inside Job

The people getting mortgages can't pay 20% of the cost of owning a home. How isn't this high risk?

The logic that loans can be bundled and therefore the risk is lessened ... uh, isn't that what happened in the US? Tranches of loans bundled to look like they aren't risky but then once housing prices started falling the defaults took on a life of their own. Surely the reason the US housing market collapsed isn't because everyone suddenly all got sick at the same time, right?

If insuring a risk - a risk to the bank - doesn't mean you are high risk then why should you have to pay for the insurance? ;-)

Using a medical analogy: if I take a large group of two-pack-a-day smokers and bundle up their life insurance it's true I lessen the risk of the whole thing collapsing (since the actuaries can calculate roughly how many people are going to die in any year) but unlike real estate one smoker's death doesn't impact on the health of the smoker next door or even the non-smoker down the street. When I am forced to leave my home or can't keep up with the maintenance it impacts on the house values of my neighbours.

Maybe I am missing some subtle point in your explanation?

It isn't high risk because they have employment income that allows them to service a mortgage today instead of waiting 4 times as long and paying rent in the mean time. In the same way that getting an auto loan does not make me high risk just because I prefer to drive the car to work today instead of taking the bus and walking 10 blocks to get to work from the bus stop, of waiting until I can pay in cash. The whole idea is that you get to live in the house, pay the mortgage and still do it while you can enjoy it. You get to drive the car to get to work today to keep your employment to be able to pay for the car.

You pay for insurance because you are pooling your money with all the other insured, that is how the payouts will be made should something happen. The amount of the premium matches the amount of risk but that does not automatically mean you are high risk, it just means there is some risk. In a portfolio of x mortgages, there will be y defaults just because things happen. In a portfolio of x houses insured, y will have a claim. If everyone has a claim it won't work so that's why things like floods and acts of war are excluded. That's why an individual insurance company will only take on so many policies in a particular area if it is higher risk - for example lots of row houses, narrow winding streets etc

You could screen and tighten mortgage credit terms all you want but you will never get the defaults on 25 year mortgages down to zero; a lot of things can happen in 25 years.

Re your life insurance analogy, you simply charge a higher premium to the smokers. You also ask the question if someone is a smoker and require a medical or answers to medical questions, unlike with a mortgage. Just because my neighbours house burned down or the house across the city burned down does not mean my house is going to burn down. If you are forced to leave your home it will be sold to someone else. If you are neglecting your home so badly that it is impacting on your neighbour's house value then city property standards will force you to meet the property standard bylaws or do it for you and add it to your tax bill. If you don't pay the tax bill you will be eventually forced out and again your house will be sold to someone who will maintain it.

What you are missing is that your idea, that requiring any type of insurance is a red flag and that anyone wanting insurance should be suspect, is not valid.

[Zeljko Kitich]

Re: Inside Job

B.C. has full recourse mortgages as far as I know. With CMHC, unless they changed it, they won't insure more than 60% of the value of a house if it's non recourse.

Back around 1980 when inflation was really high, the game was to buy as much house as a person could. In a couple of years wages would rise to make the payment affordable. And that's pretty much how it worked. Companies which didn't keep up with the wages lost employees.

Except that in 1980/81 interest reached 20% or more on mortgages so making you mortgage payments in the meantime would be very problematic if you had bought all the house you could.

[Gary Ruben]

Re: Inside Job

Except that in 1980/81 interest reached 20% or more on mortgages so making you mortgage payments in the meantime would be very problematic if you had bought all the house you could.

It depended on when the mortgage came up for renewal. Most were 5 year terms. If the mortgage came up at around 20% or more, I would imagine people wouldn't take more than 1 year to see what happened,

Many people were carrying a home on one salary back then. When the interest rates went up so did the number of two income families. If a person had a reasonable job in the 70's they could carry a house on one salary.

[Peter McKillop]

Re: Inside Job

Also, The End of Wall Street by Roger Lowenstein was a good read.

[Zeljko Kitich]

Re: Inside Job

It depended on when the mortgage came up for renewal. Most were 5 year terms. If the mortgage came up at around 20% or more, I would imagine people wouldn't take more than 1 year to see what happened,

Many people were carrying a home on one salary back then. When the interest rates went up so did the number of two income families. If a person had a reasonable job in the 70's they could carry a house on one salary.

You mean people hurried to get married so they could pay higher interest rates? How romantic.

Sure you could take a short term or open mortgage but since no one really knew where rates were going there would have been a lot of nervous people especially if they bought as much house as they could afford.

[Gary Ruben]

Re: Inside Job

You mean people hurried to get married so they could pay higher interest rates? How romantic.

Sure you could take a short term or open mortgage but since no one really knew where rates were going there would have been a lot of nervous people especially if they bought as much house as they could afford.

I'm not telling you theory. I'm telling you what was happening.

I'm not sure what I wrote that would lead to your comment on people getting married to be able to afford higher interest rates. I guess the topic has turned into a bit of a joke.