Saturday, December 13, 2008

Why Do Flaherty and Harper Hate Canadian Homeowners?

A good article in today's Globe & Mail accompanied by a good interpretation by Garth Turner at his blog. The Fox News-style title pretty much sums it up.

The story uncovers how Harper's neo-con ideology, i.e. if it's American, it's gotta be good for Canada, along with Flaherty's legendary incompetence combined to subvert Canada's housing market. What they did is something they'd had in mind well before they defeated the Martin government - the zero-down, 40-year term mortgage. They made sure it was in their very first budget in 2006.

"New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.

The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened."

In keeping with their standard Karl Rovian practice, Flaherty praises the Harper government for banning these toxic mortgages while conveniently omitting that they were his idea, his creation in the first place.

At the time, Mr. Flaherty announced that the government was opening up the market to more private insurers.

"These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership," Mr. Flaherty said.

The new rules encouraged the entry of U.S. players such as American International Group [you may know them as AIG, the outfit that got a quarter-trillion dollar bailout from Washington]- the world's largest insurance company - and Triad Guarantee Inc. of Winston-Salem, N.C. Former Triad chief executive officer Mark Tonnesen, who spearheaded his company's aborted push into Canada, said the proliferation of high-risk mortgages could have been mitigated if Ottawa had been more watchful.

"There was a lack of regulation around the expansion of increased risk," he said.'

Garth Turner warns we'll all pay the price of the Harper/Flaherty ideology over the next year or two:

"One year ago, in December 2007, I sat and wrote the book, “Greater Fool” which spelled out in detail my problem with these Canadian subprime mortgages, and predicted the outcome – a US-style real estate contagion which would sweep Canada. Unfortunately, I was right. It is now infecting every city. It will grow more virulent as the economy weakens and unemployment spreads. By the time the real estate market bottom in perhaps a year, maybe longer, values will have dropped by up to a third more."

I have my own take on this, one honed during the years I practised bankruptcy law. I've seen this story far too many times - a newly married couple wanting to start their family, a rising real estate market, real desperation to get a house for the kids to come. With the best of intentions (who intends their own financial ruin?) they find a house that they can afford but just barely. They take the plunge hoping that the market won't falter, that neither of them will lose their job, that they'll somehow hold on until their incomes grow and their debtload lightens.

Now imagine that same young couple when a 40-year term, no down payment mortgage is dangled before their eyes. No money down, no need to wait. 40-year term, either lower but still barely affordable payments or more house. They lunge at the bait and that's just what Harper and Flaherty and their pals at AIG were counting on. Suddenly you have an overheated real estate market in which first time homebuyers are spending an estimated 78% of their combined, after tax income on servicing their mortgages. That's the figure reported by CBC for first time homebuyers in Vancouver last year.


And, while you may argue that these subprime borrowers got themselves into it, that they're the authors of their own misfortune, the Conservative policies that made this possible have wreaked damage that has spread throughout the real estate market.

Especially today with Republican conservative subversion of global securities/stock markets, many Canadians are seeing their retirement portfolios crater before their eyes. Now Harper/Flaherty have undermined their fallback retirement asset, their home equity. They did it in the deliberate pursuit of a mad, uber-right ideology and we're all going to pay dearly for that.

I want to be hypothetical for a minute. If Stephen Harper and Jim Flaherty had any integrity - any integrity - they would take responsibility for the havoc they have wrought on the Canadian public and they would resign not just their offices but their seats in parliament. Yet Stephen Harper is bent on doing to our constitutional structure pretty much the same thing as he's done to our real estate markets - smother it in a thick layer of his greasy ideology. The man has to be stopped and driven straight out of Ottawa before he can make our lives and our country that much worse.


The Rat said...

Do you live in the Vancouver area? I do and I can tell you that 40 year mortgages sure as hell didn't cause the overheated market in Vancouver. In fact, a 40 year mortgage was, for many, the only way to get into an already stupid market here. In case you didn't know, there was this little thing in Hong Kong in 1997 that began a long and steady push up in the Vancouver market. Coupled with almost zero availability of land in Vancouver and the "build a condo" craze, the market went up massively starting in 2002. Who was in office then? If you are trying to blame Harper/Flaherty for Vancouver's problems, and you are, that's just sad, sad revisionism. The fact is a lot of people in Vancouver got very greedy, have seriously over-extended themselves, and are in trouble now. You might as well blame Home and Garden TV for shows like "Flip that House" as much as blame the government. But then Liberals have forgotten that "Personal" & "Responsibility" used to go together.

The Mound of Sound said...

No Rat, I'm not suggesting what you're claiming. I bought my first house near the Ridge Theatre/Arbutus area in the late 70's for $150,000 so I fully know what's happened to the market since then. I've watched the market go through its boom/bust cycles. I've seen a hell of a lot more of that than you could imagine, so please spare me your facile lectures.

To you, those who lunged at no downpayment, 40-year mortgages were "greedy." I'm not that naive nor am I a blind apologist for those who introduced these toxic practices. Most people, Rat, who go for those loans aren't greedy, they're desperate. They're afraid if they don't get in, they'll find themselves completely priced out of the market. It's fear that drives them Rat, not greed, and it's their fear that made the subprime mortgages introduced by Harper/Flaherty so devastating to all homeowners. AIG, Harper and Flaherty - curious how they go hand in glove, isn't it Rat? Responsibility, in the form of prudent regulation Rat, is something that your New Canadian Government threw to the wind.

WesternGrit said...

A lot of Vancouverites DID take on 40 year mortgages - I know a lot of them. I also know a few builders in Greater Vancouver who can't find any new jobs. They are actively looking for other work.

As far as Vancouver's problems being any different than Toronto's or Calgary's, you're wrong Rat. I lived in both recently, and can tell you that young people over-pursued those 40 year mortgages. When their jobs became insecure, they started selling... Yes it is greed - flipping houses - BUT, WHAT ENABLED THEM TO DRIVE A DUMP TRUCK FOR A LIVING, OWN A MILLION DOLLAR HOUSE WITH 2 SUITES, AND OWN 2 RENTAL HOUSES TO BOOT? Stupidly low mortgages for 40 years - that's what.

Fact is, the mortgages that "entice" voters to buy homes even when they can't afford them, are to blame. Heck, we even had Harper and Flaherty POSING WITH HOME BUILDERS ON SITE to push the public to buy homes. Forget that already? The main drive of the GST drop WAS TO CONVINCE CANADIANS TO BUY MORE HOMES AND CARS. The 40 year mortgages were touted by both Harper and Flaherty to be a part of the "incentive" to buy when they spoke to home building groups. Forget THAT already?

I was at one of the conferences when Harper talked about the "great combination" of low-cost 40 year mortgages AND a lowered GST. The same way he talked about "great investment opportunities" when the markets collapsed during this past election, he was pushing home purchases. His very clear words were about young families being able to buy homes - and he posed for photo ops with a young family, like a giddy little grade-school kid.

He IS going to wear this. Oh yes... The media is starting to put the pieces together (about 2 months too late, but that's okay - they aren't possessed with the greatest tools or time to do their jobs anymore).

Harper can't snake out of this economic mess.

The Mound of Sound said...

Interesting WG. From my perch here on the island I wasn't directly immersed in the Vancouver market. I understand that's your bread and butter.

I hadn't understood the role that these Zero/40 mortgages played in speculation. Those situations I knew of were people who took the plunge out of fear or were on the verge of doing just that but drew back in the nick of time.

By the way, WG, during the final 18-months of the American bubble some 60% of new mortgages in California were interest-only. I heard that there were some of those here too. Any truth to that?


wilson said...

The only thing that got in the way of Liberals bringing in 'subprime mortgages' was a 2006 election,
and then the Cons stole the Goodale's idea:

''In the fall of 2005, a tiny paragraph buried in a 280-page federal government estimate of expenditures signalled a new era of competition in the industry.

The Finance Department's provision was considered so insignificant at the time that many staffers of the minister,
Liberal MP Ralph Goodale, didn't recall it when contacted by The Globe.
A current spokesman for the Saskatchewan MP insisted that the provision was not designed to open the market to riskier products.

Another federal official who declined to be identified said the wording of the provision was eased because Genworth's name had changed and the government wanted to leave room for additional switches...
Ultimately, Parliament did not vote on the Finance Department's proposal, thanks to the 2006 federal election and the Conservatives' rise to office. But the U.S. insurers' efforts weren't for naught; the new Harper government quickly embraced the idea of them coming north.'

WesternGrit said...

We have built a few homes in Calgary and Greater Vancouver - but certainly not at the scale of some of my friends. I have, however, been acquainted with many many young people who have over-extended themselves badly. As a manager at a large corporation in Calgary, I watched as routinely, young people in my department making less than half what I made, extending themselves to the limits of their budgets to buy a home because "now is the time to buy", and "why rent when you can own?"

I have a mortgage broker acquaintance who indicates there were some "interesting" things going on. Mound, are you referring to clients only paying interest, then having to "re-finance" after their term is up?

Wilson - you always seem to have a "hard-on" for Mr. Goodale. What gives? You know how departments work, right? Hundreds of life-long bureaucrats formulate strategies and plans for the economy. They make the suggestions - the economists and finance experts. Copy is provided to the DMs and other senior staff (non-partisan), then finally handed to the minister, who can decide, or not decide to put the policy into action via Parliament. Mr. Goodale quite obviously did not move forward with this - even though it may have been given to him for his consideration.

You should know, as well as I do, that all the preliminary work on budgets are done by the department. The Ministers provide their "broad direction", then review the end product to see that it jives with what the government has laid out for their gameplan.

Besides, what you are talking about had nothing to do with 40 year mortgages. Only the Harper/Flaherty duo brought that on. Nice try, but you can't blame a government you defeated.

The Mound of Sound said...

Even if what you say is accurate Wilson and, based on my previous experience with you I'm not foolish enough to give you that much undeserved credit, it wouldn't change the fact that the 0/40 was a creature of the Tories' 2006 budget. There's no getting away from that Wilson so stop trying to crawl back under that rock.

The Mound of Sound said...

Yes WG, they were fixed-term, interest-only (no principal) payment mortgages. The idea was to use all your cash to either get a big house or more than one and then cash out when the price got high enough, pocketing a handsome profit. Some people bought several properties hoping they'd net enough to get one clear title. It was rank gambling, not investing. When the market tanked they were left with debts they couldn't service much less pay off.

I'd be grateful if you could check with your friends to see if we had "interest only" mortgages here in Canada.

The Mound of Sound said...

Actually it appears that such things did/do exist in Canada. A quick Google search came up with sites like this:

The Mound of Sound said...

It appears that even TD Canada Trust had some "interest only" mortgage options as part of their home equity line of credit mortgages. I expect these would be pretty highly secured, not the sort of thing accessible to a first time, no equity buyer:

WesternGrit said...

I will check with the mortgage "broker". My brother also does a lot of real estate law. I'll ask him if he has seen any conveyances come by with this set-up.


Anonymous said...

nice thread, I nominate this as one of the best discussions and shut-downs of CPC propaganda I've seen in quite sometime. Informative and enlightening, thanks.