The myth about strong Canadian banks

[Anonymous]

Canadian banks are constantly being reported about how strong they are, that there is very little risk of any sort of collapse, and that thanks to institutions, like CMHC (Canadian Mortgage and Housing Corporation), banks lending policies are now regulated by the federal government! What they don't report, is how the CMHC is an unfunded liability, it exists as a shell, or a shield, to protect private banks from any risk of mortgage default. Since CMHC has no real capital backing behind its $600 billion in insured mortgages, all it really exists to do, is shift the risk of a default onto the Canadian taxpayer. The central government has socialized the Canadian mortgage market. No wonder Canadian banks are quoted as being so strong, when they make nothing but billions in profit, lending to Canada's riskiest borrowers, and stand to lose absolutely nothing if and when these mortgages collapse! Apparently in Canada, we believe our real estate market to be so special, and we believe so strongly that these prices are justified (because Canada is awesome!) that we are actually willing to take the risk OURSELVES (as taxpayers) and publicly insure our mortgages. I am proud to be Canadian, but I am also realistic, we have the highest real estate prices in the world, and it is impossible for anybody to invest for a profit at these levels in the major urban city markets. We are in a bubble, and we best accept it, and plan our exit strategy.

 

[Thomas Beyer]

Our real estate prices are not inflated in most healthy cities. There is no bubble. Unlike Japan or Europe, Canada has a 1%+ immigration and fairly low unemployment. This keeps demand, i.e. prices elevated. Why would they drop ?



And yes, CMHC is insuring banks so they can hand out high mortgages to first time buyers but their earnings have to be able to pay for a 25 year amortized mortgage incl. property taxes. 5% down is tough to get these days . Flaherty is doing the right things and dialed down the 40 year am to 30 now to 25, disallowed rental properties over 80% with CMHC and now introduced a cap .. all smart measured moves to correct the too hot real estate market.



It makes sense to buy the most expensive home you can afford as the gain is tax free ! A smart investment in most cases !

 

[mortgageman]

What never gets talked about in the whole CMHC liability, should-the-government-be-socializing-mortgage-risk debate is that CMHC generates a boatload of revenue for the government.

National arrears rates (measured as being behind three months in mortgage payments) are a fraction of 1 per cent.

In the event of a foreclosure and sale CMHC covers 100 per cent of the lender's loss but the loss is not the entire mortgage amount.

Is it possible that housing prices will drop and arrears will increase in some markets? Yes, it is. Is it likely there will be a nation-wide melt-down like occurred in the US? I'd argue no for a whole lot of reasons starting with underwriting criteria.

It's much harder to qualify for a mortgage here than it was pre-housing crisis in the US.

 

[Thomas Beyer]

[quote user=mortgageman]It's much harder to qualify for a mortgage here than it was pre-housing crisis in the US.
Amen to that.



Also, unlike European banks, there is little exposure to risky European bank loans.



Expect Greece, Italy and Spain, perhaps Portugal and France to leave the Euro, as their economies are so weak and their debt so high.



Date to watch: Sept. 12, the German election after which all sorts of bad news about European indebtedness will emerge, and tank the Euro.