Half Baked Mortgage News (Updated)

half-baked-mortgage-newsFrom the “can’t believe everything you read” file comes this shocker from the Huffington Post:

Mortgage Debt Exploded In Past 4 Years

An unnamed Huffington Post author claims that mortgage debt at chartered banks soared 56% ($301.4 billion) in just one year—from June 2011 to June 2012.

It’s a “risky explosion” in mortgage debt says the article, which triggered 80+ comments from riled up readers.

Unfortunately, the author overlooked the real reason for this “increase.”

In 2011 banks had to adopt International Financial Reporting Standards (IFRS). That required them to “reclassify” existing securitized mortgages and reflect them on their balance sheets. Prior to November 2011, banks held these same mortgages “off balance sheet.”

IFRSIf you look at page S17 of this Bank of Canada document cited by Huffington Post, you’ll see a $259 billion jump in mortgages on bank balance sheets in November 2011. Roughly $250 billion of that was due merely to this accounting rule change. It wasn’t from new mortgages. Banks don’t even close that many mortgages in a whole year.

It’s unfortunate that stories like this make it through editing and fuel unwarranted skepticism of mortgage lending. Luckily, top policy-makers are informed enough to see through this bunk…one hopes.

RelatedIFRS & Mortgage Rates

Update (11:42 AM,  Sept. 9):  After this article was published, Huffington Post made a correction to its story to explain the error. Kudos to their editors for the quick fix. Here’s the Huffington Post’s updated story.

Rob McLister, CMT

  1. Good catch… the article definitely exaggerates the numbers.
    But the debt growth is still pretty big:
    Take away $250B from $879B and you have $629B in June 2013 vs. $437B in June 2009.
    That is a 44% increase in 4 years, or nearly 10% mortgage debt growth per year (9.5% or so, according to my math).
    That 9.5% mortgage debt growth is WAY beyond any kind of income growth, GDP growth, etc. (even beyond house price growth).

  2. Stats
    9.5% seems high, at least according to RBC.
    Higher home prices explain most of the growth in bank-held mortgages and I’m sure there are other reasons as well. Does anyone know if banks gained market share during this period?
    Regardless I don’t think growth rates from 2009-2011 are news. The news is that growth rates are trending down fast. Look at the second chart in that RBC report and you’ll see what I mean.

  3. Something to consider is that the RBC charts show % growth in credit relative to existing credit.
    ie. If existing consumer credit is double what it was 20 years ago, then having the same % growth in credit as per 20 years ago is still double the growth in credit relative to income.

  4. Interesting how often people make decisions or form opinions from reading the headlines and not taking the time to read the whole story. Good job on picking this up.
    Also, the true state of the mortgage debt is also in the the details. We are in great shape in Canada as evidenced by our low default numbers and also the overall Canadian equity positions are very impressive. I think we are in great shape.

  5. Municipal taxes and other basic house maintenance expenses are getting too high … that’s the downside for people that buy a house to live in it, not to do business with.
    Banks win as usual, higher mortgage balance, more they gain.

  6. Default rates are always low in a market where prices are rising higher then inflation. TREB prices are up 5-6% which translates into an average of $2,500/m appreciation. If prices were to stagnant or decrease then that will show what the real default potential is. Over the past few years those in a difficult position could just pull appreciation equity out of their home to keep paying the bills in difficult times or to fund their CC habbits.

  7. Look all throughout Canadian history. Default rates have been reasonable even when prices are falling.
    I’d disagree with your second point also. Over the past few years desperate people have not been able to pull out equity thanks to harder qualifications and the 80% LTV limit on refinances.

  8. I agree. Property taxes on the increase just about every year….just about wipes out any appreciation of your house. Gone are the days of 7 or 8% appreciation per year. (Speaking of what we experienced here in Edmonton from about the years 2000- 2007) Now we have to settle for 2-3% at most!
    And the banks will always win in this country. They are protected by the Canadian government the same way Air Canada or Westjet are. At the expense of the taxpayer. Look at RBC posting record profits for a second quarter this year.

  9. AltMan
    If defaults rates have always be low then both of the previous comments are not valid. The harder qualification have only been enforced in the last year so people were able, and probably still are depending on their situation, to pull money out of their house.

  10. Houses shouldn’t appreciated by 7 or 8% a year, it should pace inflation. Eventually prices are out of reach for most people and then you have less buyers.

  11. And Priceline.com’s stock price shouldn’t be almost $1,000 a share. Housing is a market like any other market. It overshoots and undershoots, but in the long run it is always fairly priced.

  12. It is sad that the media is so much more intent on selling papers (or in many cases, boosting traffic) than they are on reporting the truth. This was a great catch, and an even better challenge to HP to take a closer look at their own story and own up to mistakes they made.

  13. You’re comparing apples to oranges. RE is fairly priced in the long run? Depends on what you mean by fair? If it undershoots and overshoots, how can it always be fairly priced? What happens if you need to sell when the price is undershooting?

  14. I do not condone the use of misleading information but lets be honest here; the amount of misleading stories that are published on behalf of the RE industry is far greater that the amount of misleading stories that are bearish on RE.

  15. You have the facts reversed.
    For the last few years I’ve read nothing but stories about home prices crashing, overindebted borrowers, CMHC being too risky and other bearish BS.

  16. No. I’m comparing green apples to red apples, but they’re still apples. A market is a market. The laws of economics apply in both cases. Over/under valuation is a shorter term occurrence. Longer-term, prices always reflect the fundamentals.
    On your last point, if you sell when the price is undershooting you’ll make less than if you sell when the price is overshooting. Glad we could clear that up.
    [Edited to comply with site comment policy. -CMT]

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