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August 24, 2017 | The Big Hairy Deal

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Dripping in profits and satisfaction, RBC’s brass faced the financial media this week. Our largest bank has a monster mortgage portfolio of $245 billion (a billion is a thousand million). Just over half of that is made up of mortgages which are no insured. The rest is covered in whole or part by insurance provided by CMHC which is you, the taxpayer.

Nobody in Canada, save your local, starving Re/Max guy weeping for his Audi lease, cares more about real estate than the bankers. Back in the winter, RBC’s CEO, David McKay, was loud and clear about the housing market in southern Ontario and the GTA. “It’s not sustainable,” he said, and called on governments to bring the hammer down.

They did, barely 50 days later. Foreign buyer’s tax. Universal rent controls. CRA crackdown on speckers. Ban on AirBnB. Empty house tax approval. And now higher interest and mortgage rates.

Dave’s happy.

“We welcome the changes that have happened so far,” he just said, “and the slowing.”

As you know, Toronto sales have crashed and prices have dropped 20% in three months. Historic. In Vancouver detached sales are falling fast, average prices are in decline and move-up buyers have vanished. In Calgary deals are being outpaced by new listings. Across Canada 70% of markets have fading sales and flat or falling values. The Bank of Canada has raised rates only once, by a tiny quarter point, yet a third of homeowners polled say it hurts. There are four to six more increases to come.

Plus yesterday’s bête noir, B-20.

As described here in hoary detail, the new mortgage regs to be brought in by the regulator overseeing RBC and the other Big Five will require all borrowers – new or renewing – to pass a stress test equal to the current rate + 2%. If you fail (because income sucks, your spouse caught you with the pool boy, you were punted at work or your house value has fallen) the amount you can borrow will be reduced until a rigid LTV (loan-to-value) ratio is met.

It’s estimated (by mortgage dudes) this will reduce the size of mortgages by 18% on average, leading to a commensurate further reduction in house prices. As values fall, mortgage renewers are also caught if their financial situation has worsened or the house is worth less. In order to conform to new rules, they might have to find more money to buy their principal down, rush into the arms of an alt-lender (at a higher rate), or sell.

Lots of deporables in the comments section said, nah, ain’t gonna happen. The lenders will never go for it, since this kind of stress test would do to the market what Kim Kardashian has done to taste.

So what does our largest mortgage lender say?

“McKay also voiced his support for draft changes to the federal policy on mortgage underwriting – known as the B-20 guideline – proposed by Canada’s banking regulator. New rules would introduce tougher stress testing for uninsured mortgages, making it harder for some borrowers to qualify. But Mr. McKay called the proposed measures ‘prudent.’”

In other words we should know this: (a) the OFSI stress test will happen, and be fully in place by the end of the year, and (b) the banks love it. They want it. Uninsured mortgages are romping ahead 14% a year while insured mortgage volumes have fallen 41%. Everybody – the regulator, the banks, the realtors – know that each month thousands of people lie when they apply for “conventional” mortgages with 20% down and no need for CMHC coverage. The borrowers say the down payment is their own money when, in fact, it came from Mom or a subprime lender operating out of a Hyundai. Like this:


That picture was snapped by a blog dog this week in Vaughan – where prices are falling fast after an unprecedented explosion higher six months ago. Some people think the GTA burbs full of $1.6 million McMansions will be the epicentre of our housing demise. They may be correct.

What OSFI says is the law. The banks must obey. They actually want to. They will not deviate, weave, bend, wink or wiggle things for homeowners who have stellar payment records but no longer meet the LTV rules or can’t pass the income stress test. Having a mortgage now doesn’t mean you’ll automatically renew for the same amount. If there’s a 40% real estate correction, for example, anyone with less than 60% equity in their home could be in for grief. And the banks – in an abundance of caution and prudence for their shareholders – will throw OSFI in their face.

Now, not everyone’s happy. Home Capital is moaning.

Our largest non-bank mortgage lender, which almost went paws up after being hit with fraud charges and securities violations, says B-20 will “materially impact” its operations. That’s because the company admits having loaned billions in first mortgages to customers with spotty credit who borrowed down payments from unregulated lenders (like those awful mortgage investments corporations – MICs) to get around CMHC insurance requirements. If house prices tank, it stands to reason those borrowers have a zero chance of seeing their loans renewed.

Well, there you have it. The new rules mean people can borrow less, spend less, so prices will fall. They mean renewers must meet guidelines or find money in the couch cushions. And everyone seeking a bank mortgage must qualify as if rates – which are rising – were two per cent more. In other words, in the space of six months we will have gone from 2% mortgages to 5% ones.

Surprise, surprise.

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August 24th, 2017

Posted In: The Greater Fool

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