All We`ve Seen is the Tip of the Economic Iceberg

[Jack]

QUOTE (thomasbeyer2000 @ Jan 7 2009, 08:11 PM) why pay less ?

That`s what a lot of our American friends thought, too. Why pay less? With a lower "introductory" interest rate, we can get an even bigger mortgage! Yay!

And then when the variable rate catches up to the market, suddenly we don`t have any disposable income left after our mortgage payments. Shucks. Oh, and then when real estate values decline, we suddenly owe more on a house than it`s worth, and we can`t afford to make the monthly payments. A winning combination, to be sure. You mean that our home can no longer be our personal ATM, financing our 50" plasma`s and `09 Bimmer`s by refinancing? Well, that sucks!

VRM`s were a big factor in the U.S.`s mess; let`s just hope that it hasn`t artificially inflated Canadian home values in a similar fashion.

 

[GarthChapman]

QUOTE (Jack @ Jan 7 2009, 09:50 PM) That`s what a lot of our American friends thought, too. Why pay less? With a lower "introductory" interest rate, we can get an even bigger mortgage! Yay! And then when the variable rate catches up to the market, suddenly we don`t have any disposable income left after our mortgage payments. Shucks. Oh, and then when real estate values decline, we suddenly owe more on a house than it`s worth, and we can`t afford to make the monthly payments. A winning combination, to be sure. You mean that our home can no longer be our personal ATM, financing our 50" plasma`s and `09 Bimmer`s by refinancing? Well, that sucks!

VRM`s were a big factor in the U.S.`s mess; let`s just hope that it hasn`t artificially inflated Canadian home values in a similar fashion.

You are close to the truth of it Jack, but there is much more to it than is commonly understood. It wasn`t VRM mortgages that did them in. The differences may seem subtle at first but they are gigantic once you understand the bigger picture. My experience, besides reading a few books and newspapers over the years, is that we have owned property in the US since 2003, and have several friends who also own down south. I know lenders and brokers and realtors in the southwest US and have learned from them too. Read on for my quick summary of what really happened south of the border.

1) Mortgages with extra-low teaser rates for 2 years - then the rates would re-set to market rates. Ouch! We got one of those mortgages from WAMU in 2003 for our California condo at an initial interest rate of 2.75%; when the rates re-set to 6.5% we repatriated the debt to Canada, at about 4%.

2) Once the lenders ran out of qualified borrowers they resorted to predatory lending practices to the poor, the old, the uneducated and that exploded the market for these re-set mortgages. For a great example of what transpired check out Cleveland Ohio where whole sections of the city that used to be home to working or retired poor Blacks and Latinos who had little or no debt are now an empty wasteland of gutted houses that look like Berlin in 1945. And they`re now renting and on welfare to boot.

3) And then came the Ninja mortgages (no income, no job, no problem). And here we are now. And all the while the underwriting practices were eroding as fast as the snow melts in Vancouver when it rains hard. This last element included a level of fraud amongst Mortgage Brokers and Appraisers that would shock even Bernard Madoff.

4) A huge difference in US mortgage lending vs Canadian is that in the US once a mortgage has been lent the loan is sold off; usually right away, and certainly within 6 months. And here`s the rub - after 6 months the lender who made the loan is off the hook if the borrower defaults. And that`s why it actually benefits a lender in the USA to make bad loans - so they can churn their money and all the participants can collect their fees. In Canada the loan and the lending relationship is retained by the original lender. Our lenders are thereby motivated to make good loans.

5) Once sold off the American mortgage is sliced and diced and re-packaged with other debt instruments and sold off all around the world as securities. And that is why all those foreign banks are in so much deep kaka now. Note that of the Canadian banks only CIBC bought any amounts of those securities. The Germans and Brits and Icelanders and on and on and on; they bought tons of it.

It is important to truly understand the differences between the lending and underwriting practes in the US over the last 5 years and those here in Canada. Miles apart (or should I say kilometers apart)...

Now we didn`t make this mess, but we and the whole world are wearing it, because the American economy represents fully 1/3rd of the economy of the entire planet.

Read this excellent book - the author predicted this mess last year:
The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
by Charles R. Morris
http://www.amazon.com/exec/obidos/search-h...s%20R.%20Morris

And for a great laugh and a lesson in the workings of the US sub-prime crisis listen to this clip:
In early 2007, two British comedians staged an "interview" explaining, in their terms, what the subprime crisis was all about. Whether by astute insight or dumb luck, I believe they very aptly articulated an extremely complicated process in very simple terms.
http://www.dailymotion.com/video/x684wa_the-last-laugh-george-parr-subprime_fun

 

[retiredby50]

Man, just THINK of the OPPORTUNITIES abound right now, and in the years to come! Hoooooooeeeeee!!!!!

And now for something COMPLETELY apocolyptic.

This is very interesting. I don`t know what sort of credence to give this sort of `prophecy,` but it`s entertaining, none the less. Listen to parts 1 thorugh 6 of the Economic Armageddon thing. Jack, you`re an eternal optimist compared to these guys.

one of the things I think we need to keep in mind is that these guys are talking about the U.S. and it may or may not apply to us, to varying degrees.

http://www.youtube.com/results?search_quer...search_filter=0

...and so it goes.

keith

 

[Yev]

Bump.

Any new opinions on this topic?

Yevgeni

 

[housingrental]

Yev
Way too much reading
It also opens up a whole in my heart - Where is Jack? Anyone heard from him?
Can you summarize the topic to respond to?

QUOTE (Yev @ Jan 22 2010, 02:59 PM) Bump.

Any new opinions on this topic?

Yevgeni

 

[ZanderRobertson]

Jack moved to the Caribbean and then New York.




QUOTE (housingrental @ Jan 22 2010, 05:25 PM)
Yev

Way too much reading

It also opens up a whole in my heart - Where is Jack? Anyone heard from him?

Can you summarize the topic to respond to?

 

[housingrental]

Thanks Zander
He`s missed