Canada's mortgage collapse?

Here are some highlights from CAAMP Winter Report. The report highlights research done by the Federal Government:

- Bank of Canada simulations made predictions that the number of Canadians with high debt service rations (greater than 40%) could rise to as much as 9.6% by mid 2012, versus the average rate of 6.1% over the past ten years.
- 70% of Canadians own a home now, compared to 63.6% in 1996. At 70% Canada is looking a lot like the US before their housing crash.

So here's what CAAMP found:

- 86% of all mortgages in their sample were fixed rate (around 4%) vs variable (2.25%)
- 70% of all the fixed rate mortgages chose security of a rate that was fixed for 5 years or longer
- It is not true that buyers who take adjustable or variable rate mortgages are borrowing to the limits of what they can currently afford. For insured mortgages, for adjustable rate loans, lenders must “qualify” the borrowers (calculate affordability) based on rates for three year fixed rate mortgages, not on the actual contract rates. This inherently gives the borrowers
considerable capacity to absorb future rises in rates.
- The average total debt service ratio (“TDS”) is 32.8% (based on the qualifying
rates assumed by the lenders) and 32.3% (based on the actual contracted mortgage
interest rates). This is well below the 44% maximum allowed for borrowers with high
credit ratings and 42% allowed for others.
- On their own simulations, making assumption of a modest income growth and rates going to 5.25%, there will be marginal impacts to TDS ratios


Note: The CAAMP research was done 1/6th of the total expected amount of mortgages financed in 2009 (so it may not represent a true representation of the Canadian Mortgage market)

So in essence, CAAMP data is showing that Canadians are a very cautious...but is it a true representation?

Scotia Bank's Economist, Derek Holt, feels differently. In a recent Maclean's article, Holt says: “I have difficulty with the CAAMP report. It’s a very different picture than what I get from talking to people in the mortgage industry."

Holt says as many as "40 per cent of first-time buyers have opted for variable rate mortgages, while another 10 per cent chose fixed mortgages with just a one-year term." Macleans notes that means half of all new mortgages are heavily exposed to short-term rate changes.

“I think their study grossly underestimates mortgage rate sensitivities,” says Holt. “It doesn’t even really matter if they went variable rate or fixed rate, because pretty much all of the mortgage market in Canada resets in the next five years.”

Holt doesn't say how he came up with the 40% of first time buyers (is it a survey of his buddies at the branch?) but the Maclean's article highlights some nice anecdotal evidence of a credit counseling service indicating that their clients are in more debt problems than ever.

We no way expect a housing collapse...but we'll keep on eye on this

Why Canadian Banks want tougher regs.

Time to comment on interest rate hysteria from a profit making framework.

- On Monday February 8th 2010, the Globe reports that the big 6 banks met with Mark Carney in November to highlight their fear of easy access to credit will will lead "to a potential collapse in house prices."

The article further states: "The banks reportedly want Ottawa to mandate tighter rules on mortgages so that buyers will need a larger down payment - as much as 10 per cent. They also want Ottawa to reduce the maximum amortization period of a mortgage to 30 years from 35."


In a follow up article on Tuesday February 9th, The Globe reports Peter Aceto, CEO of ING, the 6th largest lender in Canada, advised that the Canadian government
should think twice about changing qqasx0the regulations.

Aceto comments: “The banks in this country don't have to lend to the limit of the law – they can make smart rules on their own and not have Minister Flaherty make the decision for them.”

Now, let's think bank...every decision they make is for profit. Why would the banks want more regulation from Mark Carney?

They can't afford to police themselves and what the government to do it for them because they want to aggressively build more relationships with you. Think NHL salary cap!

Why else would the banks want to have the government increase regulations?

Well according to a note I read in the blog Canadian mortgage Trends (via Georgia Straight Blog), the banks want to cut out competition from smaller credit unions. According the George Straight article, "tighter mortgage rules would make life harder for the banks’ competitors, like credit unions, which rely heavily on mortgages."

That's a look of what's going on behind the curtain.