Inside the US Mortgage Meltdown

[Thomas Beyer]

The more news comes out of the US housing market meltdown and the more the FBI and congress investigates the mortgage situation in the US, the more it becomes apparent that prudent risk management was ignored in many cases. Unbridled capitalism gone unchecked, sometimes bordering on fraud .. or often just to keep the party going for one more quarter !

Some stories here: Washington Mutual knew about their bad loans

In the US loans got sold off .. thus no risk for the banks. Similar in Canada: no risk for banks getting a loan insurance called CMHC ! While we were and are more prudent than our brethren south of the 49th parallel, we are still taking too many risks in Canada ! Jim Flaherty did not go far enough in my opinion by still allowing 5% down mortgages for new home buyers. He changed only 3 things .. see here. 10% down should be expected, with a 30 year maximum amortization .. say I. Everything above that is too risky at taxpayers (mine !!) expense !

Your thoughts ?

 

[Gen1GT]

Do Canadian lenders sell their mortgages too?

I think the CMHC is one reason we won`t see the same problem the US did. Fewer persons here that shouldn`t be getting astounding mortgages are getting those astounding mortgages.

 

[julieCEO]

QUOTE (Gen1GT @ Apr 13 2010, 04:38 AM) Do Canadian lenders sell their mortgages too?

I think the CMHC is one reason we won`t see the same problem the US did. Fewer persons here that shouldn`t be getting astounding mortgages are getting those astounding mortgages.

Its not the matter. I know many people that are getting astounding mortgages both in USA and CANADA.

 

[housedoc]

Many wonder why so many don`t seem to see it coming.....like a slow moving train (wreck).

 

[Thomas Beyer]

QUOTE (Gen1GT @ Apr 13 2010, 03:38 AM) Do Canadian lenders sell their mortgages too?

I think the CMHC is one reason we won`t see the same problem the US did. Fewer persons here that shouldn`t be getting astounding mortgages are getting those astounding mortgages.
the US has FreddieMac and FannieMae .. similar idea to CMHC.

The biggest difference between Canada and US is that most Canadian banks do not sell their mortgages .. thus in the US the perception of "risk" or the real risk of lending (i.e. not collecting) is offloaded to others !

 

[RedlineBrett]

QUOTE (ThomasBeyer @ Apr 13 2010, 02:02 AM) 10% down should be expected, with a 30 year maximum amortization .. say I. Everything above that is too risky at taxpayers (mine !!) expense !
Your thoughts ?

By doubling the downpayment requirement you make it twice as hard for people at the bottom end of the real estate cycle to get into the market. This has a ripple effect by choking off trade up transactions which impacts every spinoff business that touches the real estate industry while also making it more difficult for people that need to sell to find a buyer.

It`s akin to expecting a full harvest when you`ve only planted half as many seeds. With many sellers being in bad deals and poor interest rates I don`t think it`s a bad thing to allow people to trade up into their properties. These sellers are willing to take losses to get out of bad deals and I think it`s in the best interests of the Canadian economy to have new homeowners getting into these properties rather than rampant foreclosures.

The changes that were made were put in place to stop people from getting in over their heads. You really have to be able to prove that you can afford a property before the banks and the true gatekeeper - CMHC - will grant you a loan.

 

[Thomas Beyer]

QUOTE (RedlineBrett @ Apr 13 2010, 09:48 AM) By doubling the downpayment requirement you make it twice as hard for people at the bottom end of the real estate cycle to get into the market. ..
Well, the question is: if you buy an average house in Calgary for around $400,000 and you do not have $40,000 should you be an owner ? I`d say no .. save more .. wait a year or 3 .. then buy ..

The mentality of "now" "fast" "immediately" without any savings is what concerns me.

Too many people, especially those with little money, expect "society" i.e. others to pay for your house.

Thus: with 10% down you eliminate many mortgage blowups .. and yes a few less homes would be built .. but if ownership really were important to you, and you had only $18,000 .. then you`d find the other $22,000 .. perhaps from parents or saving more !!

When I grew up I was a renter .. until I was 30 and we had enough money finally. Today, folks leave university at 22 or 23 and expect immediate condo or house ownership.

Thus, I advocate more savings, more delayed gratification .. a smaller house perhaps until you can put at least 10% down !!

 

[RedlineBrett]

QUOTE (ThomasBeyer @ Apr 13 2010, 02:08 PM) Well, the question is: if you buy an average house in Calgary for around $400,000 and you do not have $40,000 should you be an owner ? I`d say no .. save more .. wait a year or 3 .. then buy ..

Remember though that the greater the downpayment the lower the income required to become approved. So if a buyer has no cash but has income they are qualifying themselves using different but equally valuable attributes. Perhaps they have not demonstrated the virtue of patience and a track record of savings but they do demonstrate the ability to get a high paying job and good enough credit... which in and of itself is an accomplishment.

When I graduated university I had been paying rent for five years and all of a sudden went from living off $6000/semester to grossing a little less than that in a month. I had never owned anything and was ready to make my mark on the world. I 100% financed my first purchase (borrowed 25% from mom and pop and paid off their LOC at prime minus 1%). But that $150k condo nearly doubled in value in two years and I have never looked back. I am confident that for every first time buyer that gets in over their head and flunks at financial management there is a success story at the other end of the spectrum that offsets it. To paint everyone with the same brush and say you have to have 10% isn`t being fair to the young, enterprising buyer that wants to add assets and knows how to within their means.

I do agree with your sentiment that many young buyers seem to have a sense of entitlement about them.. I also see more and more ladies pushing 40 that act as if the world revolves around them and their kids... just an unfortunate sign of the times.

 

[gwasser]

QUOTE (RedlineBrett @ Apr 13 2010, 02:49 PM) Remember though that the greater the downpayment the lower the income required to become approved. So if a buyer has no cash but has income they are .....

I do agree with your sentiment that many young buyers seem to have a sense of entitlement about them.. I also see more and more ladies pushing 40 that act as if the world revolves around them and their kids... just an unfortunate sign of the times.

I am on Thomas side with this. Yes, I bought my first Condo in 1982 with $2000 down plus my first paycheque. Looking back and knowing that barely 2 years later there was a real estate crash makes me realize that I had no clue of the risks I took. Lucking out is no excuse for takings risks and for beiing unaware for the risks taken.

Yes there is a pay-off in terms of who can own and who has to rent in terms of economic performance - to some degree. However, people who rent have furniture too. Even more so, in Europe where many more rent than here, renters are of a generally higher quality and take excellent care of their place, including the purchase of furniture, kitchen equipment, etc. So there home ownership is not that important regarding the performance of the economy! Construction is though.

Guess what, Calgarians, and many North Americans feel it is their right to own a house as soon as they leave school. That is quite different in many other parts of the world and to be honest, in those countries exists a more conservative and savings oriented attitude. With 5% down, the starting home owner, or investor, can be in a major loss and liability situation within a few months. This North American attitude regarding spending now and paying later is an important culprit regarding poor savings rate and the enormous gap between `haves and have-nots`.

I don`t agree with Thomas` comparison between Fannie Mae and mortgage insurance from CMHC. If there was any resemblance, U.S. banks would not have failed in such large numbers. No, one of the main reasons for these credit problems was that many of the loans were kept off the bank`s books similar to ENRON, only in 2008 it was, strangely enough, not illegal and criminal to do so. And mortgage insurance, provided through private investors (CDSs) was so underfunded it cratered right at the start of the SubPrime Mess.

There is just no comparison between this system and Canadian Mortgages. That is not to say that we should get too cocky, but with my latest mortgage experiences, we are nearly on the opposite side of the risk spectrum than our U.S. friends. If you don`t perfectly fit in the sandbox, just try to even finance your properties. I had one mortgage broker decline based on the number of properties owned, he was not even interested in income and net worth or debt level. Others don`t touch rental pools, no matter how profitable - and the excuses provided are out of this world. One client, had the temerity to mention that the place looked like a `hotel` and was immediately informed that she could not qualify.

No there is very little in common between the U.S. and Canadian Banks and lenders.

 

[sstokes]

QUOTE (RedlineBrett @ Apr 13 2010, 01:49 PM) I do agree with your sentiment that many young buyers seem to have a sense of entitlement about them.. I also see more and more ladies pushing 40 that act as if the world revolves around them and their kids... just an unfortunate sign of the times.


Sorry, but did I miss something? I don`t get the part about the ladies and their kids!?! Could you elaborate?

 

[YehoramShenhar]

QUOTE (ThomasBeyer @ Apr 13 2010, 11:50 AM) the US has FreddieMac and FannieMae .. similar idea to CMHC.

The biggest difference between Canada and US is that most Canadian banks do not sell their mortgages .. thus in the US the perception of "risk" or the real risk of lending (i.e. not collecting) is offloaded to others !

I am not sure of the exact numbers - but isn`t CMHC sitting on a $140B portfolio with only $9B in equity? If the housing market turns, CMHC would need to be bailed out. And since CMHC was the underwriter of a large portion of the mortgages in recent years - it can have a serious effect on lending (I apologize for not backing my arguments with links - too late in the day for that

)

 

[luckyluciano]

I think 10% down would be like a recking ball to our economy. This overstimulation by allowing purchasers to spend their lifetime paying off a mortgage is the real culprit. Ie: 35 year ammortization! It`s very difficult to save 10% while paying rent at the same time, 5% is very reasonable to get into home ownership but government should refrain from exaggerated stimulation and then tightening. This only creates bubbles an busts. Stimulation needs to be only in emergencies and very short term to avoid bubbles. Economies need to run their cycles, gov`t intervention only exaggerates the inevitable. People need to build equity, the 25 year amm is more than enough. The 35 and 40 year is a joke making the banks richer. This thread falls on the heels of 5 year rates rising 2 times in two weeks possibly with more to come followed by a crushing squeeze from the obvious rise in the BOC rates thus the variable. It will be nice to see what homeowners will do over the next few years with no equity in their real estate and possibly being upside down in mortgages like our friends to the south.

 

[RedlineBrett]

QUOTE (sstokes @ Apr 13 2010, 09:33 PM)
Sorry, but did I miss something? I don't get the part about the ladies and their kids!?! Could you elaborate?




Ummm, gonna have to be careful with this one lol...



I've just had a rash of experiences with moms of young ones letting them fly all over the place and expecting the world at large to make it easy for them to go about their business.



Might have to pull my foot out of my mouth after this one but



- don't come into an open house of mine and set your kids loose like it's chucky cheese all the while you are crapping on my listing



- You are not pregnant nor are you old or handicapped. So If I land my kidless car in that sweet parking spot outside safeway keep your stink eye to yourself



- If I say your house isn't selling because your kids have bagged it and it shows like a daycare maybe listen to the expert rather than question my ability to upsell the partial mountain view your house has over your kidless neighbor that sold 2 months ago for a better price.



Rant off, flame suit on!

 

[RedlineBrett]

QUOTE (luckyluciano @ Apr 14 2010, 06:20 AM) I think 10% down would be like a recking ball to our economy. This overstimulation by allowing purchasers to spend their lifetime paying off a mortgage is the real culprit. Ie: 35 year ammortization! It`s very difficult to save 10% while paying rent at the same time, 5% is very reasonable to get into home ownership but government should refrain from exaggerated stimulation and then tightening. This only creates bubbles an busts. Stimulation needs to be only in emergencies and very short term to avoid bubbles. Economies need to run their cycles, gov`t intervention only exaggerates the inevitable. People need to build equity, the 25 year amm is more than enough. The 35 and 40 year is a joke making the banks richer. This thread falls on the heels of 5 year rates rising 2 times in two weeks possibly with more to come followed by a crushing squeeze from the obvious rise in the BOC rates thus the variable. It will be nice to see what homeowners will do over the next few years with no equity in their real estate and possibly being upside down in mortgages like our friends to the south.


I`d also be in favor of reducing amortizations back to 25 years.

 

[housingrental]

Brett just lost some potential 40 year old mother clients.
QUOTE (RedlineBrett @ Apr 14 2010, 11:12 AM) Ummm, gonna have to be careful with this one lol...

I`ve just had a rash of experiences with moms of young ones letting them fly all over the place and expecting the world at large to make it easy for them to go about their business.

Might have to pull my foot out of my mouth after this one but

- don`t come into an open house of mine and set your kids loose like it`s chucky cheese all the while you are crapping on my listing

- You are not pregnant nor are you old or handicapped. So If I land my kidless car in that sweet parking spot outside safeway keep your stink eye to yourself

- If I say your house isn`t selling because your kids have bagged it and it shows like a daycare maybe listen to the expert rather than question my ability to upsell the partial mountain view your house has over your kidless neighbor that sold 2 months ago for a better price.

Rant off, flame suit on!

 

[housingrental]

There is a big issue relating to all of this being ignored:

Equality of opportunity


Higher down payment requirements create a barrier to entry to home ownership.

Re Thomas`s post on "perhaps from parents or savings more !!" Re parents - this is an issue - Read Brett`s post above on his start. Having well financed family willing to loan you money shouldn`t be the determining factor for someone with good income and credit. The wealth multiplier impact this has is significant

 

[sstokes]

QUOTE (housingrental @ Apr 14 2010, 08:51 AM)
Brett just lost some potential 40 year old mother clients.




Actually.....after that tirade, I'd be reluctant to refer any client to him, with our without kids! I'd be surprised if I'm the only one who feels that way.

 

[gwasser]

QUOTE (sstokes @ Apr 14 2010, 06:04 PM) Actually.....after that tirade, I`d be reluctant to refer any client to him, with our without kids! I`d be surprised if I`m the only one who feels that way.


I doubt you are referring anyone to anyone else anyway. Don`t get so hot under the collar and so self righteous. Now you`ve got another realtor whom you won`t give references. Great!

Oh, I did a spell check on this, but you may still have an issue with my Grammar!

 

[JohnS]

QUOTE (sstokes @ Apr 14 2010, 08:04 PM) Actually.....after that tirade, I`d be reluctant to refer any client to him, with our without kids! I`d be surprised if I`m the only one who feels that way.

I certainly don`t feel that way. With all the help he`s given to people on this site over the years, I`d definitely mention his name to others as someone they should consider, even though we`ve never met or even talked. (At least, I don`t think we have...it sometimes get hard to remember with everyone on here.) Other people in this thread had talked about a behavioural trend of a certain demographic, and he just provided examples of a related kind of behaviour in a different, yet similar demographic. Now, if you are a disrectful woman in her late 30`s who therefore hasn`t taught her kids how to be respectful, then you might not want to go to him. And I`m guessing he`s happier spending his time with clients that want to develop a solid relationship anyway. But if you`re a respectful woman in her late 30`s who has raised her kids to be respectful, then you`re not a member of that demographic anyway.

However, if that was one of the first posts of his you`d read, I can see how you could come away from his post with a bad taste in your mouth. I`d still disagree with it, as to me it was obvious that he wasn`t attacking all mothers with kids (as opposed to the other kinds of mothers, I guess...), but I can still see it.

Have a good one!

JohnS

 

[Gen1GT]

QUOTE (gwasser @ Apr 14 2010, 10:14 PM) I doubt you are referring anyone to anyone else anyway. Don`t get so hot under the collar and so self righteous. Now you`ve got another realtor whom you won`t give references. Great!

Oh, I did a spell check on this, but you may still have an issue with my Grammar!

Haha, usually it`s Thomas that has the poor grammar!

Thomas, didn`t you write a book, too?

I recommend using Microsoft Word, and then copying and pasting it into the messageboard.