The Canadian Version of Subprime Mortgages

[Progressive Tory]

"The untold story of how elements of the first Conservative budget in 2006 encouraged big U.S. players such as AIG to make a push into Canada, creating our version of subprime mortgages"

http://www.theglobeandmail.com/servlet/sto...tory/Front/home

An interesting article in the Globe and Mail should have Canadians concerned about the vulnerability of our own 'Sub-prime mortages', which Jim Flaherty has guaranted to the tune of 200 billions dollars of tax payer money.

"In the first half of this year (2006), as the subprime mortgage crisis was exploding in the United

States, a contagion of U.S. style lending practices quietly crossed the border and infected

Canada's previously prudent mortgage regime.

New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.

The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened. Just yesterday, Finance Minister Jim Flaherty repeated the mantra that the government acted early to get rid of risky mortgages. What he and Prime Minister Stephen Harper do not explain, however, is that the expansion of zero-down, 40-year mortgages began with measures contained in the first Conservative budget in May of 2006.

“These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership,” Mr. Flaherty said. The new rules encouraged the entry of such U.S. players as American International Group – the world's largest insurance company – and Triad Guarantee Inc. of Winston-Salem, N.C. Former Triad chief executive officer Mark Tonnesen, who spearheaded his company's aborted push into Canada, said the proliferation of high-risk mortgages could have been mitigated if Ottawa had been more watchful. “There was a lack of regulation around the expansion of increased risk,” he said.

Virtually unavailable in Canada two years ago, high-risk mortgages proliferated in 2007 and early 2008 and must now be shouldered by thousands of consumers at a time when the economy is sinking quickly and real-estate prices are swooning. Long-term mortgages – designed to help newcomers get into the housing market sooner – are the most expensive in terms of interest costs, and least flexible when mortgage-holders cannot meet their payments and need extensions.

The federal government waited until June of this year to slam the regulatory door on 40-year mortgages. In October, as the global financial crisis erupted, Mr. Harper lauded his government for its “early” response to the mortgage dangers.

He didn't say that, not only did his own government open the sheltered Canadian mortgage market to U.S. insurers, but it also doubled to $200-billion the pool of federal money it would commit to guarantee their business.

An investigation by The Globe and Mail found:

– AIG's Greensboro, N.C., mortgage subsidiary launched a quiet lobbying campaign in 2004 with senior U.S. executives and a former CMHC official to push open the doors to Canada's mortgage insurance market, where some of the world's highest insurance rates are charged. Two years later, on May 1, 2006, AIG's mortgage insurance division registered with the lobbying commissioner's office. It was the day before the federal budget revealed new players would be allowed into Canada.

– Banking and insurance officials were so concerned about the alarming rush to 40-year mortgages at the beginning of 2008 that one bank executive warned the Bank of Canada's chief financial stability officer, Mark Zelmer, in a meeting that “the government has got to put an end to this.”

– Critics, including former Bank of Canada governor David Dodge, say the lax mortgage policies only further stoked soaring house prices. As for mortgage insurance premiums, industry officials say rates remain virtually unchanged and could potentially rise as troubled U.S. players begin to retreat from Canada.

Edited January 4, 2009 by Progressive Tory

[Jerry J. Fortin]

I can only hope that the exposure was mainly to US corporate efforts, not Canadian ones. If not then I can see a bank bailout coming north to a country near you.

[Progressive Tory]

I can only hope that the exposure was mainly to US corporate efforts, not Canadian ones. If not then I can see a bank bailout coming north to a country near you.

I don't know. Anything that serious being veiled in so much secrecy is a little un-nerving. A mortgage broker opened up in our little strip mall about a year and half ago; with much fanfare. Their marquee advertised 40 year mortgages with no down payment. They seemed to be doing a booming business but closed it's doors recently, no doubt after it was announced that Flaherty and Harper were closing the door on the scheme that they had opened. If the economy gets worse, we should expect to wear this one for awhile.

[gordiecanuk]

I don't know. Anything that serious being veiled in so much secrecy is a little un-nerving. A mortgage broker opened up in our little strip mall about a year and half ago; with much fanfare. Their marquee advertised 40 year mortgages with no down payment. They seemed to be doing a booming business but closed it's doors recently, no doubt after it was announced that Flaherty and Harper were closing the door on the scheme that they had opened. If the economy gets worse, we should expect to wear this one for awhile.

The US economy and to a lesser degree Canada's...we've been feeding our properity on the crack cocaine of cheap credit. My fav term coming out of this mess is that of NINJA loans.

NINJA stands for loans given to those with NO Income, NO Job or Assets.

[Jerry J. Fortin]

The responsibility for those loans lays with the lender. That they made these high risk loans was their responsibility. Unfortunately the government now believe it is our responsibility to cover the losses. Like the car manufacturers, the need to go belly up. If there product or service is NFG, why make the taxpayer fund it?

[Progressive Tory]

The responsibility for those loans lays with the lender. That they made these high risk loans was their responsibility. Unfortunately the government now believe it is our responsibility to cover the losses. Like the car manufacturers, the need to go belly up. If there product or service is NFG, why make the taxpayer fund it?

Exactly. But let's not forget: "He didn't say that, not only did his own government open the sheltered Canadian mortgage market to U.S. insurers, but it also doubled to $200-billion the pool of federal money it would commit to guarantee their business."

Doubling 'to $200-billion the pool of federal money it would commit to guarantee their business' is a nice way of saying committing 200 Billion dollars of 'taxpayers' money. We now own this whether we want it or not. (and I'm assuming most Canadians do NOT ). Are we taking this seriously enough?

[gordiecanuk]

Exactly. But let's not forget: "He didn't say that, not only did his own government open the sheltered Canadian mortgage market to U.S. insurers, but it also doubled to $200-billion the pool of federal money it would commit to guarantee their business."

Doubling 'to $200-billion the pool of federal money it would commit to guarantee their business' is a nice way of saying committing 200 Billion dollars of 'taxpayers' money. We now own this whether we want it or not. (and I'm assuming most Canadians do NOT ). Are we taking this seriously enough?

The debate seems to be pay now or pay later. Whether its the Big 3 or mortgages, if things are allowed to disintegrate (sp?) then the social costs will be enourmous, but of course so are the costs of propping things up.

[Jerry J. Fortin]

Come on folks open your eyes! We are being lead into the new world order of corporatism. Business being funded at public expense, that is the direction we are heading. Governments being control by corporations through economic ties and political and financial influence. That is where we are going.

Feeding this animal with public funds is simply the wrong way to go.

[daniel]

Sub-prime mortgages are the private sector's solution to low income housing. In the end the public has to pick up the tab anyways. Would have been cheaper as a government program.

[fellowtraveller]

Baloney, and dangerous baloney at that. 'Hey. lets get the sheep stampeding for no good reason"

Here is the key "Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down."

Those are the mortgages at risk, and they won't be at risk until they come due, which will be for the most part in about two to five years, since they were available and popular only for a couple oif years and nearly all will be at a five year term. Taking a mortgage over 40 years is no more risky than taking one for 25 years, in neither case do you pay off any prinicpal for many years. The risk is the same, essentially. People who get 40 year mortages must qualify within strict CMHC guidelines, No qualify, no mortgage, same as always. You still need good income and good credit. The length of the amortization has nothing to do with either of those qualifying factors.

More deception: GE has been in the mortgage insurance business as a competitor to CMHC for many years. They have the well earned reputationof being cherrypickers: they are even more strict than CMHC about taking on mortgages. If anything is shaky about your application, they are not interested.

The people at risk are those who have no equity by taking zero down mortages, and their risk will come when they renew, which for the majority will be in two to five years. Of course, not all or even the majority will default. This also assumes that property values will be lower in that time frame, nwhich is far from certaion.

The defaults will be some portion of the $10 billion, which is negligible in the grand scheme.

Edited January 4, 2009 by fellowtraveller

[Jerry J. Fortin]

Sub-prime mortgages are the private sector's solution to low income housing. In the end the public has to pick up the tab anyways. Would have been cheaper as a government program.

Another government program! Please no, not this one and not another one!

I can only hope that someday we will have enough brains to elect a group of representatives that will tackle and bring down the house of cards that is the bureaucracy of public service. That thing is a millstone around the necks of citizens, and one of the key causes of high taxes to fuel a revenue stream for government. These programs need to be taken apart one by one and reformed into a comprehensive system more able to remain flexible enough to withstand the test of time. You can call it cradle to grave benefits if you want, but there is a need to reform the public service sector and a need to reform the services provided to the public.

I do not advocate cutting all programs and services, nor do I advocate creating more programs and services. What I do suggest is that we begin to understand the true costs and responsibilities of being part of an enlightened society. We need to define that which we desire that government provide and the manner in which it does so. How else can we do a cost benefit equation to determine a correct path?

[daniel]

Another government program! Please no, not this one and not another one!...

Well, we're living in the aftermath of the private sector solution and we're in a world wide recession. Now you know the lesser of two evils.

Edited January 4, 2009 by daniel

[gordiecanuk]

Well, we're living in the aftermath of the private sector solution and we're in a world wide recession. Now you know the lesser of two evils.

Big biz screws the pooch and comes running to government for help, but their advocates are dead set against social programs. I think this is the very definition of duplicity.

[Progressive Tory]

Come on folks open your eyes! We are being lead into the new world order of corporatism. Business being funded at public expense, that is the direction we are heading. Governments being control by corporations through economic ties and political and financial influence. That is where we are going.

Feeding this animal with public funds is simply the wrong way to go.

I agree. By now most Canadians know that the Conservatives have a cute little code word 'choice' which means 'private' and if in power long enough will privatize everything. 'For profit' providing of services is naturally going to cost taxpayers more, since ultimately it's our money going to private industry, who NEED to make a buck.

In fact, they are even talking 'for profit' jails and prisons. I'm feeling much safer knowing that profit will be the driving force behind keeping prisoners locked up and the public safe.

However, back to our own mortage crisis, yes the mortgage insurers cover the risk, but what happens if a lot of people all of a sudden can’t make their payments and the insurer who is supposed to protect the lender is unable to cover their insurance obligations? The Canadian government will guarantee up to 90% of the mortgage amount against this insurer default. and that's when the taxpayer gets hosed.

We need to wake up and make government more accountable.

[Jerry J. Fortin]

I agree. By now most Canadians know that the Conservatives have a cute little code word 'choice' which means 'private' and if in power long enough will privatize everything. 'For profit' providing of services is naturally going to cost taxpayers more, since ultimately it's our money going to private industry, who NEED to make a buck.

In fact, they are even talking 'for profit' jails and prisons. I'm feeling much safer knowing that profit will be the driving force behind keeping prisoners locked up and the public safe.

However, back to our own mortage crisis, yes the mortgage insurers cover the risk, but what happens if a lot of people all of a sudden can’t make their payments and the insurer who is supposed to protect the lender is unable to cover their insurance obligations? The Canadian government will guarantee up to 90% of the mortgage amount against this insurer default. and that's when the taxpayer gets hosed.

We need to wake up and make government more accountable.

I would suggest that a "for profit" approach is wrong. On the other hand, creating crown corporations for the purpose of service delivery in the private sector founded upon a "non-profit" model has merit. If you think about it, you will conclude that while you are reducing the ranks of public service employees, you are also tackling the bureaucracy problems. You can begin dealing with patronage appointments at the hands of politicians and through that be addressing corruption. You can realize a net benefit from reduced expenditures. All of this without seeking a profit.

[Progressive Tory]

I would suggest that a "for profit" approach is wrong. On the other hand, creating crown corporations for the purpose of service delivery in the private sector founded upon a "non-profit" model has merit. If you think about it, you will conclude that while you are reducing the ranks of public service employees, you are also tackling the bureaucracy problems. You can begin dealing with patronage appointments at the hands of politicians and through that be addressing corruption. You can realize a net benefit from reduced expenditures. All of this without seeking a profit.

There are some things the government should be in, and some things they shouldn't. Healthcare, the military, jails and prisons, should not be for profit. I support user fees, even to some degree in healthcare. One area where my Tory leanings come into play is with the fact that while I will always support a good publicly funded healthcare system, we have to admit that it is being abused. Go to emergency or any after hours clinic, and count how many people are there for legitimate reasons.

My niece is studying forensics and is currently working at an Emergency Dep't of a large hospital in Philadelphia. When she was visiting over the holidays, I asked her what the big difference would be between that job here and in the US (she worked at our local hospital before joining her husband, and yes they met online). She stated that she only ever dealt with actual emergencies now, while sniffles and colds dominated her work in Canada.

My concern with allowing so many US firms to set up shop for profit, is exactly what's happening now. Companies like AIG, that Flaherty and Harper allowed in, are part of the US financial industry. If we experience the mass unemployment that many are predicting, these 40 year 'higher risk' mortgages could default. The homeowner has no equity, because what little they did have would get eaten up in real estate fees, etc. If large number of houses are put on the market, real estate values will deflate and if AIG falls the way of many US firms and they can't cover all the losses from the lenders; do we 'bail' them out or simply tap into the money we've set aside to guarantee the debt.

Either way, the tax payer is out of pocket.

[Jerry J. Fortin]

The real estate issue is indeed perplexing. I must continue to suggest that it should be tax deductible, freeing up disposable income for families is a key to the crisis that we are indeed walking into.

That aside, a way must be found to reduce government expenditures. That does not mean cutting services and programs, it does mean that we need to start spending less money. We need to rethink our social programs and just about everything else to find ways to improve service deliveries.

[Progressive Tory]

The real estate issue is indeed perplexing. I must continue to suggest that it should be tax deductible, freeing up disposable income for families is a key to the crisis that we are indeed walking into.

That aside, a way must be found to reduce government expenditures. That does not mean cutting services and programs, it does mean that we need to start spending less money. We need to rethink our social programs and just about everything else to find ways to improve service deliveries.

Reducing taxes and government spending is indeed the nature of Arthur Laffer's 'Curve'. However, many governments like GW's and SH's follow one and not the other.

I'm all for tax cuts based on income taxes, not sales taxes; because without the first we can't pay the second. In fact, I may venture so far as to say that Sales taxes (like the GST) are a good way of collecting taxes from the rich, who generally benefit the most at income tax time. The more you are able to spend in a country with a free enterprises system, the more you should contribute to keep it a free eneterprise system. Listen to me, the big scarey socialist.

I also agree that we need to find ways to streamline services, but 'for profit' is not the answer. When services are privatized, they usually eliminate good paying union jobs and put in place minimum wage earners or just above, who don't pay as much income tax, don't have as much disposable income, and often have to tap in more to social programs. We need a balance but we also need to find that balance with Canadian companies, governments and workers. Leave the US mess in the US.

[Moonbox]

I also agree that we need to find ways to streamline services, but 'for profit' is not the answer. When services are privatized, they usually eliminate good paying union jobs and put in place minimum wage earners or just above, who don't pay as much income tax, don't have as much disposable income, and often have to tap in more to social programs.

For profit is often the answer. Good paying government union jobs only benefit the union workers. There's a reason why public service unions receive so little public support when they go on strike. Personally, I don't feel that I should be paying higher taxes so that I can help ensure under qualified and unskilled workers earn far more than their skills would otherwise dictate.

[Jerry J. Fortin]

The gist of rationalizing the public service is two fold. Reducing government expenditures is only one facet of the effort, the other is service delivery. The "for profit" concept is flawed, in as much as it applies to the public sector. Tax dollars being spent need not turn a profit, especially if that would interfere with efficient service delivery. You see the profit is an added cost, and in terms of service delivery it becomes an impediment.

Job elimination is another story altogether, yet one in which an equitable solution is possible.

[Progressive Tory]

For profit is often the answer. Good paying government union jobs only benefit the union workers. There's a reason why public service unions receive so little public support when they go on strike. Personally, I don't feel that I should be paying higher taxes so that I can help ensure under qualified and unskilled workers earn far more than their skills would otherwise dictate.

Good paying union jobs DO NOT JUST BENEFIT the union workers. They benefit everyone. On the whole, Union Workers pay more income tax, which benefits everyone. Those tax dollars help provide social programs, pay to equip a military, etc., etc.

Good paying Union Jobs provide expendable income, which helps industry provide jobs, and generate tax revenue - both income tax and GST.

Lower income employees have very limited expendable income and pay little if any, income tax. They also tap into social programs, closed to Union wage earners.

I also oppose privatizing the Civil Service since it is really only a way to appease lobbyists like Accelerate (formly Anderson Consulting until the Enron Scandal) The idiotic John Baird did that when he was in the Mike Harris Government in Ontario and justified it by saying that it was good news for employees since they now paid less income tax. That's like telling a homeless person to look on the bright side, because they now didn't have to do housework.

Ultimately, in 2000, an Ontario government report revealed that Andersen Consulting was charging an average of $257 per hour for work that had previously been done by ministry staff at $51 per hour (including benefits). So the moron not only reduced income tax but paid 5 to 1 what it would have cost to keep the good Union job that generated income tax. He won 'Idiot of the Year' honours then and has been in the running ever since.

[Topaz]

I saw something on the Tv that Canadian banks or other financial institutions and the plan was called ABCP and a lot of Canadian investors loss their investments, did anyone else see this? One woman was crying and said she had to come out of retirement to work because she lossed her investments and it was that the party investing the money didn't tell them about the connection with the subprimes. Sorry I can't be clearer but I only caught the last half of the story.

[Progressive Tory]

I saw something on the Tv that Canadian banks or other financial institutions and the plan was called ABCP and a lot of Canadian investors loss their investments, did anyone else see this? One woman was crying and said she had to come out of retirement to work because she lossed her investments and it was that the party investing the money didn't tell them about the connection with the subprimes. Sorry I can't be clearer but I only caught the last half of the story.

I think it was about holding paper assets until some kind of restructuring could take place.

"Investors ranging from major corporations to provincial and territorial governments and private individuals have been stuck holding the paper since last August, when the U.S. subprime mortgage crisis tossed financial markets into a tailspin, causing the market for Canadian third-party asset-backed commercial paper to come to a screeching halt." http://globaleconomicanalysis.blogspot.com...bankruptcy.html

"He added that the taxpayer commitment is probably close to the CA$9.5 billion ($7.8 billion) proposed by a blue-ribbon committee toiling to untangle the mess.The Ontario, Quebec and Alberta governments are involved because much of the crippled ABCP is held by their institution." http://www.iht.com/articles/ap/2008/12/19/...Rescue-Plan.php

"As a result of the subprime mortgage collapse in the United States, many Canadian investors began to question the liquidity and value of the assets backing their commercial paper. Most investors are not aware of the nature of the assets underlying their commercial paper. The lack of transparency resulted, in part, because of the fact that the assets underlying the paper were purchased contemporaneously with the sale of the paper itself. Due to this lack of transparency, investors assumed the worst and stopped buying and reinvesting in ABCP. As Conduits were thus unable to generate further funds, this subsequently resulted in a lack of available funds to repay maturing ABCP." http://www.chasecambria.com/site/journal/article.php?id=357

You must be referring to new news, however. Can't find anything just yet.

[OddSox]

Good paying union jobs DO NOT JUST BENEFIT the union workers. They benefit everyone. On the whole, Union Workers pay more income tax, which benefits everyone. Those tax dollars help provide social programs, pay to equip a military, etc., etc.

Um, we're talking about government paid union employees here. You're saying that if we pay them $100,000 a year and they pay $40,000 back in their taxes, that's a good thing? Seems to me that the taxpayer ends up $60,000 in the hole.

[fellowtraveller]

The real estate issue is indeed perplexing. I must continue to suggest that it should be tax deductible, freeing up disposable income for families is a key to the crisis that we are indeed walking into.

That aside, a way must be found to reduce government expenditures. That does not mean cutting services and programs, it does mean that we need to start spending less money. We need to rethink our social programs and just about everything else to find ways to improve service deliveries.

Disagree on the exemption for mortgage interest.

It provides a tax break only to property owners and is discriminatory in that sense. It is also factored into calculations for qualification for obtaining mortgages in the US, which helps create the porperty bubbles we are watching bursting.

Edited January 5, 2009 by fellowtraveller