Canada could be headed for mortgage meltdown, says Merrill Lynch Canad

[Smallc]

TORONTO — Merrill Lynch is warning that Canada could be headed for a housing and mortgage meltdown similar to the one that has devasted the United States economy.

The Canadian Press

[Smallc]

I realize that this is business news, but the subject is important to Canadian politics and the current election, at least in my view.

[Riverwind]

I have read recently, that the US has consumer "protection" laws that prevent banks from going after to people to collect any debt left over after a house has been re-possed and sold by the bank. In Canada the consumers are responsible for the debt unless they declare bankruptcy. This means Americans have an incentive to walk away from houses once the prices fall below their mortgages. As a result, property busts are going to always be much worse in the US than in Canada.

I need to confirm this detail about US law but if true then I would say that it is a major contributor to the financial mess that the US is in right now. If people were responsible for any remaining debt then they would be less likely to buy a home with no equity and more likely to keep paying the mortgage even if the property prices are less than the balanced owed. This, in turn, would mean that the banks would not have had as many defaults.

Edited September 24, 2008 by Riverwind

[Moonbox]

Being employed in the banking/finance/investment industry, the comparison between American and Canadian lending practises underscores ENORMOUS differences.

[OddSox]

Hmm, alarming headline, rather banal story. A couple of economists are worried about their jobs and figure they better make a name for themselves while they still can...

[Smallc]

Hmm, alarming headline, rather banal story. A couple of economists are worried about their jobs and figure they better make a name for themselves while they still can...

A couple of economists from a company who could barely stay in business.

[fellowtraveller]

There will be Canadian homeowners in trouble, but only a few and not for a while.

Zerodown mortgages are not all that common, a fairly recent product, and the majority will not come up for renewal for a few years. If the market has recovered by then, the owners will be even or have equity and will have no trouble renewing. If the market has not recovered and their home is worth less than their debt, many will still not have trouble.

Keep in mind that zerodown mortgage qualification in Canada is (or was, they are banned after October 15 here) is more difficult than qulaifying for a regualr high ratio mortgage. To get a zerodown mortgage here, you must have a stronger credit score and better than average income, it is not easy at all. Plus, you have to pay higher interest, which means you'd easily cover the same standard mortgage at a lower rate.

Not an issue here, yet. And unlikely to become one.

[Topaz]

On the US news, about a month ago, it showed a man who couldn't afford his house and so he walked away from only to go buy a cheaper one and I've heard alot of people are doing that. Say they bought a house over $500,000, just walk away and buy 200-300,000 houses.

[Vancouver King]

On the US news, about a month ago, it showed a man who couldn't afford his house and so he walked away from only to go buy a cheaper one and I've heard alot of people are doing that. Say they bought a house over $500,000, just walk away and buy 200-300,000 houses.

There is a better display than that looming stateside - when the trillion dollar bailout for bankers and speculators happens, the world will begin to witness a travesty on an unimaginable scale: The American govt foreclosing and tossing into the street, it's own citizens coerced into teaser-rate mortgages they were eventually unable to pay. This will warm the hearts of most conservative Republicans.

A fitting legacy for America's most despised president.

[August1991]

I have read recently, that the US has consumer "protection" laws that prevent banks from going after to people to collect any debt left over after a house has been re-possed and sold by the bank. In Canada the consumers are responsible for the debt unless they declare bankruptcy. This means Americans have an incentive to walk away from houses once the prices fall below their mortgages. As a result, property busts are going to always be much worse in the US than in Canada.

That's basically correct, Riverwind.

I quoted this in another thread but I'll repost it here. It's an interview with Martin Feldstein:

Mortgage contracts are very different in the U.S. than they are in most other countries. As a general rule, they are so-called non-recourse loans, which means that if an individual stops making payments, the creditor can take the house - but if selling the house doesn't provide enough money to pay off the mortgage, the creditor cannot go after other assets or the income of that individual.

That's very different from Canada or virtually any other part of the world. It gives homeowners who have negative equity [i.e., mortgage debt bigger than the value of their house] an incentive to default because they'll lose less. They'll be able to walk away, rent and wait for prices to come down, and they will have escaped the full cost of the mortgage. Until that process stops, the crisis will not end.

G & M

As to the possibility of a financial crisis in Canada, of course it is possible. In all matters concerning money and finance, you are dealing in perceptions and symbols. For most of us, the symbols of our wealth are mere numbers on a computer screen. We can readily obtain real goods and services merely by swiping a plastic card through a computer. Without trust, such a system cannot work. I am always surprised at how little people understand this and how quickly, when fearful, they can resort to something just as ephemeral but somehow more trusted to record their wealth.

The link above to a Merril Lynch report refers to indebtedness. I have never been comfortable with such reports. For everyone in debt, there is necessarily someone else who is saving/lending. In my mind, the more debt a society has, the more that society trusts its fellow citizens.

OTOH, the link above also has this:

It also says housing prices are now falling and inventories of unsold homes are rising sharply in Canada suggesting that this market turnaround will not be a transitory phenomenon.

This is more troubling. It is the fall in housing prices - the bursting of a housing bubble - that is the real problem in the US IMHO. For boomers approaching retirement, the knowledge that their house is worth less than they anticipated is bound to affect their real behaviour.

If you want to see justification for a claim that Canada's "housing market" is also suffering from a speculative bubble, take a look at this graph. Frankly though, Canada doesn't have a "single housing market". Alberta's housing market might as well be in a foreign country when compared to Quebec's housing market.

[HistoryBuff44]

where is the US gonna get 700 billion from? who is gonna buy that much debt from them right now? They are just gonna print it and their dollar is gonna tank. They better hope that China, Japan and southeast asia doesnt start getting the jitters about a worthless US dollar or they will start dumping the nearly 3 trillion they hold.

they shoulda let those companies go bankrupt and hope that the shock wave from it is enough to get them off the track they are on. Not even the powerful US economy can bleed a trillion a year and not die.

If the US tanks hard like some are saying, i dont see how canada can sail those waters unscathed. Hopefully eastern demand for resources stays high enough to keep prices reasonable.

[msj]

A few things in response to various posts above:

1) Yes Canada and the US have some real differences. There is no evidence that Canada allowed the amount of NINJA loans as the US has (and we are not just talking "subprime" loans but also "alt a" loans (which would be considered a higher investment grade).

There is also a lack of evidence to indicate that Canadian banks have been as involved in the shenanigans as various US banks (less leverage and more regulation in Canada will not prevent a decline in house prices but will likely prevent a, say, $70 billion bailout of the banks).

2) In the US there are (or, rather, will be) real consequences for walking away from one's house. One's FICO score would be affected and, as the US discovers that regulation is more effective at preventing crises than bailouts in solving them, a person will find that the days of NINJA loans are over and one's FICO score does matter.

For this I recommend one spend time reading the archives of Calculate Risk about the reality (or lack thereof) of reports of "jingle mail" in the US.

One should also consider that on the ever popular mortgage equity withdrawals that have taken place over the past decade well, the rules may not be as simple as walking away depending on if it was recourse or non-recourse.

Refi's are almost always recourse so anyone trying to walk away from a Refi in the US will likely have to payback something.

I will reiterate - for an intelligent review of this issue for the US you would be better off reading the archive section of Calculate Risk than trying to glean anything remotely informative from any of the posters on this forum.

3) Mortgages are both a debt obligation and an asset at the same time. It seems that some do not understand the importance of timing differences (short term vs. long term), market sentiment (when professionals won't buy others debt it should be obvious that the market has finally realized significant, and very real, flaws), and the fact that for the US much of the money is coming from Asia rather than from other Americans (which has a profound impact on FX, trade and inflation - once again, all real effects on the worlds' economies).

[OddSox]

where is the US gonna get 700 billion from? who is gonna buy that much debt from them right now? They are just gonna print it and their dollar is gonna tank. They better hope that China, Japan and southeast asia doesnt start getting the jitters about a worthless US dollar or they will start dumping the nearly 3 trillion they hold.

...

I was wondering about that the other day. I haven't had much time to look into it, but my impression is that there hasn't been a major drop in the US dollar since this started. Were these issues already anticipated by the market, or maybe I have no idea what I'm talking about...

[OddSox]

Back in 1979, I moved to Alberta to take advantage of the 'boom'. Within a year the NEP pretty much put a tank on the boom (admittedly the tank in world oil prices didn't help, but the NEP was the nail that did it). Houses all over in northern Alberta were on the market for $1 - you couldn't walk away from the mortgage.

By 1982 I was married, and bought a house. I paid $72000 for a three year old house which originally sold for $132,000. After a few years (1987) I moved back east and sold the house for about $80,000. I didn't get rich on it - but that same house is likely worth well over $500-$600k now (nice subdivision in St. Albert).

The thing is, economic crap happens, but sooner or later that bad shit gets flushed. (and sometimes its a matter of timing)

Edited September 25, 2008 by OddSox

[Vancouver King]

I was wondering about that the other day. I haven't had much time to look into it, but my impression is that there hasn't been a major drop in the US dollar since this started. Were these issues already anticipated by the market, or maybe I have no idea what I'm talking about...

I have heard no plans to cut spending or increase taxes to pay for this measure. During a presidential campaign this is understandable but given the gravity of the situation - McCain would have America believe it is ominous enough to suspend his campaign - one would think this "no bad news" rule would be suspended and the American taxpayer reassured the money will simply not be printed/borrowed.

[msj]

I have heard no plans to cut spending or increase taxes to pay for this measure. During a presidential campaign this is understandable but given the gravity of the situation - McCain would have America believe it is ominous enough to suspend his campaign - one would think this "no bad news" rule would be suspended and the American taxpayer reassured the money will simply not be printed/borrowed.

The talk is to raise the cap on the debt from 10.6 trillion to $11.3.

No one seems too concerned about this....

Regarding the "no bad news" rule - well, it is practiced best by the media.

Edited September 25, 2008 by msj

[OddSox]

I have heard no plans to cut spending or increase taxes to pay for this measure. During a presidential campaign this is understandable but given the gravity of the situation - McCain would have America believe it is ominous enough to suspend his campaign - one would think this "no bad news" rule would be suspended and the American taxpayer reassured the money will simply not be printed/borrowed.

Are you saying that due to the American election, money traders worldwide are following a "no bad news" rule in regards to the value of the dollar? (again, I'm new at this)

(edit - commas in the wrong place:()

Edited September 25, 2008 by OddSox

[August1991]

The talk is to raise the cap on the debt from 10.6 trillion to $11.3.

That's still about 50% of GDP or less than most countries in the G8.

The US federal government is borrowing against the power of 300 million Americans to generate value. If I were the US president, I would be far more concerned about letting those millions of people get on with their daily lives and doing something productive. In such a context, the debt of the US government takes on a different relevance. Will a large government debt hinder people from having jobs and working hard?

[Vancouver King]

Are you saying that due to the American election, money traders worldwide are following a "no bad news" rule in regards to the value of the dollar? (again, I'm new at this)

(edit - commas in the wrong place:()

If either candidate suggested a tax increase or spending cut to pay for this measure he would face certain defeat. Obama came close when he hinted that spending proposals (ie expanded medicare) would be delayed due to the bailout package. Forget for the moment this is the

"reformer" candidate talking, his opponent, incredibly, is still on record as favoring additional income tax reductions for wealthiest taxpayers.

I find it nothing short of Alice in Wonderland that a trillion dollars can be found to rescue bankers and speculators while millions of children lack health care coverage. Only in America.

[msj]

That's still about 50% of GDP or less than most countries in the G8.

The US federal government is borrowing against the power of 300 million Americans to generate value. If I were the US president, I would be far more concerned about letting those millions of people get on with their daily lives and doing something productive. In such a context, the debt of the US government takes on a different relevance. Will a large government debt hinder people from having jobs and working hard?

Sure, it is still relatively small as a % of GDP - probably will be closer to 70% over the next few years as the dust eventually settles on whatever bailout comes up (including Fannie and Freddie).

But it will have an impact - Americans have been living beyond their means for too long at the individual and government levels.

They can no longer rely on mortgage equity withdrawals to consume.

The government will eventually find that it can only rely on the generosity of foreigners for so long.

Eventually interest rates will rise and tax rates will go up too (probably with spending cuts).

The next thirty years are not going to be as good as the last thirty years - for most Americans, anyway.

[OddSox]

Once again, if the American economy is in the toilet, why does the dollar seem to be holding it's own? I'm sure I'm missing something...

[bush_cheney2004]

Once again, if the American economy is in the toilet, why does the dollar seem to be holding it's own? I'm sure I'm missing something...

Which dollar?.....if the Canadian economy was/is in "the toilet", would anybody outside Canada notice?

[OddSox]

Which dollar?.....if the Canadian economy was/is in "the toilet", would anybody outside Canada notice?

Well, yes the American dollar. (who's cares about Canada anyway?) I'm pretty sure a lot of people worldwide take note of the American economy - or perhaps it doesn't matter any more?

[Vancouver King]

Which dollar?.....if the Canadian economy was/is in "the toilet", would anybody outside Canada notice?

...and if an American president with an 18% approval rating implored Americans to take his trillion dollar leap of faith, would anyone care?

[bush_cheney2004]

...and if an American president with an 18% approval rating implored Americans to take his trillion dollar leap of faith, would anyone care?

Yes......starting with the US Congress which has an even lower approval rating.