The Globe on "High Risk" Mortgages

Globe&Mail The Globe & Mail ran a story this weekend on Canada’s “version of subprime mortgages.”

Here is the article.

According to the story, $0-down mortgages and 40-year amortizations were nothing more than “risky” “sub-prime” products.  The Globe slams pretty much everyone who played a role in their existence.

For those intimately familiar with “0/40” mortgages, however, this article comes across as superficial at best.  Here is why….

  1. To the authors, 40-year amortizations are “risky” and “subprime.”  When we read that we immediately wondered if the writers knew what “subprime” means.  Up to 95% of 40-year mortgages were prime.  That means applicants needed solid credit and income to be approved.  In a lending sense, borrowers like this are not “subprime” or “risky.”  Many people who got 40-year amortizations, for example, could have qualified at a 25-year amortization.  Moreover, experts estimate that the average 40-year mortgage will be paid off in just 20 years.
  2. There were definitely 0/40 borrowers who overextended themselves.  That’s a fact.  On the other hand, the story makes no effort to acknowledge the utility that zero-down and 40-year products provided to responsible borrowers.  These products had real value to real estate investors, the self-employed, and other sound borrowers with higher priority uses for their cash.
  3. The authors unapologetically denounce 40-year amortizations and zero-down mortgages without providing any evidence that they’re actually causing a problem.  There is no doubt that some Canadians with 0/40 mortgages will lose their homes in this market correction.  That is a harsh cyclical reality.  But, will 0/40 defaults be an epidemic like in the U.S.?  Far from it.
  4. The story draws no lines in its assumptions.  Obviously, 100% financing (103% after insurance fees) is bad if real estate values are sinking.  But so is 95% financing.  So is 90% financing if prices sink 20% and you have to sell.  Where do regulators draw the line?  Do we require everyone to put down 20% when buying a home?  How far do we go to legislate how people spend their money?
  5. The Globe knocks U.S.-based mortgage default insurers for bringing these evils to Canada.  This too, is ludicrous.  U.S. insurers have not harmed Canada’s real estate market any more than CMHC has.
  6. The story suggests Ottawa was short-sighted for allowing Genworth and AIG into our insurance market because of the risk they pose with their 90% government guarantees (CMHC gets a 100% guarantee by the way).  The authors seem to have no idea what our default insurance market would be like without Genworth and AIG.  From our perspective the result would be disastrous.  Canadians would be worse off as there would be little to drive product innovation and lower premiums.
  7. The authors criticize the institutions that promoted 40-year and zero-down mortgages but say little about the borrowers that demanded these products.
  8. The article suggests CMHC was forced by other insurers to “aggressively push…risky U.S.-style lending.”  Again, ridiculous.  CMHC is a great insurer but the fact is, CMHC was the first insurer to launch long-term amortizations.  Thereafter, they quickly jumped on the 40-year wagon as well.

The Globe tried to write a “60 Minutes”-style expose here.  The thing is, there isn’t that much to write about.

40-year amortizations and zero-down products were not Canada’s version of subprime.  They were simply powerful financing tools designed to be used responsibly.

Canada’s mortgage industry is one of the most prudent in the world.  Mortgage policies like long-term amortizations are not the cause of our present housing issues.  If you want to know why home prices are falling here, look south of the border.  Our problems are macro-economic, not financing-driven.

  1. Hey guys,
    With regards to the article, I wouldn’t say it’s as bad as you think. Keep in mind it wasn’t written for you (people in the know) but for the general public.
    1. They use the subprime tie in because everyone has heard that overused word. They appear to be using subprime to mean risky as apposed to the proper definition.
    2. It would have been interesting if stats were available on how many folks used 0/40s because they couldn’t qualify for anything else. These folks are definitely risky and could be the catalyst for a Canadian meltdown. I’m not sure what percentage of defaults is needed for the situation to tip, but it is a risk.
    3. They’re predicting that 40 year mortgages will be a problem. You can’t prove predictions, though you can give reasons for your predictions, such as “Long-term mortgages – designed to help newcomers get into the housing market sooner – are the most expensive in terms of interest costs, and least flexible when mortgage-holders cannot meet their payments and need extensions.”
    4. I think the line should be drawn at 20%, but statistics could suggest another number. 0% is definitely too low.
    5. Agreed.
    6. Agreed.
    7. Readers prefer attacks on big institutions to attacks on them. Go figure.
    8. The article claims that CMHC offered the 30 year as a pre-emptive strike on incoming US competition. The 35 year was Genworth reacting to the threat of increased competition. It looks like US stupidity was imported here in the name of competition.
    have a good one,
    Al

  2. How come 40-year mortgages are *risky*, if payments in Canada are fixed? I really don’t understand that, I bought a condo last year with a 40-year mortgage, with variable rate. I started with 5.35% and today I’m at 2.75%, however my payments didn’t change, only the amount that is going to principal. This, together with my weekly payments, made my mortgage amortization goes downs to 18.5 years already! Even if the rates go up in the next years, my payments will still be the same, so I fail to understand when people say they cannot afford the house payments anymore (why, what changed?).
    The only problem I can see is if I decide to sell my condo later and its price is lower than what I paid, so then I’ll be losing money. But this is not happening here, at least not in GTA where I live. I bought my condo believing I’ll stay here for a loooooong time, my payments are fixed for at least 5 years, rates are going down, and my place IS appreciating (I paid $210,000 last year and last month a unit like mine but with a *uglier* view was sold at $259,000).
    Anyway, I really don’t understand all this panic about 40-year mortgages, it’s not like people will REALLY take 40 years to pay it… like I said, by only making bi-weekly/weekly payments, the amortization term goes downs to close to 25 years!

  3. The 0/40 mortgage product is definitely a subprime mortgage.The experts have been proven not to be experts over and over again.
    At best the experts are idiot talking heads, these people that used the 0/40 mortgage did so because they were unable or incapable of saving a down payment, mortgage brokers played a crucial role in pushing these mortgages, and i can sense already that you are reacting like the realtors with the don’t blame us attitude, we are going to have a mass of foreclosures shortly and everyone wants to point their fingers elsewhere, if you cant attain a mortgage with at least 10% down spaced over 25 years than you should be a renter as you do not deserve to own.
    I do not wish to insure mortgages of people who are unable to save at least 10% down, period.

  4. Well said George. Who really cares whether or not 0/40 fits the definition of sub prime. The fact of the matter is that they caused the artificial inflation of home prices in this country. Realtors and the owners of this site can spin it what ever way they want. They should be ashamed of themselves.
    But alas, their points of view are bias at best.

  5. Canada’s mortgage industry is one of the most prudent in the world.
    “0/40” mortgages is definitely not prudent. you object to the article because you are a broker!!! Do brokers have credibility? NO!

  6. And Agatha:
    When rates go up over the next few years, your mortage will have negative amortization. Th 18.5 yr might turn into 45, 50…. your payment might be fixed, but your principal balance will go up. you wll end up owing more than your original principal, and when housing price starts depreciate, you are in big trouble.

  7. I am extremely skeptical about any of the statistics on 40 year mortgages.
    When we got our mortgage in June, we qualified for a 20 year mortgage, but it was “registered” as a 40 year mortgage with the payments adjusted to pay it off in 20 years.
    The Major Bank who did this explained that virtually ALL of their mortgages were actually registered as 40 year mortgages with payments simply adjusted to pay it off at whatever rate people wanted.
    They did this because they knew if folks were rejected at a 20 year mortgage, they would just turn around and apply for a 30 or 40 year mortgage anyway — either with them or elsewhere. So, to save time, hassle, etc., they just put everyone who qualified down as a 40 year mortgage.
    In other words, a 40 year mortgage isn’t always what it seems. Most people will pay this off much faster — indeed, they never even intended to take 40 years in the first place!

  8. Agatha,
    You have a fixed payment variable rate mortgage. Not everyone does. Many people have a “true” variable rate mortgage in which the payment is adjusted every month depending on the Prime rate.
    Why would anyone chose a variable payment VRM rather than a fixed payment VRM? Well, in order to qualify for a fixed payment VRM, your fixed payments must be set at a level much higher than the actual Prime rate — usually it is fixed at the undiscounted 5-year fixed rate.
    This is a terrific strategy if you can afford it; but not everyone can.

  9. I’m very surprised by the tone of your post. Usually you’re pretty level headed, but the G&M article seems to have touched a nerve.
    The tone of your post is not dissimilar from various RE agents blogs who are decrying any suggestion that now is not a good time to buy.
    I think there are few buyers who have sufficient cash for a 20% downpayment would choose instead to pay the hefty CMHC premium for a high ratio.
    So I would expect that the various high ratio mortgages were utilized by those who needed them, rather than those who chose them as an option.
    We’re starting to see more reporting in the mainstream media about the icebergs in the Canadian real estate market, and I think it is a good thing. Albeit probably too late to help most people.
    I have no doubt that we are in the exact same situation as the US, UK and other housing markets. We’re just lagging their downswing by 12-24 months. Further, I think that some of the structural differences in the Canadian market (ie. no jingle mail, no 30yr fixed rate mortgages) will serve to stretch out our downturn and we’ll still be slogging through it in five years long after the US is back up to speed.
    I applaud the G&M article.

  10. Well it looks like Garth Turner’s lackeys have finally found this site. Their viewpoint that the sky is falling and Canada is mired in subprime debt is just as biased as any Realtor-speak.

  11. The Globe’s story is interesting because it explains how these mortgages came to be. The hypothesis that 0/40 mortgages are a mass plague however is totally unsupported.

  12. Why Rob do you feel you need to defend the Zero down, 40 year am?
    It worked for some, and politicians like to bash it. It’s gone now from the insurers, let us all move on.

  13. Thanks to everyone for the comments, even the not-so-flattering ones. :)
    It’s good to have an open dialog and all viewpoints are welcome. It was clear to us going in that this story would spark more debate than usual.
    Ignoring the Globe’s other mischaracterizations, the biggest issue we have is the misconception that 0/40 mortgages are all bad.
    In the hands of the wrong client, they absolutely are. People with marginal financials that relied on 0/40’s to enter the housing market never should have got them (nor did responsible mortgage planners “push” them in these cases). Fringe borrowers who got 0/40 mortgages will definitely increase defaults. There is no doubt about that.
    (Remember that underwriting guidelines were fairly conservative for $0-down products however, so the repercussions remain to be seen. The biggest driver of Canadian defaults by far, will be the general economy itself.)
    The goal here is to highlight the need to protect choice. There were valid uses of these products and instead of eliminating them altogether, underwriting guidelines could have been made much stronger. That would have prevented the marginal borrower from getting them while keeping options available for prudent Canadians. In the end, it turned into a political issue and when that happens “valid uses” are overlooked for the “greater good.”
    The government could have easily reduced the maximum insurable loan-to-value to 90% instead of 95%. It can be a slippery slope when politics get involved and that’s something we have to watch out for.
    Rob

  14. I have the option to lock my rates as soon as I want. So, when the government starts increasing the rate, that’s exactly what I will do. As long as they don’t increase the rate from 2.75% to 6% (is that possible? Likely to happen?) in ONE single jump, I will have time to lock it.

  15. The article had a political angle to it as well, makes me think they were trying to uncover yet another scandal that didn’t exist.
    ie Harper Conservatives ushered in a subprime mortgage crisis in Canada.


  16. bob wrote:
    When we got our mortgage in June, we qualified for a 20 year mortgage, but it was “registered” as a 40 year mortgage with the payments adjusted to pay it off in 20 years.

    In that case you may have been ripped off on the mortgage insurance. Any mortgage “registered” as amortization longer than 25 years carries extra insurance cost of 0.2% per each 5 years. And that is added right away not after 25 years.
    CMHC Purchase
    On a $200,000 mortgage that’s $12,000 of additional cost. If not paid up front but added to the mortgage then it is even more. This is why the “registered” amortization length matters.
    Also some lenders may have extra charges for non-standard mortgages. One should always read the fine print.

  17. couple calculations
    10% of mortgages were zero down. assuming they won’t qualify otherwise this means next year 10% of home buyers will disappear from the market
    40 year amz which represent 50% of mortgages will be replaced by 35 year amz. Assuming 10% of those borrowers would not otherwise qualify that means a further 5% of home buyers will disappear from the market
    With the new minimum beacon score and gds/tds rules in place expect another 5-10% of home buyers will disappear from the market
    The subprime mortgage market in Canada collapsed which means another 4% of home buyers will disappear from the market
    We are also heading into a recession unlike any seen in the past 20-30 years we can expect default rates and distress sales to rise.
    Incidentally if a borrower has less than 10% equity they are roughly twice as likely to default on their mortgage versus someone with more than 10% equity. In the past couple of years there has been an orgy of home buying with new borrowers with low equity expect them to begin defaulting.
    As a result expect that mortgage lenders will begin to tighten their lending criteria squeezing a further 5-10% of borrowers out of the market.
    Based on the above calculations expect that 29-39% of home buyers will disappear from the market in 2009
    If demand drops 29-39% expect housing prices to drop as well.
    Don’t expect next year to be marshmallows and bubble gum it’s going to get ugly.

  18. couple calculations
    10% of mortgages were zero down. assuming they won’t qualify otherwise this means next year 10% of home buyers will disappear from the market
    40 year amz which represent 50% of mortgages will be replaced by 35 year amz. Assuming 10% of those borrowers would not otherwise qualify that means a further 5% of home buyers will disappear from the market
    With the new minimum beacon score and gds/tds rules in place expect another 5-10% of home buyers will disappear from the market
    The subprime mortgage market in Canada collapsed which means another 4% of home buyers will disappear from the market
    We are also heading into a recession unlike any seen in the past 20-30 years we can expect default rates and distress sales to rise.
    Incidentally if a borrower has less than 10% equity they are roughly twice as likely to default on their mortgage versus someone with more than 10% equity. In the past couple of years there has been an orgy of home buying with new borrowers with low equity expect them to begin defaulting.
    As a result expect that mortgage lenders will begin to tighten their lending criteria squeezing a further 5-10% of borrowers out of the market.
    Based on the above calculations expect that 29-39% of home buyers will disappear from the market in 2009
    If demand drops 29-39% expect housing prices to drop as well.
    Don’t expect next year to be marshmallows and bubble gum it’s going to get ugly.


  19. Thanks Dave,
    Sorry for the typo, it should have read $1,200. It is amazing how much one pays for a simple mortgage “registration” difference.

  20. – June 25, 2008
    – $342,106.30 mortgage
    – 40 years
    – $0 down
    – $659.91
    – Prime minus 0.75%
    All I can say is that my amorziation is now 28yrs, 8 months based on my current interest rate of 2.75%. The Bank of Canada doesn’t look like it will be increasing its rate anytime soon and I challenge anyone to provide credible evidence that mortgage fixed rates are due to increase significantly. I can easily afford a rate up to 9% so I’m not concerned.
    As a new graduate, I didn’t have the downpayment but this helped me get into a house sooner. I have a 5yr horizon so short-term price drops are fine with me. I’m paying less now than I was renting and I’m going to build equity over the next 5yrs. I’m also fueling the economy working on my house.
    40yr, $0 down should be brought back provided the lending criteria is strict and only the best borrowers can be qualified.
    It’s good for borrowers and good for the economy.

  21. A new graduate getting a $342,106.30 mortgage. If that’s not a subprime loan. what is?
    Housing price is guranteed to drop over the next five years. Just wait till the day your principal balance is higher than the value of your house.

  22. If prices are down after 5 years just send in your renewal form. Housing has leveled off so buying now has far less exposure than buying 6-12 months ago. I agree prices will still go down but I don’t it is a certainty they will be lower than today in 5 years. 5 years is a long time and Canada’s economy is being heavily stimulated.

  23. CJ: You fell into the same trap as the people who wrote the Globe article. You made a generalization and you never thought to ask me what type of new graduate I am!
    I just graduated dental school and am making excellent coin. I chose to invest in my education rather than saving for a down payment on my 1st house. Who’s a greater risk: Me or the guy who saved 20% but is working in the automotive sector right now?
    My point is that $0 down/40yr mortgages should NOT have been eliminated for all borrowers. They should have just made the borrowing criteria more strict. Without the $0 down mortgage, I would be paying rent to someone else right now while I save money at a guarantee rate of below 2% right now in my short term investments.

  24. George?!?! Your are confused. The amount of a mortgage down payment and its amortization is no indication of purchase price.
    In fact, I purchased my house in a situation where the person had to sell quickly. Their company compensated them financially so they didn’t care too much about price.
    Basically, I got it for $75,000 less than market value because I was pre-approved without any conditions. I was able to jump on this opportunity thanks to the $0 down mortgage. All hail!

  25. Unbelievable! Hindsight is 20/20 and the nay sayers today who denounce the 40yr / 0 down would have been the same ones praising it 12 months ago because there home value had gone up substantially. While I never agreed with the 40 year am as it did artificially inflate prices, it is far from the subprime mess in the US. Frankly it is just irresponsible journalism to continue to shake consumer confidence by making assertions that are simply not accurate.
    The credit requirements for 100% financing have been substantially higher in Canada then in the US.
    We have not had the same kind of teaser rate mortgages that they had in the states (and any teaser rates we had had to be qualified at the 3 year posted rate, not the discounted ARM rate)
    Qualification criteria in Canada has been and still is much more stringent then the US.
    Yes, a declining real estate market and job losses coupled with the kind of confidence shaking media that is out there, will certainly result in some people losing homes. But lets keep things in perspective. you can disagree with the logic behind 100% and 40 year ams all you want (and I tend to agree to some extent that this was not a great move) but do not let the general public believe that we are in the same situation as, and just a few months behind the US. That is where I take issue with these kind of fear mongering articles. They may sell newspapers but they do a disservice to our country.

  26. Morning
    If you are buying a home that has not reduced in price at least 140k then your going to feel pretty bad over the coming months. The big boom prices for houses and cars are over, probably for the next 15 years or so.
    I to have a 40yr, 5% down, VR mortgage. I wanted this product because I Don’t plan on staying in this home for more than 10 years. My extra cash is going into retirment funds (safeones)I don’t really want to pay the banks 2 or 3 times the purchase price of my home over the next 15, 20, 30 or 40 years. I have owned 4 homes over the past 34 years in Calgary, always selling one at a modest profit to step up. I found that over the years the Banks seemed liked loan sharks, few mortgage options and none that seemed to work in your favour ever.
    Started using a broker in the mid 90″s and found rate cutes, mortgage sales, rate sales and have never gone back to the banks. But wait, my mortgage is with a subsid of CIBC, offering a 5 yr VR that over the last 2 months reduced my payments by $290 a month ..lock in when you want, how can you loose.
    I really believe the age of buying a home and living in it all your life is gone. The job market no longer supports this sort of life style. Who cares if you pay off your house, put that extra down payment money into your retirment, pension. The average person needs to save 800k today in pension money to retire with some comfort. Your not going to get there putting 20% or higher into a home that will cost you twice the price if not three times the price paid back to the BANK. Its an illusion that should be seen for what it is, cash is king, equity is dead.

  27. Just to follow up with Peter. I to am a new graduate and was able to take advantage of the zero down mortgage. The details of the mortgage were as follows:
    – 210000
    – 0 down
    – 25 years (biweekly accelerated)
    I too would be squandering rent money had I not bought into the market when I did. Whether some people want to believe it or not, the zero down was a much needed option for some.

  28. Just to follow up with Peter. I to am a new graduate and was able to take advantage of the zero down mortgage. The details of the mortgage were as follows:
    – 210000
    – 0 down
    – 25 years (biweekly accelerated)
    I too would be squandering rent money had I not bought into the market when I did. Whether some people want to believe it or not, the zero down was a much needed option for some.

  29. bob wrote:
    When we got our mortgage in June, we qualified for a 20 year mortgage, but it was “registered” as a 40 year mortgage with the payments adjusted to pay it off in 20 years.
    In that case you may have been ripped off on the mortgage insurance. Any mortgage “registered” as amortization longer than 25 years carries extra insurance cost of 0.2% per each 5 years. And that is added right away not after 25 years.
    CMHC Purchase
    On a $200,000 mortgage that’s $12,000 of additional cost. If not paid up front but added to the mortgage then it is even more. This is why the “registered” amortization length matters.
    Also some lenders may have extra charges for non-standard mortgages. One should always read the fine print.

    Uhhh, no. I put down a 25% downpayment. No CMHC insurance required, thank you very much.

  30. If you can not save at least a 10% down-payment i do not want to insure your mortgage, you can get it insured at your own expense not subsidized from the public purse.
    Owning a home is a privilege and not a right.

  31. Peter, carrying mortgage with longer than a 25 year period comes with at a premium.
    with TD bank there is a surcharge of .5% per extra 5 years of maturity,so in your case a 1.5% per anum would apply.
    And why any bank would do that is mind boggling.

  32. And George just lost business from new graduate who is now a dentist with stable income and probably make six figure and probably have tons of dentist friends he can refer a good business to.
    Smart business there.

  33. How can a borrower know the truth when the pundits cannot agree? What if there is an absolute standard but we are not interested since it opposes our own interests? And maybe this is why things are so wrong today.

  34. Good discussion folks. A point that has been mentioned but I think needs to be said again.
    Housing prices are inflated, no one can argue this. Anything beyond 3 to 3.5 times salary is inflated. Why are they inflated? Definitely a big part of the reason was the 0/40 mortgage. Once the 10-25% down payment/25 year mortgage crowd dried up the banks/realtors/brokers needed 0/40 to keep things chugging along. This was the only way to get more buyers for these inflated prices and for the priced to continue going up.
    If these types of mortgages were never made legal and we only had 10% down and 25 year mortgages then prices would never have gotten so out of hand. However, the low interest rates are another huge factor in this. If things ever change dramatically in the other direction and rates start rising quickly then we will be in for even more pain.

  35. Peter, carrying mortgage with longer than a 25 year period comes with at a premium.
    with TD bank there is a surcharge of .5% per extra 5 years of maturity,so in your case a 1.5% per anum would apply.
    And why any bank would do that is mind boggling.
    George, I am quite familiar wiht TD mortgage policy and there is no .5% premium as you allude to. You can easily register a conventional mtg at 40 year amortization and set your payments at a 25 year amortization (or less)with no extra costs whatsoever.

  36. I agree with your analysis of the article completely. The globe was reaching for something far beyond their journalistic abilities.
    0/40 mortgages were not subprime, and in the way they were actually granted, did not cause undue market activity. There were other reasons.
    People, the globe included, don’t bother to learn the background, such as the conditions surrounding the entry of AIG and Gentworth.

  37. Peter, carrying mortgage with longer than a 25 year period comes with at a premium.
    with TD bank there is a surcharge of .5% per extra 5 years of maturity,so in your case a 1.5% per anum would apply.
    And why any bank would do that is mind boggling.
    George, I am quite familiar wiht TD mortgage policy and there is no .5% premium as you allude to. You can easily register a conventional mtg at 40 year amortization and set your payments at a 25 year amortization (or less)with no extra costs whatsoever.

    I’ll second Fesnaris. There is no such surcharge at National Bank. I’m not sure where George is getting his information.

  38. And I’m not going to waste time trying to find the comment, but to the guy who was saying “no way I’m buying now”…if you’re buying a home, now’s a great time! If you’re buying a long-term investment, it’s an even better time! (Being careful and doing your homework is always important)

  39. Although you might classify 0/40 as a subprime type mortgage, stricter lending practices in Canada don’t make it equivalent to what was offered in the US. For example, US applicants who couldn’t qualify for a $1000/mo rent were getting $500,000 ARMs. I ask anyone on this blog if they know anyone (Canadian) who couldn’t pay their 0/40. Being an owner of multiple properties I’ve used 0/40 to increase my portfolio while cash-flowing at all times. It was a great investment tool, I was sorry to see it go.


  40. The question is, why stop at 40 years? If the 0%/40y was a great tool for some, wouldn’t then 0%/50y or 0%/60y, heck why not 0%/100y, be even better tool. The 0%/40y mortgages were bad for the same reasons that the hypothetical 0%/100y would be. Oh, but the 0%/100y could be an excellent tool for some, so why shouldn’t we have them? Is anyone willing to venture an answer to that? What about 0%/200y?

  41. Bad
    Where were you and the rest of “pro-homeowner” movement when Canadian lenders were offering 90-95% LTV interest-only mortgages?
    Did you just wake up and read the headlines now?
    You’re a few years late my friend.
    Badder

  42. Yes, I too am disappointed with Rob’s post. Your uncharacteristic polemic against an article in the staid and conservative Globe and Mail tells me there really is a serious crisis looming. The mortgage and real-estate industries are circling the wagons to avoid taking any blame for what is happening.
    The public purse has already been tapped to the tune of tens of billions of dollars to cover mortgages taken out on very dubious terms. This fact alone undermines the assurances Rob and others keep dishing out. And it does seem that controls were slackened by the Conservatives as a result of ideological dogma and lobbying from very big American (and Canadian) finance-industry players.
    Of course, the trend towards deregulation and blind faith in “free markets” (with full guarantees from the public purse!) started before Harper; but the Conservatives certainly exacerbated the problem.

  43. Hi Nathan
    Agreed
    in response to your comment about free market.
    The government guarantee distorts any free market balance.
    In a normal market without the government guarantee mortgage rates would be 10-20 bps higher due to the risk of insurer default.
    In this market AIG would be wiped out and GE/CMHC would have at least a 60 bps risk premium.

  44. Bad,
    ” … 0%/50y or 0%/60y, heck why not 0%/100y, be even better tool.” if you extend the amortization period infinitely as you suggest, you get an interest only payment schedule and yes these do exist and are a common tool used by investors. Read up on how to use them.

  45. Vince
    There’s a difference between speculation and investing.
    speculation is where you hope the underlying assets will increase in value enough to cover your costs and repay your debt.
    Investors ensure that the cash flows from the underlying asset are able to repay debt.

  46. Hi Nathan,
    Thanks for the post and thank you for teaching me a new word today: “Polemic.” :)
    The facts have got a little skewed it seems. I don’t think folks here are trying to “avoid blame” or dish out “assurances.” As you can read in this site, we’ve always said that imprudent lending can and does cause problems. It’s just nowhere near as prevalent in Canada as down south.
    The issues we presented in this story are threefold: 1) the Globe (as staid as they may be) got a lot of facts wrong; 2) Canadian mortgage products have not led to disaster as some are suggesting; and 3) some of the products that have been taken from the market in fear were bad news for some, but served a purpose for other responsible borrowers.
    Those are the main points that we’ve tried to make. All that said, I don’t disagree for a minute that our housing market is in for a bumpy ride and that lenders should err towards being conservative.
    Cheers,
    Rob


  47. So I gather from the responses that 0%/40y or longer mortgages are just fine. Also I infer that the interest only mortgages are perfectly good.
    Thus it seems the collapse of the US housing was caused purely by the lax underwriting standards. The collapse of the housing markets in Spain, U.K. and some other European countries was caused by… anyone willing to venture an answer to that?
    Hints: What effect on R/E prices availability of such mortgages may have? What kind of feedback it would create? What is the possible outcome of that?
    The conservative Lewis agrees that such reasoning is impeccable. “The math always works out,” he says. But, he adds, decisions about investing and spending are guided not only by math, but by psychology.
    Lots of people tell themselves that they’ll invest the difference between interest-only and amortizing mortgages, Lewis says, but not all of them follow through. The money is there, tempting them to spend it on boats, vacations, pampered lifestyles.
    “The people who are frugal about going into debt, or don’t use much debt, are generally the ones with higher net worth,” he says. “It’s just that somehow in their life, they accumulate more wealth.”

    Who should get an interest-only mortgage?

  48. Quote: If a borrower has less than 10% equity they are roughly twice as likely to default on their mortgage versus someone with more than 10% equity.
    Quote: Don’t expect next year to be marshmallows and bubble gum it’s going to get ugly.
    ——————————
    Hi John,
    I think you’re absolutely right that overall housing demand fall a fair bit as we move into 2009. I have no idea how much but it will probably be considerable in some markets and minimal in others.
    Regarding your stat on defaults, that’s an interesting datapoint. Do you have a source for that as I’d like to follow up on it further?
    It would also be intriguing to know the absolute odds of default for someone with 20%, 10%, 5%, and 0% down. Maybe we’ll ping one of our insurers for the answer.
    Cheers,
    Rob

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