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.

An Issue We Can Still Fight an Election On

Steve Harper, echoing his American Idol, Mr. Bush and the Geezer McCain, says we have nothing to worry about, that the fundamentals of the Canadian economy are sound.

Does that sound familiar?

Then, yesterday, Merrill Lynch Canada released a report saying that we Canadians shouldn't get smug about what's happening in the U.S. and that we'll be next to face our own debt and housing price crisis. I found that pretty hard to believe but the more I thought about it the more I had to wonder what if they're right?

It may or may not be anecdotal but I recalled a recent study that showed that the average, first time home buyers in Vancouver were now paying something in the range of 75-78% of their combined, after-tax income on housing. A Vancouver starter home takes somewhere between three quarters and four fifths of a two income family's take home.

Back in my day it was considered not just prudent but essential to keep one's housing costs below 30% of net income. That got me wondering how this has changed so radically? How does a family get by while paying out three quarters of their disposable income on housing?

What if Merrill Lynch Canada is right? Don't we need a government that's on top of this now? If this danger is real, what measures, what policies do Canadians need to minimize the risks and impact? Is it really enough for Steve to tell us that the fundamentals are strong?

I don't know but it seems to me that when it takes nearly all of a two job family's net income to buy a house, maybe we are in an unhealthy and dangerous housing bubble. Why do I need to find that out from the Canadian subsidiary of a defunct, American securities giant?

In the greater scheme of things it's no skin off my backside. My house may have soared in price but it hasn't gone up a dime in value. It'll still buy me the house next door and that's about it. That's just fine for those of us lucky to be in a low debt/no debt position but the operative word there is "lucky."

What about the unlucky, the vulnerable? I'm talking about the new families that have just taken the plunge, hoping they can stay afloat long enough to get their debt down to something manageable. It's easy to say "that's their problem" except that it's not just their problem, it affects all of us. It affects the prosperity and stability of our communities among other things. It certainly affects their ability to contribute to our communities, to our societies. We benefit when we keep them healthy.

Have our politicians been asleep at the switch, blinded by our petro wealth to the gathering perils to our people?

Housing bubbles are economic cancer. Read my post on that subject from yesterday. It cavasses the approach some other countries have used to tame the destructive fluctuations in housing stocks, to recognize that housing can't be treated as just another commodity for speculation.

Don't look for any answers from Steve "the fundamentals are sound" Harper. I want to hear from the Liberals on this. If this problem is nearly as bad as claimed by Merrill Lynch, we need to identify it and come up with solutions. The Americans have shown us what happens if you don't deal with these threats promptly.

There's no better time to get this on the radar screen than right now, in the midst of a general election.