Personal Finance

Another real estate bubble?

  • Last Updated:
  • Dec 17th, 2013 5:22 pm
Tags:
None

Poll: Are we in a 2nd real estate bubble?

  • Total votes: 0. You have voted on this poll.
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
pitz wrote:
Aug 26th, 2009 3:11 pm
A high ratio loan is not a 'prime' loan. You can hide behind semantics all you want, but people who use CMHC insurance are subprime borrowers. The loans themselves cannot be bought by banks without being insured.
You are redefining the definitions. Prime loans != conventional loans.
Show me a definition of prime lending practices in Canada that states you must have a conventional mortgage? (i.e 20% down).
The loans can not be bought by banks without being insured because of law. I know many people who take out CMHC insured mortgages, but don't have to. They are not subprime borrowers. They just opt to have a high ratio mortgage.
pitz wrote:
Aug 26th, 2009 3:11 pm
Doesn't that describe the CMHC-using crowd too? A crowd that isn't able to save money (because they obviously don't have the downpayment), and is viewed by the lender as being too much of a credit risk to extend credit without insurance?
It's not a direct relationship. There are many wealthy individuals that take out CMHC insured mortgages. Is it a little more risky? Sure it is. That is why you are required to purchase insurance. Is this person as risky as say a subprime borrower south of the boarder? Not at all, they have large sums of assets and a good income stream.
Subprime borrowers by DEFINITION have poor credit and have no where else to go. CMHC insured borrowers come from a wide range of backgrounds. That and most if not all CMHC products require you to have a 680 score or higher.
pitz wrote:
Aug 26th, 2009 3:11 pm
One thing to keep in mind is that there is no CMHC in the United States; high-ratio loans require PMI, which is basically the private-sector's version of CMHC mortgage insurance. Fannie Mae/Freddie Mac only deal in prime, 'conforming' mortgages, and facilitate securitization of those mortgages with the assistance of their implicit government guarantee and backing.
By and large they only backed prime loans (some of their portfolio was subprime). They are not innocent though. Their purchasing of billions of subprime backed securities.
pitz wrote:
Aug 26th, 2009 3:11 pm
One can either buy mortgage insurance, and pay an explicit premium, or take out a subprime loan, and pay an implicit premium (ie: a higher interest rate). Both the user of mortgage insurance (PMI, CMHC, etc.), and the implicit borrower are 'subprime', and both have similar effective interest rates.



There's no difference between a front-loaded mortgage insurance premium (ala CMHC, PMI, etc.), and a amortized premium.



I have not redefined anything. I'm just showing you that CMHC insured borrowers are the same thing as subprime borrowers, for all practical purposes.



Ummm. But the CMHC premium itself is a front-loaded fee, which, if you amortize it over the loan, would give you exactly the same interest rate as you would be paying if you went to a 'subprime' borrower. Why? Because the risk profile is identical.

Don't delude yourself into thinking otherwise.

If you'd like some mathematical examples, I'd be more than willing to post them. A CMHC-insured borrower is paying, in most cases, effective interest rates in excess of 10%/annum, once the mortgage insurance premium is properly amortized over its effective life.
I agree that risk is risk. That is why you pay a premium.
Subprime borrowers pay it because their credit rating is poor. They are less likely to pay it back.
High ratio borrowers can have a very good credit rating. They pay because there is less equity in the house. The premium is guarding against the risk the loan goes upside down.
pitz wrote:
Aug 26th, 2009 3:11 pm
Happens all the time. Why do you think outfits like TD have those "5% cash back" mortgages? Someone gets qualified for one of those, and then immediately uses the 5% cash back, to cover the downpayment, thus circumventing the CMHC 5% downpayment requirement. I only bank with TD, but I imagine all Canadian banks have some form of this.



"No money came out of your pocket" = no equity. And the interest rate, is obviously jacked higher, so the bank still gets its money. It really doesn't matter if you have 5% equity in anything, if the debt service costs are commensurately higher.
Just because TD offers a 5% cash back product doesn't mean CMHC will insure it @ 95% LTV. Lending standards have tightened up considerably. I can safely assume you have never gone through the process of getting a CMHC mortgage before. Everything you say is based on assumption not fact.

It doesn't matter if "no money" came out of your pocket.

Example
100,000 mortgage @ 5% cash back = 5k cashback
You take out a 95% LTV mortgage for 95,000, the cash back is used as down payment.
If the bank forecloses on you there is still 5K of equity in the property. Originally it wasn't your money but in the banks point of view 5K is still there.
100% LTV is when the bank forecloses on you and there is absolutely no equity.
Deal Expert
User avatar
Feb 9, 2003
17889 posts
2485 upvotes
Langley
It depends on the definition of "subprime," according to wiki, "Although there is no single, standard definition, in the United States subprime loans are usually classified as those where the borrower has a FICO score below 640." Can someone with a score under 640 still get a mortgage in Canada from a major bank?


Yeah, CMHC fees are an insurance premium for the first 5 years, but they're amoratized over the entire loan. If you calculated the extra cost over just 5 years, you'd be paying a couple of points extra. If it isn't, it just means that there's essentially a government subsidy on the insurance.

Besides, 5% down doesn't mean 5% equity if you amortize your closing costs and CMCH fees. 5% down and a 35 year term have a premium of 3.3%, so realistically, you probably only have about 1% equity after the other closing costs. With prices falling at 6%/year, (as they were in June, according to the latest number from "Teranet-National Bank National Composite House Price Index" which tracks same-house sales) that means that your 1% equity is gone in 2 months.

It's also worth noting that in the US, 61% of subprime borrowers had credit scores good enough to qualify for conventional loans. (source: http://www.info-mortgage-loans.com/usen ... tate.shtml)

I know that in Canada, scores in the 600s will still get you a CMHC mortgage, some people here have posted to that effect, and there's probably many more people who wouldn't want to reveal their score.

The difference between the US and Canada rests in the fact that CMHC insurance is forced on all high ratio borrowers, even people with scores over 700. So having a CMHC mortgage doesn't have the same sort of stigma as a subprime mortgage, even though they're essentially the same thing.
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
bcbgboy13 wrote:
Aug 26th, 2009 3:06 pm
Sure about that?
This past weekend a friend went to two places in Toronto that advertised 5% down with 0% interest for 3 years.

The first one I cannot provide any details - as he was driving around he could hear the noise of three landing airplanes and decided to skip on the spot without going to the sale office.

The second one (5 minutes to 401; walk to the beach) had 39 town homes and detached homes for sale priced between 435k and 485k (towns the same price as the detached ones):
Details of the offer:
1. Buy with 5% down;
2. No need to qualify - did not ask what is the meaning on this one
3. 3 years @ 0% interest
There were also $5k thrown into upgrading...
The devil is always in the details. It's easy to quote marketing fluff. It's like the cashback mortgages! You get x%age back but the lender more then makes up for it via a higher rate. There is no free lunch.
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
i6s1 wrote:
Aug 26th, 2009 4:06 pm
It depends on the definition of "subprime," according to wiki, "Although there is no single, standard definition, in the United States subprime loans are usually classified as those where the borrower has a FICO score below 640." Can someone with a score under 640 still get a mortgage in Canada from a major bank?


Yeah, CMHC fees are an insurance premium for the first 5 years, but they're amoratized over the entire loan. If you calculated the extra cost over just 5 years, you'd be paying a couple of points extra. If it isn't, it just means that there's essentially a government subsidy on the insurance.

Besides, 5% down doesn't mean 5% equity if you amortize your closing costs and CMCH fees. 5% down and a 35 year term have a premium of 3.3%, so realistically, you probably only have about 1% equity after the other closing costs. With prices falling at 6%/year, (as they were in June, according to the latest number from "Teranet-National Bank National Composite House Price Index" which tracks same-house sales) that means that your 1% equity is gone in 2 months.

It's also worth noting that in the US, 61% of subprime borrowers had credit scores good enough to qualify for conventional loans. (source: http://www.info-mortgage-loans.com/usen ... tate.shtml)

I know that in Canada, scores in the 600s will still get you a CMHC mortgage, some people here have posted to that effect, and there's probably many more people who wouldn't want to reveal their score.

The difference between the US and Canada rests in the fact that CMHC insurance is forced on all high ratio borrowers, even people with scores over 700. So having a CMHC mortgage doesn't have the same sort of stigma as a subprime mortgage, even though they're essentially the same thing.
The difference in my eyes is the risk profile.
CMHC is insuring the bank against the fact that the borrower has high LTV.
Subprime lenders add a premium to the rate they charge because the borrower has a poor track record of payment.

There is overlap but to generalize them under the umbrella "they might not pay you back" is a gross oversimplification.
Deal Expert
User avatar
Feb 9, 2003
17889 posts
2485 upvotes
Langley
GonePostal wrote:
Aug 26th, 2009 4:18 pm
The difference in my eyes is the risk profile.
CMHC is insuring the bank against the fact that the borrower has high LTV.
Subprime lenders add a premium to the rate they charge because the borrower has a poor track record of payment.

There is overlap but to generalize them under the umbrella "they might not pay you back" is a gross oversimplification.
As I pointed out, most of the so-called subprime borrowers in the US had scores that would qualify them for conventional loans. So while many people with CMHC insurance have good scores, so do many of the subprime borrowers.

I checked a bit more on wiki, and here's another definition of prime:
a credit score above 620 (credit scores are between 350 and 850 with a median in the U.S. of 678 and a mean of 723),
a debt-to-income ratio no greater than 45% (meaning that no more than 45% of gross income pays for housing and other debt), and
a combined loan-to-value ratio of 90% (meaning that the borrower is paying a 10% down payment).
So under that definition, anyone with 5% down is subprime.

Canada has a hidden subprime mess. It wouldn't surprise me at all to learn that Canadian banks were approving people with scores under 620 (or whatever the Transunion/Equifax equivalents are.) The banks have no risk, so I don't really see why they would care much about someone's score.
Banned
Jun 19, 2006
9349 posts
53 upvotes
GonePostal wrote:
Aug 26th, 2009 4:03 pm
It doesn't matter if "no money" came out of your pocket.
Actually, it does. That's the definition of equity. Equity can't just be printed out of thin air. And you're right, I'm not a welfare subprime borrower, so I've never had the misfortune of dealing with the CMHC.
Example
100,000 mortgage @ 5% cash back = 5k cashback
You take out a 95% LTV mortgage for 95,000, the cash back is used as down payment.
If the bank forecloses on you there is still 5K of equity in the property. Originally it wasn't your money but in the banks point of view 5K is still there.
No, because the mark-to-market value of the debt itself isn't $95k, its $100k, and the bank, when they foreclose, will be seeking the present-value of the debt back (ie: through an interest-rate differential calculation).

Say that no-money-down person wins the lottery the day after they sign all the paperwork. It would cost them $100k (probably even more) to discharge that debt.

In theory, a borrower against any sort of asset could go to the bank, and ask for their loan to be 'converted' to one with a high rate of interest, with a reduction in principal. And yes, that would, under your logic, give a person some 'equity'. But, really, that's just phoney. Just as phoney as these 5% downpayment scams being pulled by the bank.
100% LTV is when the bank forecloses on you and there is absolutely no equity.
There is no equity if there is no cash out of pocket.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
pitz wrote:
Aug 26th, 2009 5:20 pm
Actually, it does. That's the definition of equity. Equity can't just be printed out of thin air. And you're right, I'm not a welfare subprime borrower, so I've never had the misfortune of dealing with the CMHC.



No, because the mark-to-market value of the debt itself isn't $95k, its $100k, and the bank, when they foreclose, will be seeking the present-value of the debt back (ie: through an interest-rate differential calculation).

Say that no-money-down person wins the lottery the day after they sign all the paperwork. It would cost them $100k (probably even more) to discharge that debt.

In theory, a borrower against any sort of asset could go to the bank, and ask for their loan to be 'converted' to one with a high rate of interest, with a reduction in principal. And yes, that would, under your logic, give a person some 'equity'. But, really, that's just phoney. Just as phoney as these 5% downpayment scams being pulled by the bank.



There is no equity if there is no cash out of pocket.
_Read_
Someone else paid for your equity. It's not invented out of thin air.

Home is "worth" (not debatable because this is outside the scope of the debate if the asset it worth the price you paid for it) 100k and the debt that is secured against it is 95k.
100-95 = 5k = 5% equity. (This is simplified because it doesn't take into account with CMHC premium)

You are making alot of assumptions based on little fact.
Deal Expert
User avatar
Feb 9, 2003
17889 posts
2485 upvotes
Langley
The equity is the amount of the value of an asset that isn't borrowed. When there's an interest rate difference (say 5% compared to 4%) because of the $5k gift, that's just hiding the $5k repayment. The 1% interest difference is really just $5k borrowed and amoratized. Each time you pay that 1% difference, you repay the principal and interest.

The bank isn't giving you a gift out of the profits of the deal. It's just an accounting slight-of-hand.
Banned
Jun 19, 2006
9349 posts
53 upvotes
GonePostal wrote:
Aug 26th, 2009 5:37 pm
_Read_
Someone else paid for your equity. It's not invented out of thin air.
Its not equity. A loan that's at 6%, in a 5% interest rate environment, has a present-value that's higher than par. Hence, no equity. In fact, its negative equity because the bank is most certain to skim off a fee for making such an arrangement available to you.
Home is "worth" (not debatable because this is outside the scope of the debate if the asset it worth the price you paid for it) 100k and the debt that is secured against it is 95k.
100-95 = 5k = 5% equity. (This is simplified because it doesn't take into account with CMHC premium)

You are making alot of assumptions based on little fact.
I most certainly am not. The present-value of an higher-interest rate obligation (as implied by the higher than market rate charged on one of those 'cash-back' loans), means that equity does not exist. I know you might not understand this distinction, or the concept of present-value, but what you're suggesting is akin to alchemy.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
i6s1 wrote:
Aug 26th, 2009 4:50 pm
As I pointed out, most of the so-called subprime borrowers in the US had scores that would qualify them for conventional loans. So while many people with CMHC insurance have good scores, so do many of the subprime borrowers.
That's a logical fallacy.

Just because subprime mortgages have some of borrowers with good score and CMHC insured mortgages have some of borrowers with good scores, doesn't make them the same.

A large contingent of borrowers who can qualify for a "subprime" mortgage can't qualify for a CMHC mortgage.
i6s1 wrote:
Aug 26th, 2009 4:50 pm
I checked a bit more on wiki, and here's another definition of prime:



So under that definition, anyone with 5% down is subprime.

Canada has a hidden subprime mess. It wouldn't surprise me at all to learn that Canadian banks were approving people with scores under 620 (or whatever the Transunion/Equifax equivalents are.) The banks have no risk, so I don't really see why they would care much about someone's score.
Banks bear the risk on conventional mortgages.
For CMHC mortgages, there are stringent guidelines put out by CMHC as to who qualifies.
No Canadian bank would risk committing fraud. It just doesn't make sense financially. The penalty for getting caught defrauding CMHC far out weighs the benefit.
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
pitz wrote:
Aug 26th, 2009 5:43 pm
Its not equity. A loan that's at 6%, in a 5% interest rate environment, has a present-value that's higher than par. Hence, no equity.



I most certainly am not. The present-value of an higher-interest rate obligation (as implied by the higher than market rate charged on one of those 'cash-back' loans), means that equity does not exist. I know you might not understand this distinction, or the concept of present-value, but what you're suggesting is akin to alchemy.
Day 1 you sign for a
95k mortgage (5k down payment)
5k cash back
Day 2
Foreclosure
100k property - 95k mortgage

It doesn't matter that the present value of a higher interest rate obligation. That's a moot point.

What I am suggesting is akin to alchemy. That is why your scenario of a 100% LTV in this market is just that! A pipe dream. Even in the best case scenario you aren't 100% LTV. You are 95%LTV where someone else out of the kindness of their heart put up 5% for you.
Banned
Jun 19, 2006
9349 posts
53 upvotes
GonePostal wrote:
Aug 26th, 2009 5:46 pm
Day 1 you sign for a
95k mortgage (5k down payment)
5k cash back
Day 2
Foreclosure
100k property - 95k mortgage
Its not a $95k mortgage because it would cost at least $100k to redeem that mortgage. That's the problem.
It doesn't matter that the present value of a higher interest rate obligation. That's a moot point.
Its not moot at all. That $95k mortgage is not redeemable for $95k. At minimum, it is going to cost $100k in present dollars to redeem, and probably more, because the bank tacks on a cost of redemption.
What I am suggesting is akin to alchemy. That is why your scenario of a 100% LTV in this market is just that! A pipe dream. Even in the best case scenario you aren't 100% LTV. You are 95%LTV where someone else out of the kindness of their heart put up 5% for you.
Lol. You still don't get it. Does playing with interest rates and accounting entries really change the fact that the person is *putting nothing down*?? Of course not. Its just a ruse that the industry is using in a last-ditch attempt to keep reported pricing high, and to keep woefullly and tragically undercapitalized sub-prime buyers buying. And from what I've seen out there, its the only thing holding the market together at this point.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)
Deal Fanatic
Aug 27, 2004
6628 posts
207 upvotes
Toronto, ON
pitz wrote:
Aug 26th, 2009 3:11 pm
A high ratio loan is not a 'prime' loan. You can hide behind semantics all you want, but people who use CMHC insurance are subprime borrowers. The loans themselves cannot be bought by banks without being insured.
pitz wrote:
Aug 26th, 2009 3:11 pm
Doesn't that describe the CMHC-using crowd too? A crowd that isn't able to save money (because they obviously don't have the downpayment), and is viewed by the lender as being too much of a credit risk to extend credit without insurance?
Correction: is viewed by PARLIAMENT as too much of a credit risk. The 20% equity requirement is in the Bank Act, AFAIK... or in the regulations.

I have difficulty being as critical of high-ratio loans as you are. Used wisely (i.e. purchasing a modest property - which, in this era of inflated real estate, is ever harder to do), they let people buy a house much sooner than if they had to pay rent _and_ try and save up the extra 10-15% of the house price, which might take them years and years.

Used FOOLISHLY, i.e. to speculate, or to buy properties way out of line with people's income, then they can be extremely dangerous.

But take somebody like my parents. They bought a cheap new house (mortgage amount slightly higher than twice their income at the time) at 5% down a long time ago, paid it off in 10 years (could have paid it off sooner, except they didn't realize just how much interest it was costing them), and then all of a sudden they owned a house outright (which had also doubled in value, but that's another story). I don't think that there was anything particularly irresponsible about that...
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
i6s1 wrote:
Aug 26th, 2009 5:37 pm
The equity is the amount of the value of an asset that isn't borrowed. When there's an interest rate difference (say 5% compared to 4%) because of the $5k gift, that's just hiding the $5k repayment. The 1% interest difference is really just $5k borrowed and amoratized. Each time you pay that 1% difference, you repay the principal and interest.

The bank isn't giving you a gift out of the profits of the deal. It's just an accounting slight-of-hand.
I understand that in a cash back mortgage you more then amortize the amount you get back over the term of the loan. I said the same thing a few posts up. There is no argument there.

The rub lies in the claim to a 100% LTV via CMHC insured mortgage.
CMHC's Flex down plan allows for flexible down payment sources, including cashback from the lender.
So the best scenario is using a 5% cash back mortgage with a 95% LTV CMHC insured mortgage. Pitz argues that the loan is 100% LTV, which it isn't.
Banned
Jun 19, 2006
9349 posts
53 upvotes
GonePostal wrote:
Aug 26th, 2009 5:44 pm
No Canadian bank would risk committing fraud. It just doesn't make sense financially. The penalty for getting caught defrauding CMHC far out weighs the benefit.
CMHC, not the bank, actually does the approval. The bank just puts together the documents, and ships them off to CMHC for investigation and a decision.

If I were a bank, I would be putting aside money right now to deal with potential claims from CMHC that the entire cash-back scheme itself is just a fancy way of committing fraud on CMHC. Although, I suspect, in the interests of maintaining the Canadian housing market and economy, the Government, in some form or another, has granted official sanction to the practice.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)

Top