BoC official warns that government is overexposed to housing market

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A senior official from the Bank of Canada is warning that the government is overexposed to the housing market. Deputy Governor Lawrence Schembri notes that the market is currently secure with the forecast for more balance when interest rates increase; but he says a sharp rise in unemployment or other economic shock could be costly for the government, especially with the level of risk carried by CMHC. Schembri says that things have to change with high levels of consumer debt being a major worry, and he has repeated calls for the private sector to take on a greater proportion of the risk. Read the full story.
  • Angela Wong-Liao - Invis on 2014-11-06 10:26:47 AM

    I fully agree with our BoC Deputy Governor Lawrence Schembri, the very high levels of consumer debt and very high debt to income ratio are vulnerable to economic risks, especially our government owned mortgage insurance agency, Canada Mortgage and Housing Corporation (CMHC). Any future economic shock, ie: rise in unemployment, external political instability, decrease in foreign investments and other economic shock can create a major risk to our real estate value, especially to CMHC.

  • Tony Piattelli on 2014-11-06 1:38:21 PM

    I don't necessarily agree that the increase in consumer debt ratio is driven by the mortgage industry, but has more to do with the unsecured credit such as credit cards, unsecured lines of credits and auto sales which are not as regulated. They focus on the housing market because they are able to regulate it where they aren't as able to legislate the unsecured market. Remember people have to qualify for a mortgage within the guidelines whereas they don't have to qualify for car loans or credit card debt as they are credit scored. Focusing on the wrong area of debt. By the way an major economic downturn will impact the mortgage industry we saw that in the 80s...but not so much in 2008.

  • Kuldip S Panesar Homeland Mortgage Corp. on 2014-11-06 3:00:07 PM

    I do not agree with this, the mortgage industry is regulated by the Government and Bank of Canada and intervened by them from time to time . The need is to regulate the unsecured debt , like credit cards, car loan and unsecured line of credit. Mortgage is approved if the borrower qualify as per the guidelines set for the mortgage Governing bodies . Secondly principal amount of mortgage is reduced with each and every installment paid by the clients . Whereas other unsecured loans and line of credits are not. The need is to regulate the unsecured financing . No doubt major economic shock will have some effect on the mortgage industry but not as have been stated .

  • Faye Drope on 2014-11-06 3:45:42 PM

    Funny i was just at a CMHC function and they are touting that they are not over exposed. Their arrears is .33%. Their average LTV is 54%, 73% of their book is at 23.5% GDS. With almost 9 billion under management that seems pretty good to me. 20% of our GDP is Housing and so the majority of Canadians have their wealth in their homes. We are not the US. Canadians buy homes to live in and sure we count on our investment but we also value our homes differently. In the 90's we went through a downturn and in my market (BC) most of my clients were underwater but they didn't bail, no they stuck with it. Sure there were some foreclosures but considering the economic climate it was minimal. The 80's downturn was different and supposedly we have learned from this.

    Harper won't be happy till he has this machine broke too. There has been so many cuts to our services this is just one more that he will cut and it has nothing to do with being profitable or or fiscally responsible with "our" money. No if it was truly about profit then CMHC is a winner. If they put back all the money that they have drained from their reserve to cover other expenses this would be a 4 start company.

    More propaganda that is all this is. I am not saying that there is not issues with out system but to qualify for a mortgage the riff raff has been weeded out. Placing your clients mortgage with big bank lenders is a disadvantage for your clients. Weeks after they take possession their bank lathers them up with a line of credit, a massive credit card with high rates. AGAIN THE PROBLEM IS NOT THE MORTGAGES IT IS THE UNSECURED DEBT. They tie the client up. At our meeting we deemed the banks pushers. Talk to your clients about this!!!

  • Ron Butler on 2014-11-06 5:31:08 PM

    It's always amazing how some people who work in our business everyday have so little understanding of how the basic principals of the mortgage business work. The government has zero involvement in unsecured debt, the government has a massive involvement in mortgage debt. In terms of total consumer debt; Mortgage debt represents almost 8 times the total of consumer debt.

    These two simple facts are the critical factors in the government's policy. If the Canadian public went deeply in arrears on their unsecured debt the banks would be in trouble. If arrears reached 15% on the mortgage side both the banks and the whole country would be in trouble, just ask our cousins to the south how that works.

  • Tony Piattelli on 2014-11-06 5:42:54 PM

    You are correct in your assessment that some people who work in our industry have such little understanding how the basic principals of the mortgage business works starting by comparing what happened south of the border and extrapolating it to Canada. There's very little resemblance between the two countries in how mortgages are approved and the primary reason people by houses as they are distinctly different. Even at the height of the crisis in 2008 our delinquency arrears never broke .65% with the banks having an allocation of 1% for bad mortgages. The other fact that's being missed is that the banks and government will allow for people to re amortize their mortgages back out to 25 years if required. This is all hype by the government in an effort to unload one of the most profitable branches of the government. Since WWII, CMHC and the BoC have been the only profitable performers for the government. Maybe CMHC should stop the banks from bulk insuring mortgages with a ltv less than 75% to free up room for the primary reason CMHC was established for in the first place.

  • Ron Butler on 2014-11-06 6:11:54 PM

    @ Tony.... while I completely agree that mortgage underwriting in the USA prior to 2008 had no relationship with our system please be aware that the in 2008 in Canada house values only dropped for 7 months and then fully rebounded to the point that 2010 was a record year in Canadian Mortgage Lending and prices were up 10% over 2009.

    So while I will agree that there was nothing the same about underwriting standards clearly the sustained reduction in home values that lead to a cycle of wrenching problems for banks and government in the USA could (just.... could, not.... will) happen here. A very smart woman who is a director at a lender said to me just yesterday "nothing goes up forever" we are approaching year 26 of an expanding real estate market and while I am not Garth Turner I don't think property value increase is eternal condition.

  • Tony Piattelli on 2014-11-06 6:27:24 PM

    @Ron, I fully agree that prices won't keep rising like many believe, just look at oil prices. All the gurus have said oil will be $200/bll on more than one occasion with nothing really to back it up. Additionally, people are allowed to write off mortgage interest against their taxable income in the US, so there's an inducement for them to keep refinancing their houses in order to have the tax write off and essentially never really own their home. In Canada, you can only write investment interest off, which is distinctly different as you would only be able to use the equity below the 80% threshold or 65% if your going straight HELOC. Canadians buy homes to keep as assets and part of their investment portfolio, not so much in the US. What would be interesting to see, is the breakdown of the write offs from the Canadian downturn, as I'm guessing most of those who walked were the 0 down rental properties, which is an area that the insurers should never have entered into. If you don't have the money for the investment, then you should be exposing yourself to the risk. Take care.

  • Faye Drope on 2014-11-06 8:01:08 PM

    Actually the model CMHC used to show a catastrophic housing crash of 25% would be no problem for Canada.
    There must be something more sinister here than the fact that CMHC is a risk to the Canadian people. It is not a risk it is what makes Canada so stable. Do you honestly think for one tiny minute that the Ontario's Teachers Pension (backers of Canada Guarantee) are careless with their money? No because they make money. Getting rid of CMHC is all about money - sell it and pay off some debt and make the Gov't look great. Isn't that what happened to CN Rail too? In 1992 a new management team led by ex-federal government bureaucrats, Paul Tellier and Michael Sabia, started preparing CN for privatization by emphasizing increased productivity.
    I bet I can write the ending to this CMHC story, besides they have the majority of Canadian's brainwashed to think it is too risky.

  • Tony Piattelli on 2014-11-07 10:53:21 AM

    What's interesting is that you have a BoC official claiming that Canada (CMHC) is just short of a crisis, yet CMHC is going around the country showing us that Canada can absorb a 25% catastrophic collapse and endure begs the question: Who's full of caca? The BoC Official or the cross country tour from CMHC? As Canada can't be both.

  • Ron Butler on 2014-11-07 3:52:39 PM

    A 25% reversal in Canadian property values would be "no problem". Well..... I don't think so. I think it would be a big problem. Would it break the banks and CMHC, likely not but it would be real ugly. New Construction would virtually cease, unemployment would soar, not just among trades but bankers and mortgage brokers and realtors, owners of shoe box rental condos would hand their keys to lenders so everyone in the hi-rise building would feel the pain of empty suites and rising fees. Real ugly, I assure you.

  • Andrea Taylor on 2014-11-12 10:36:54 PM

    Is it just me or is anybody else concerned about a Canadian corporation, one of our banks, Scotiabank for example. Record earnings of approximately $5.6 million (or is it billions, I've lost track!) profit to date as of October this year, and they are laying off approximately 900 employees? And they say they are concerned about our economy and the unemployment rate? How much is enough for the people (and I use that term politely) at the top? How much greed are we as a society going to tolerate? This smells like what happened in the U.S. with the big bail outs and the monies not trickling down past the executive floor.
    Scotiabank should be ashamed of themselves! Being in the business I know I will never refer a client to them again. They're motto should be "We're richer than you think", not "You're richer than you think". I hate over legislation by the government as much as the next person, but our government owes the citizens of this country a stable economy and with our government allowing greedy corporations to get away with ruining 900 families' lives because their shareholders want a bigger piece of the pie, well, that's just wrong and immoral! So, really in their own way Scotiabank is contributing to the downturn of the Canadian economy! Kudos to them for assisting in being the masters of their own demise!

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