How soon is soon, you ask?
That’s the funny thing about bubbles. After a certain point in their inflation, it becomes obvious to just about everybody that prices are way too high, and they’ve gotta come down eventually, and when they do it’s probably gonna be pretty drastic. But nobody knows with any certainty when exactly that inflection point is going to be, and most people like to think that they’re smarter than average and that they’ll get out while the getting is good. Most people try to beat the bubble.
Or they go all ostrich-style and deny that the bubble is there, insist that the rapidly inflating prices (“Housing sales across the Greater Toronto Area climbed 11.3% in February from a year ago, helping to push the average sale price of detached homes in the city pass the $1 million mark for the first time”) are based on some until-now-unnoticed inherent value, and that there’s nowhere to go from here except up, up, up!
(All of those links, by the way, are to the Financial Post, which is my go-to source for finding out what’s definitely not going to happen in the economy.)
The poor fools who buy into this pap are the target demographic for subprime loans, which despite being a major cause of the US’s real estate debacle a decade ago are actually and truly still a thing here.
And the subprime market is starting to show signs of going belly-up:
[Home Capital Group, Canada’s largest non-bank mortgage lender,] focuses on “alternative” mortgages: high-profit mortgages to risky borrowers with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime borrowers.
So it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September: “falsification of income information.” Liar loans.
Liar loans had been the scourge of the US housing bust. Lenders were either actively involved or blissfully closed their eyes. And everyone made a ton of money.
So Home Capital revealed that it has suspended “during the period of September 2014 to March 2015, its relationship with 18 independent mortgage brokers and 2 brokerages, for a total of approximately 45 individual mortgage brokers,” who’d together originated nearly C$1 billion in single-family residential mortgages in 2014. That’s 5.3% of the company’s total outstanding loan assets, and 12.5% of its total single-family mortgage originations in 2014…
I like that euphemism that they use – “alternative” mortgages. Sounds almost hippie-esque, until you dig into what it actually means – loans to people who banks have reason to believe won’t be able to repay them. Or, if it’s widespread enough, the creation of systemic risk.
And then we find out that fully one-eighth of the single-family mortgages this “alternative” mortgage company loaned out last year didn’t even meet their already-low standards, and were only made because someone somewhere along the chain of approval actively lied about how much income the mortgage recipient has.
Which is terrifying.
“Everyone had their ideas about what transpired in the past six months; this corroborates some suspicions but dispels some others,” Shubha Khan, an analyst at National Bank Financial told the Financial Post, adding – with Canadian understatement – that there were “still some questions.”
Among them, whether these insured liar loans would continue to be insured; and whether this was an isolated problem, rather than an industry issue in the Canadian housing market. In other words, is it just the tip of the iceberg?
Housing bubbles are money generators. Temptations are huge. Falsifying mortgage applications is easy if no one checks them. It’s a mad scramble to extract as much money as possible for as long as possible – but with a devastating aftermath.
Now liar loans are coming out of the Canadian woodwork. The much touted down-payment requirements in Canada have already fallen apart. Don’t have the money for even 5% down? Solutions are openly promoted, for example:
It is not a problem anymore!!! Canada Mortgage & Financial Group (CMFG) has a new product that now allows you to borrow your down payment from any source…. The only amount you need to show on your own is 1.5% of the purchase price….
With regulators breathing softly down their necks, banks might have become more careful in lending to people to buy homes that are among the most overpriced in the world. What has that accomplished? The rise of alternative lenders in the shadow banking system. They’re not subject to the same regulations as banks.
For anybody wondering who the hell is buying all those million-dollar Toronto and Vancouver homes, here’s your answer: in large part, it’s people who can’t afford them, people who are going into hock just to get their hands on a 5% down payment. And they’re being approved for mortgages anyway, because a lot of people make a lot of money off of keeping the game going.
Now even the big banks are starting to acknowledge that there may be a problem, although they continue to delude themselves that somehow this time will be different and the market will just softly and gently “correct” itself downward:
A fresh report from TD Economics released Thursday said several indicators, such as home prices relative to incomes and the current elevated level of home construction, are flashing warning signs.
“When we put it all together, key housing indicators on balance continue to highlight the vulnerability of the Toronto and Vancouver housing markets to a significant correction in activity and prices,” Derek Burleton, the deputy chief economist, and Diana Petramala, economist at TD, said.
TD’s outlook continues to call for a “soft landing” in home prices – something that’s already started in markets outside Toronto and Vancouver.
Uh-huh. Kind of like, say, in Calgary, where sales are expected to decrease by 22% this year.
The revelation that Canada’s largest “alternative” (read: subprime) mortgage lender was an (admittedly indirect) source of widespread “liar loans” to people who would otherwise not even remotely qualify for mortgages is just another reason to believe that this bubble’s gotta pop sometime soon.
And if you had any doubt about it, just check out what the Financial Post has to say:
Home Capital’s broker purge not a sign of a bigger problem in Canada’s housing market, says rival lender
I rest my case.