Tuesday, October 27, 2009

Risky Business - Harper Turns Cdn Government into World's Biggest Subprime Lender

As the rest of the world was being slammed by the fiscal sledgehammer of securitized subprime mortgages, the subpar economist who calls himself prime minister was throwing the Canadian government headlong down that same well.

Writing in this weeks's Tyee, Murray Dobbin reveals how Harper has transformed your government and mine into the world's largest subprime lender and argues that we're in for our own meltdown when the current, made-in-Ottawa housing boom goes bust.

...what few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world.

...The facts are that over 90 per cent of existing mortgages in Canada are "securitized." That is the practice of pooling mortgages (or other assets) and then issuing new securities backed by the pool -- MBSs, or Mortgage Backed Securities.

... So long as borrowing requirements were tight, the percentage of loans that were securitized remained modest. But in 2007 the Harper government allowed the CMHC to dramatically change its rules: it dropped the down payment requirement to zero per cent and extended the amortization period to 40 years. In light of the mortgage meltdown in the U.S., Finance Minister Flaherty moderated those rules in August 2008 (it's now five per cent down and 35 years). But these are still relatively very loose requirements and securitization has taken off.

By the end of 2007 there were $138 billion in NHA securitized pools outstanding and guaranteed by CMHC --17.8 per cent of all outstanding mortgages. By June 30, 2009, that figure was $290 billion, a figure [National Bank Financial advisor David] Lepoidevin says, "exceeds the total value of mortgages offered by CMHC in its 57 years of existence!" CMHC's stated goal was to guarantee $340 billion by the end of this year and is on track to reach $500 billion by the end of 2010. Total mortgage credit in Canada will grow by 12-14 per cent of GDP in 2009.

In an effort to prop up the real estate market in 2008 (when affordability nosedived), the Harper government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing. CMHC described these risky loans as "high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities." The approval rate for these risky loans went from 33 per cent in 2007 to 42 per cent in 2008. By mid-2007, average equity as a share of home value was down to six per cent -- from 48 per cent in 2003. At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income; in Canada today that ratio is 7.4:1 -- almost 50 per cent higher.

...This is the ticking time bomb Prime Minister Stephen Harper has tossed at the Canadian taxpayer. Why? So that he can maintain the fiction that he is a good economic manager and win a majority in the next election.

Dobbin accuses the opposition of sitting on this scandal out of rank cowardice and political opportunism. No one wants to be seen as the one who set collapse in motion by pointing out that the Tory Emperor is running about without his pants on.

This affects each and every one of us. It affects our kids and their future. It whipsaws the housing market, inflating it for temporary political gain with astonishingly arrogant indifference to the price all Canadians will pay for it at the end. Look at it this way. Harper has pledged your good credit and mine to the tune of tens of billions of dollars. He has set up countless droves of young, hopeful Canadian first-time home buyers for an awful fall and he's undermined the stability of house values for the rest of us in the bargain. And he's done it all for the greater glorification and political opportunism of Stephen Joseph Harper.

The Canadian people have been betrayed by Harper, the Conservative Party and also by every opposition politician who has sat mute while the PMO perpetrated this scam on us. It's time these opposition leaders accepted that their duty is to protect us, not themselves. Too bad Harper is their puppeteer.


UU4077 said...

Actually, I'm afraid this guy doesn't really know what he's talking about. The mortgage lending in Canada was and is different than a lot of the practices that went on in the U.S. (ie. - Canada does not have no-recourse mortgages).

The Mound of Sound said...

Actually, UU4077, I'm afraid he does indeed know what he's talking about. When you encourage people to buy homes they can't really afford - homes that leave them with the double curse of being land poor and having no equity buffer - you're setting them up for disaster.

I was a bankruptcy lawyer for many years and I saw an awful lot of young people ground up in this sort of fiasco.

Maybe if we had no-recourse mortgages, more of these first-timers would survive economically. As you point out, with the exception of Alberta, we don't. Property values collapse, there's a deficiency on the mortgage and the young families who really never had much if any equity anyway, are left with no house and on the wrong end of a judgment for the shortfall.

It's not rocket science to understand this UU.