Harbringer of a CDN housing market collapse? Or nothing

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distracted_at_work
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Joined: Fri Jan 13, 2017 11:51 am

Harbringer of a CDN housing market collapse? Or nothing

Post by distracted_at_work »

http://www.theglobeandmail.com/report-o ... e34816524/

Thoughts? Predictions? Are we heading off a smaller cliff a-la 2008? The above article talks about an "alternative mortgage lender" or subprime mortgage lender in Canada needing a 2 bil line of credit for a tldr.

Two examples from my life that I'd like to share:
-My roommate has been putting bids 5%+ above asking on garbage (half-mil fixer uppers) houses and has yet to get one.
-Long before my FI journey, when my only asset was a Honda Civic, $5000 and a part-time engineering job, the bank pre-approved me for a mortgage with 5% down. Don't know if pre-approval means jack but it gave me pause. Who needs a subprime mortgage in Canada if they were willing to lend me money?

Edited for spelling.
Last edited by distracted_at_work on Thu Apr 27, 2017 1:38 pm, edited 1 time in total.

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fiby41
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Re: Harbringer of a CDN housing market collapse? Or nothing

Post by fiby41 »

Sorry but only full form of CDN I know is content delivery network?

Edit: sorry, never mind CDN means Canadian. :roll: can't even delete stupid questions. A message comes up saying you cannot delete posts in this forum.

distracted_at_work
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Re: Harbringer of a Canadian* housing market collapse? Or nothing

Post by distracted_at_work »

I am unable to change the post title... unless I change my subject reply title?

Riggerjack
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Re: Harbringer of a CDN housing market collapse? Or nothing

Post by Riggerjack »

So, I read the article, and have some questions you probably can't answer.

First, the article went on about a possible run on the bank.

This makes me ask, is there no central bank set up to be a lender of last resort?
Is there no mortgage wholesaler, similar to Fannie Mae or Freddy Mac?
If no to BOTH, is there no limit to the fractional reserve lending, to ensure capitalization?

Since I don't think Canadian banking is opporating on 18th century principals, I expect the answer to all 3 is yes, and that this is just an Ignorant Journalist, or worse, a clickbaiter. I noticed 3 other articles linked to similar stories.

I don't know enough about Canadian real estate, or banking to comment intelligently on this. But my BS detectors are flashing red.

You will need more information to act.

distracted_at_work
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Re: Harbringer of a CDN housing market collapse? Or nothing

Post by distracted_at_work »

@Riggerjack. I'll sure as hell try to answer them :D

The answers to my limited knowledge:

Yes, the Bank of Canada.
No, not to my knowledge.
Unsure. Canada has no reserve requirement if that's what you mean. I'll have to read and digest the fractional-reserve banking Wikipedia article and get back to you, if not.

Sorry for sharing something clickbaity. My intent was to share an article to help explain the event. I'm not very knowledgeable about the housing crash or macro-economics/central banking in general. The book, The Big Short, is about the extent of my information and otherwise I'm not well read on the topic. Maybe this would be a good time to request reading material recommendations?

Riggerjack
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Re: Harbringer of a CDN housing market collapse? Or nothing

Post by Riggerjack »

Here's a bit about how this works in the States, for reference.

I get a mortgage with Chase at 4%. Chase bundles my loan with a bunch of other loans at 4%, and sells them to Fannie Mae. (Fannie Mae sets the parameters of the loans they will buy in a package. This is where the term "conforming" comes in). Fanny Mae bundles loans from many banks and sells them wholesale.

Chase services my loan. I send payments to Chase. If I default in the first 2 years, chase gets my loan back. Chase pays fannymae for my loan, and has to keep it on their books.

So, the bank only gets hit if I default in the first 2 years. That's why the subprime loans were set up with sweet terms for 2 years, then the variable rates kicked in.

This is also why banks are so slow to respond to short sale offers, they don't own the loans. The loss, if it happens isn't their loss. They aren't authorized to approve short sales, in general.

While the author of the article used all the right keywords (subprime, default, run on bank, etc) he didn't come up with a reason why a bank would be going to outsiders for capital. This is why my BS alarms triggered. They may be in trouble, I don't know. But there isn't much actual info in your link, and it just " sounds wrong".

I don't know what you are looking for. CDN real estate has gone up and up. If I wanted a heads up of when that was changing, I would check Realtors stats. Watch selling price over asking price, and days on market. This is put out weekly or monthly. Default rates on loans is months delayed.

Personally, I sell when prices are high, and buy when they are low, or at least try to. So I am selling this summer, and may sell another next year if trends continue. I bought in 2001 (coincidentally, not strategically) 2009, 2014. Buying because prices have gone up and up seems to be courting losses, but then, I have missed some great deals, too.

Whatever you do, good luck, and I hope this helps.

BlueNote
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Re: Harbringer of a CDN housing market collapse? Or nothing

Post by BlueNote »

Home Capital only has like 1% of all mortgages in Canada and from what I understand those assets were, on a net basis, good. Therefore I doubt it's contagion time. Depositors lost trust in the bank because they were essentially doing liar loans. Downstream effect was the bank assets weren't as liquid as the liabilities so they couldn't convert the loans to cash fast enough to satisfy the panicked depositors. I suspect a big 6 bank will do a deal and buy Home Capital, which still has good assets, or maybe this will all blow over. Worst case scenario the depositors can rely on CDIC (insurance) to cover them (up to a certain limit per customer/account) if the bank goes bust. Ultimately the problem seemed to lie with the banks ethics/reputational capital not the general state of the market. I doubt the big banks, which hold most of the mortgages have this type of problem, they'd survive a bust (no walk away mortgages in Canada). In Canada the regulations and history favour having a few large well regulated banks. However there are credit unions which rely on mortgages far more then the big banks and they could get nuked if the SHTF.

Here's my crystal balls predication. .. I think a good old fashioned raising of the interest rates is what will take the Canadian housing market down. Canadian interest rates historically follow US rates, but they lag the US. If Canada keeps its rates low while the US raises theirs the CAD will usually lose value making American imports more expensive causing an inflation issue which causes BoC (Bank of Canada) to almost reflexively raise rates (it's their mandate). Prices are set on the margin so 5-10% of the idiots who over-mortgaged may very well be forced to sell under interest rate pressure and they'll take prices down with them, likely hitting hardest in VAN and TO. I also think that all these government interventions (foreign buyer taxes, rent control, vacancy tax etc.) just chip away at supply and make the problem worse. The problem is I don't know if this will happen next year or ten years from now or at all......

distracted_at_work
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Re: Harbringer of a CDN housing market collapse? Or nothing

Post by distracted_at_work »

@Riggerjack. Thank you, it did. I shall continue to rent. I'm simply looking for more information on something I do not understand :)

@Bluenote. Thanks. That's the summary I needed to help me understand what was going on. Shit has been hitting the fan, personally, this last week so I haven't had a chance to do my due diligence after starting the thread. Oops!

I'd agree with your crystal ball prediction as I do not see unemployment ravaging the country in the near future. Or some other relatively catastrophic event. If I'm concerned at all, it's for my over-mortgaged friends whose jobs are tied to the price of oil.

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