Canada’s Subprime Mortgage Secret

The Globe and Mail recently published an article detailing what they called “Canada’s dirty subprime secret”. They looked into over 10,000 Canadian foreclosure proceedings and uncovered a subprime mortgage problem that many (including PM Stephen Harper) claimed does not exist in Canada. Here are some of the main points of the article. Some readers claim the article is fear-mongering and exaggerating the situation while other readers claim that we haven’t seen anything yet. I will let you form your own opinions.  I would love to hear what you think. You can view the entire article by clicking the link at the end of this post.

– Data from both B.C. and Alberta governments and two private companies that specialize in tracking foreclosure proceedings show that lenders are foreclosing on homes at an “alarming rate”.
– More than half of foreclosures in 2008 were initiated by a number of subprime lenders who targeted riskier borrowers with poor credit histories.
– Thousands of homeowners borrowed more than they could afford and lenders lent money too easily.
– The number of unsold homes in Canadian cities is building which has ultimately depressed the value of homes of even people who haven’t overextended themselves.
– Canada does not report court ordered sales or foreclosure numbers like the USA which uses the data to gauge it’s economic health. In Canada it is hard to get these detailed numbers.
– In B.C. and Alberta private companies collect foreclosure data from the courts. Ontario handles their foreclosures through a process known as “power-of-sale which effectively removed the issue from the courts and shielded the scope of the problem”.
– Canada’s real estate sector has not suffered as much as the USA.
– It was common in the past couple years to hear companies who had relaxed lending practices state “We say yes when the banks say no” and “No income verification”.
– We do have a subprime problem in Canada, lenders significantly reduced their lending standards over the past five years.
– Vancouver courts are overwhelmed with the flood of foreclosure applications. It now takes six weeks to process an order vs. one day six months ago.
– Subprime lenders “trashed the market”. These lenders gave loans that no sound financial institution would touch.
– Many wealthy individulas offered private high-interest-rate mortgages to homeowners who already had high debt and are now foreclosing on the properties at lower values than projected.
– Canadian government agencies don’t publish numbers on the scope of high-risk lending also banks and other mortgage lenders don’t disclose details about these loans know as “non-conforming” loans.
– Until the early 2000’s: subprime mortgage lending was often done by private investors or mortgage lenders who would take a gamble and charge high interest rates to home buyers who didn’t meet conservative lending requirements. This was a very small percentage of mortgage lending.
– Mid 2000’s: this small percentage mortgage lending changed into the fastest growing segment of the country’s mortgage market. This brought aggressive U.S. mortgage lenders to the Canadian real estate market which happened predominantly in the west.
– The mentality was as long as real estate values continued to increase the lenders were not taking on a high amount of risk because they could always foreclose homes and sell at a profit.
– Aggressive U.S. mortgage insurers that were approved by the Canadian federal government in 2006. These mortgage newcomers further minimized their risk by selling mortgages to entities that sold securities backed by mortgages to investors.
– Benjamin Tal, an economist with CIBC world markets was one of the first to sound the alarm. He published a report in late 2006 that estimated subprime loans were growing at a “meteoric” annual rate of 50 per cent by the end of 2006, becoming the fastest growing segment of Canada’s mortgage market.
– In 2006, Mr. Tal estimated more than 85,000 Canadian homeowners had subprime loans.
– Late 2007 easy money and soaring real estate prices tempted many borrowers and lenders into viewing homes as cash machines. Numerous second and third mortgages at high rates of interest were taken out to fund a lifestyle that was not financially responsible.

More Canadians Plan To Buy A Home: Study Conducted By Ipsos Reid

Here is an article written by Becky Rynor of the Financial Post. She summarizes a survey conducted by Ipsos Reid that details Canadians’ feelings about the current real estate market. It would be interesting to find out how Kamloops residents feel about the current real estate market here in our city.  I would love to hear your opinion. Read below for the full article.

Most Canadians believe it is a home buyers market, with more first-timers planning on purchasing their own homes, according to a study released today by Royal Bank of Canada. “The current economic environment does not appear to have dampened Canadians’ overall confidence in the housing market,” says Royal Bank spokeswoman Karen Leggett. “Canadians continue to have an overwhelming belief in the long-term value of a home and we’re seeing this in the buying intentions of many first time home buyers this year.”

In its 16th annual RBC home ownership survey, 65% of Canadians said they believe it’s a buyer’s market, with 27% saying they intend to buy a new home over the next two years. RBC says that’s up from 23% in 2008.

The survey, conducted by Ipsos Reid, shows that almost half of respondents, 48%, said it makes sense to buy a home now instead of waiting until next year.

Younger Canadians, those under 35 years old, are most likely to spark an upsurge in homes sales, with 48% saying they plan to buy a home. That’s up sharply from 36% last year. And even renters want to get in on the action: 38% of them want to buy in the next two years.

“Low mortgage rates and favourable housing prices are influencing home purchase intentions this year and may be the reason why more Canadians are poised to purchase over the next two years,” RBC says.

A large majority of Canadians, 83%, remain positive that home ownership is a good investment. That is down slightly from 85% in 2008 and from the all-time high of 90% in 2006. Fifty-four percent of respondents said they believe house prices will be lower in 2009, a substantial change from 31% in 2008.

Nationally, respondents in Alberta expressed most interest (35%) in buying. Quebec was lowest at 22%. Those in British Columbia believed most that now is a buyer’s market (78%), compared with Saskatchewan/Manitoba, where only 34% believe so.

In Ontario, home-buying intentions have increased over past year, with 30% saying they are likely to purchase a home within the next two years. That’s up from 21% in 2008.

The online survey of 2,026 adults was conducted between Jan. 6 and 9, 2009. Ipsos Reid said the results are accurate to within plus or minus 2.2 percentage points, 19 times out of 20.

Home Ownership Budget Measures Will Help, But Not Reignite, Real Estate Sector

The recently announced federal budget gives some relief to homeowners, but it is not expected to change the current condition of the real estate market in Kamloops, provincially or nationally. The number of listings on the market not only in Kamloops but nationally are up and the number of home sales are down. It would take a number of factors to change before this ratio adjusts.

The federal budget offered the following:  first time home buyer’s RRSP allowance was increased and tax credit was increased. There are also tax write-offs for home renovations.

In an uncertain market these allowances and tax cuts most likely won’t change the rate at which real estate is selling in B.C. but it will encourage current home owners who are on the fence about renovating their home to take the tax write-off as it will not be available forever.  The positive aspect of the new home renovation tax write-off  is it will keep people working. Some trades people in Kamloops have felt a slow down in their business. This stimulus should encourage home owners to consider hiring a professional to help with renovations.

Below I have included an article from the Vancouver Sun.

Potential home buyers won some small gains out of the federal budget that won’t necessarily re-spark activity in the declining residential real-estate sector, but do go along with the theme of offering incentives for consumers to spend.

In Tuesday’s budget, Finance Minister Jim Flaherty raised the limit for how much first-time home buyers can withdraw from RRSPs to make a down payment to $25,000 from $20,000 for individuals and $50,000 from $40,000 for couples.

Also for first-time purchasers, Flaherty included a 15-per-cent tax credit on home-purchase closing costs to a maximum of $5,000, which would be worth $750 off a buyer’s federal tax bill.

“Perhaps none of these things in and of themselves will be the turning point, or whatever,” Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals, said in an interview. “But they all help, and really it’s the issue of government trying to deal with the whole issue of consumer confidence.”

Murphy said the RRSP home buyer program, first initiated in 1992, has been a very popular program, and that more buyers “than you might think” take advantage of it.

The program allows buyers to withdraw money from their retirement investments tax free for use as part of their down payment so long as they pay it back into their RRSP accounts within 15 years.
The federal government has estimated increasing the limit will cost $15 million a year over the next two years.

The tax credit on closing costs is expected to be more expensive, costing the federal treasury $30 million in fiscal 2008-09, $175 million in 2009-10 and $180 million in 2010-11.

Increasing the limit on RRSP withdrawals to keep step with rising home prices is something the mortgage industry and realtors have been advocating for a long time, Murphy said, and he expects there will be buyers who do use the extra money.

And while the $10,000 increase in the limit for a couple might not be a huge increase, Murphy said it can help reduce the principal of mortgages buyers take out, or help push them over the threshold for not requiring mortgage insurance on their transaction.

“Every little bit helps,” Murphy said.

Dave Watt, president of the Real Estate Board of Greater Vancouver, added that home sales have considerable spin-offs in terms of the furniture new homeowners tend to buy and home improvements they tend to make.

And the whole thrust of Flaherty’s budget was to encourage average people to spend, says Lincoln Schreiner, a Vancouver-based tax-practice partner in the firm PricewaterhouseCoopers.

“When you go into a situation where people start to talk socially about whether their job is going to be there or not, you’re going to be more cautious,” Schreiner said. “People start cutting back on spending, and it becomes like a tidal wave.”

Link

5th Annual Demographia International Housing Affordability Survey 2009

The Demographia 5th Annual International Housing Affordability Survey for 2009 is out. It rates metropolitan markets for affordability of the housing in each market. Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States are all discussed.

The Demographia International Housing Affordability Survey employs the “Median House Price to Median Household Income Multiple,” (“Median Multiple”) to rate housing affordability. The ratings are as follows 3.0 or Less is defined as “Affordable”, 3.1 to 4.0 “Moderately Unaffordable”, 4.1 to 5.0 “Seriously Unaffordable” and 5.1 and above “Severely Unaffordable”.

In recent decades, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices being generally 3.0 or less times median household incomes. This historic affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in Australia, Ireland, New Zealand and the United Kingdom and in some markets of Canada and the United States.

Over the past year, house prices have declined in most markets. This “bursting of the housing bubble” followed an unprecedented increase in housing prices in all markets except some areas in the United States and Canada. The result is that housing affordability has generally improved, though remains at Median Multiples well above the historic norm in many markets.

Vancouver came in at 8.4, Victora 7.4, Kelowna 6.8 and Abbotsford 6.5 to name a few. All the previously named markets are defined as “Severely Unaffordable”. The province of British Columbia was generally described as severely unaffordable based on the calculations employed in this survey. However, many of these severely unaffordable markets have experienced steep price declines in the last year. Among the major markets, Vancouver is the least affordable. The Kamloops market was not specifically cited in this survey, but as a part of the province of British Columbia one can draw the conclusion that we too are at least “seriously unaffordable”.

To read the entire PDF document from The Demographia Survey click HERE.

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