Canada

Canada’s National Housing Agency Discreetly Sent Banks A Memo That Warns Defaults Are Coming

Canada’s national housing agency discreetly asked lenders to curb risky lending. Evan Siddall, the head of the Canada Mortgage and Housing Corporation (CMHC) sent a confidential memo to lenders this week, requesting they tighten lending. Instead of taking the advice, the industry leaked parts of the memo. The CMHC has responded by releasing the whole memo, including their rationale for the request. It turns out lenders aren’t your friends. Surprising, I know.

Letter Asks Banks To Curb Risky Lending

The letter requests banks curb risky loans, but not because they’re worried about banks. Siddall starts with a request to “… continue to support CMHC’s mortgage insurance activity in preserving a healthy mortgage sector in Canada.” He follows with policy changes they’ve made, as well as the negative consequences Canadians would be exposed to if they didn’t.

For those that need a recap, the CMHC tightened the criteria for mortgage insurance. Starting in July, credit scores were limited to a hard minimum of 680. A hard minimum meaning there’s no room for flexibility, as previously accepted. The agency also won’t insure properties bought with borrowed down payments, and removed exceptions to debt service ratios. Generally, just promoting sound underwriting policy at a time where there’s increased risk. They can only suggest their competitors do the same.

Lenders Warned They’re Making Recovery More Difficult

In Siddall’s own words, “borrowing creates a very significant economic drag on our outlook.” Since debt is future income used today, expansion of household debt will slow future economic activity. The memo warns the slow economic growth going into the future can be an issue. A particularly worrisome one, considering this implies a longer recovery from the current recession.

Canadian Mortgage Defaults Are Coming

A significant number of homebuyers think housing risk disappeared, because defaults haven’t jumped. Defaults can’t rise right now, because lenders stopped collecting payments from almost a fifth of mortgages. The CMHC reminded lenders they “always anticipated a delayed impact: weakening in late 2020 and 2021 once government income supports unwind, bankruptcies increase and unemployment starts to bite.” A sentiment also reflected by the Bank of Canada, which also expects defaults to rise next year. This isn’t new information to lenders. They know this, despite aggressively chasing first-time buyers.

Expanding first-time buyer lending ahead of rising defaults is predatory. First-time buyers don’t have to lose their job to be impacted. Rising defaults tends to create more supply, tending to push prices lower. First-time buyers only need prices to fall a few points to push them into negative equity. Siddall added, “We don’t think our national mortgage insurance regime should be used to help people buy homes with negative equity”

Why Banks Don’t Give A Sh*t

A lot of lenders learned the wrong lessons from the US housing bubble, and one is on negative equity. After the US bubble popped, defaults soared because of investors, not first-time homebuyers. Investors with great credit scores strategically disposed of assets, to lower liabilities. Actual homes occupied by families, paid bills right through negative equity.

These negative equity homeowners were the biggest losers in the whole transaction. They would have to pay to sell, and a lot didn’t have the money to do that. First-time buyers aren’t known for sitting on huge capital reserves. Instead, when they get hit with negative equity, they attempt to ride it out. In the US, there’s millions of people still paying off their 2008 purchase, that haven’t accumulated any wealth. Lenders on the other hand, racked up all of those interest and principal payments.

The government has created so much moral hazard, there’s no reason for lenders to act responsibly. The government pumped the gas on mortgage growth, even as home sales reached new highs… during the greatest period of unemployment in Canadian history. If that’s not a sign the government is telling banks to proceed with risky lending, I don’t know what is.

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26 Comments

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  • Jamie Cass 2 months ago

    It’s all taxpayer backed, why would the banks care?

    • Trader Jim 2 months ago

      For the taxpayer to actually kick in cash at private insurers, they would have to go under. Probably not realistic to see that.

      Although, the government is certainly giving them the go ahead to act recklessly.

    • neo 2 months ago

      The Big Five are protected….not the subprime Genworth’s of the world who aren’t even following the new CMHC July guidelines.

      • MH 2 months ago

        If you are a Canadian taxpayer and things go south, you are on the hook to pay 90% of mortgage insurance Genworth MI Canada underwrites. Called 90% guarantee.

        http://investor.genworthmicanada.ca/English/glossary/default.aspx

        Isn’t it fun to be a Canadian taxpayer?

        • neo 2 months ago

          Well….That sucks doesn’t it. Does Buffet still have his money in it or has he bailed yet?

          • MH 2 months ago

            It sure does. That’s why the truly wealthy (and the wannabes) much prefer receiving taxpayer funded bailouts and guarantees rather than paying taxes. It just makes more sense and taxpayers don’t seem to mind at all.

            I did not know about Buffet.

  • Ethan Wu 2 months ago

    Banks aren’t your friend. That should be a lesson in kindergarten, along with don’t take candy from strangers.

    • Mortgage Guy 2 months ago

      No real impact, since market rates are already at record lows. The benchmark isn’t reflective of the real market.

      Although if we’re doing rates this low right now, what are we going to do next year when these resources run out?

      • neo 2 months ago

        What about variable rates. Those would theoretically go down for HELOC’s and mortgages.

      • RainCityRyan 2 months ago

        True, though this is used as the hurdle rate for the mortgage stress test no?

        Certainly seems like the industry (off which is what this benchmark rate is based) is trying to entice more leverage into the system, while CMHC who holds a very HIGH amount of the risk for this leverage is trying to reduce/limit the growth in leverage.

  • OM 2 months ago

    RBC CEO was on BNN talking about the letter. He seemed unhinged. It was hard to watch.

    • Ian Brown 2 months ago

      Are they pretending they’re really just a part of our life’s?

    • Itchy Bear 2 months ago

      Not a surprise. Was at an event for expats thinking about coming home to Canada where the CEO of RBC recommended they take unpaid internships here to get their foot in the door and suggested that’s a great career moves for serious professionals who have done work orders of magnitude bigger and more complex than anything that they’re likely to see in Canada.
      It was horrifically tone deaf, but definitely exemplary of a world view where other people are things to be stepped on.

  • alvi 2 months ago

    After 15 years over excessive monetary and fiscal “stimulus”, moral hazard is rampant in the economy. What a shocker!Thanks BD

    • Thomas 2 months ago

      This “stimulus” is actually making me feel sick about this country. How much greed is too much? This is really not the canada I knew of.

  • Ghl 2 months ago

    Canadian Tax payer especially young professional are paying for all the free health care and real estate wealth these boomers are getting. Yet they are too stupid to realize they are getting screwed.

    If these young sheeps are the future of Canada then the future is not very bright if you know what I mean.

    • alvi 2 months ago

      Yeah you forget that boomers are not all retired, were your age, have kids in your cohort and faced interest rates that were much higher than today. When the health care system was first introduced in Canada average age of pppulation was 28 , now it is 48 and health care by its very nature is very back-loaded. Any attempts to reform are met with a cacophony of protests.
      What I dont understand is why your cohort along with the public sector(surprise?) supports the very”progressive ” agenda that has resulted in these massive deficits that you now rail against. Think about it, goverments in the 90s were able to balance budgets with interest rates 4X higher than today and in a much less favourable employment environment, though that has now changed to the shock of your generation.( The recesssions in the early 80s and 90s that were just as brutal.) Sadly there is no political party willing to make the tough choices just borrow,borrow,

      • Fight Back 2 months ago

        Well, Canada is sucking the blood out of their young to feed the old. This country have no future and this is all because of greed.

        Good job boomers, stop pretending its not your fault.

        Btw can someone organize a movement to stop this real estate blood sucking government??

    • Average Man 2 months ago

      What else are we supposed to do? You can’t just toss them all into a wood chipper. It’s illegal. And they don’t make a big enough wood chipper.

  • Bill Robins 2 months ago

    Record debt for years and everyone talking about it….Government “Nothing to see here”. I thought people went to jail for ponzi schemes but seems in Canada they just get rich.

  • straw walker 2 months ago

    Its always the case…if you work hard, pay your bills, live modestly and within your means you live poor..and watch your neighbors live a lifestyle that they cannot afford..

    In the end your neigbours get a financial assistance programs to pay for their excesses, and guess who pays
    You do..

    • Thomas 2 months ago

      What you said is so true. This is the real canada.

  • I am Groot 2 months ago

    I believe the whole system is rigged. Banks are lending recklessly because they know have been given the green light by the government to do so. They also have a “bail in” provision ( https://www.cdic.ca/what-happens-in-a-failure/resolution-of-large-banks/resolution-tools-for-d-sibs/bail-in/bail-in-backgrounder/how-bail-in-works/) should crap really hit the fan. As for Genworth and Canada Guaranty, the private insures, they were likely assured that they would get bailed out as well through guess who?….. the CMHC. Yes the CMHC re-insures the private insures up to 70% of their losses; they always have. Sidall is just covering his tail now in the event that the sky falls a few years from now. The he will say I told you so and look like a Genius even though he was probably complicit in the whole thing. Once housing became too big to fail it stopped being a free market.

  • Thomas 2 months ago

    Totally rigged. The message from the govt to “responsible” (or now-called “stupid”) young taxpayers who don’t have RE is clear: “it is your fault that you don’t borrow to buy RE. We are going to keep inflating this bubble and we will use any measure including mortgage deferral forever to stop the bubble burst”.

    Is there a future for our children in this country if they aren’t born with a silver spoon?

  • Golden Oldie 2 months ago

    Just wait for those 350 billion defecits kick in and the dollar goes to 35cents US.
    That will be the final nail in the coffin for the Great Canadian Ponzi!!!!

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