*VANCOUVER BUBBLE* The road to a 50% housing crash (w/ monthly stats)

[gomyone]

Hi Mark. As per usual I don't check in every day, so nice to see you respond with your arrogant responses again. Amazing that you would post in writing that you think Fitch (they can't even get the basics right according to you!!!) and S&P are wrong, and you only are right. What complete arrogance. If you really believe that, then you should write to Fitch and S&P, and then you can improve your position in life dramatically with a high paying job at Fitch or S&P. I'm sure they would appreciate hearing from you. I personally know some directors at S&P, I 'm sure they would love to hear your views.

If you want to understand, then all you have to do is read, and serious consider what others are saying. Just reading the article I generously linked before would explain why banks are at risk. Do you even care to understand or do you just like to pretend that you are a financial expert.

I don't think I've ever see such delusion, where a poster that posts such amateur analysis actually thinks they are educating people. As I stated in that other thread, in which you were OWNED, because you post so often, there are some posters who actually believe you have knowledge in personal finance. I will state right here, that your posts are extremely dangerous, because you are like a dog with a bone. You never let go. even when it is clear you are wrong, you keep insisting that you are right. You usual tactic when someone mentions an informed article is to say something bad about the company (e.g. Fitch & S&P rated US government AAA before -- that doesn't mean they are wrong on this).

Warning to all readers who want to truly understand the issues. Mark77's posts take up space and are of questionable value. He is good at trying to sound important and knowledgeable, but his level of knowledge in finance is extremely superficial.

Most RFDers already know the questionable value of Marks posts. Most view him as a troll. I, personally feel sorry for him. A single unemployed, 30 something that lives in his parents basement and spends his day sitting on the Internet writing posts on a deals website trying to show everyone how smart he is. If there was any value in anything he says someone would be paying him for his advice. Thankfully no one is!

[S5]

Mark's corner about to throw in the towel, he's still trying but is just relentlessly getting pummeled by multimut.

STOP THE FIGHT!

[Mark77]

Really Mark???

Do I have to ask you about this thread again. http://forums.redflagdeals.com/best-.../#post14862454

That thread shows in full all the tactics you use to deflect the issue when it is shown you are wrong. And yet, you were OWNED.

That thread shows a few individuals sticking to old wives' tales and pre-conceived notions, rather than actually looking at the balance sheets. gomyone is also guilty of this in his claim (disproven in the context of Canadian banks) that they borrow short and lend long. Many of the activities of insurance companies are relatively market-neutral, and insurance companies have a wide variety of ways in which they can invest capital not required for short-term liquidity requirements. Some insurers may choose to take different positions than others. Some insurance companies (ie: Berkshire Hathaway) have become fabulously wealthy because of their flexibility in dealing with their surplus capital.

So to say that anyone proved me wrong, is a complete exxageration. Not one person in that thread even produced a balance sheet from a Canadian insurer.

If you have full-length links to S&P and Fitch's reports, by all means, please post them here. As for posts being 'wrong', certainly I support my posts heavily with evidence and argument, something that you don't do. I blew gomyone's claim that Canadian chartered banks engage in maturity transformation out of the water this way.

[Mark77]

Mark's corner about to throw in the towel, he's still trying but is just relentlessly getting pummeled by multimut.

STOP THE FIGHT!

Hahaha, hardly. Multimut is clearly the desperate one, running his mouth instead of throwing fact-filled punches. The more people whine, the greater the likelyhood that their position is not defensible in debate.

[multimut]

So to say that anyone proved me wrong, is a complete exxageration. Not one person in that thread even produced a balance sheet from a Canadian insurer.

You are Delusional. I specifically gave the names of dozens of major insurers in that thread, and challenged you to find even one Management Discussion & Analysis (MD&A) of any insurer that supported your views. I suggested that you would find that EVERY SINGLE one contradicts your opinion. You do know how to use internet search don't you?

And for your information, the MD&A provides management's discussion of financial results and risks, and is an integral part of the annual report which includes the balance sheet and income statement. Or didn't you know that?

[Conquistador]

Hahaha, hardly. Multimut is clearly the desperate one, running his mouth instead of throwing fact-filled punches. The more people whine, the greater the likelyhood that their position is defensible in debate.

Yeah let's keep this thread one of facts and discussion, not one of distracting ego wars.

Solid advice.

[danibelo]

Canadians have an average 45% equity with only 2% of all CMHC borrowers having less than 5% equity, making the shift to negative equity much more difficult here

I am really tired to read this citation...
Let's imagine that we have 200 people with 30 year mortgages and 0 downpayment, including 100 people that tomorrow pay their last payment and 100 people that yesterday paid their first payment. In average this group of people has 50% of equity. What would be the default rate for this group if today the RE prices drop by 50%? For some reason you believe that an average 45% equity is good and would result in an extremely low default rate. My guess is that 20-30% of this group will default (assuming the 0% downpayment).
The fact that 'only 2% of all CMHC borrowers having less than 5% equity' actually does not disapprove my claim. If we are talking about 50% reduction of RE prices, we need to take CMHC borrowers that have less than 50% of equity rather than 5%. I would guess that roughly half of the borrowers have less than 50% of equity, which makes the expected default rate much higher, probably in the range 5-20%.

[Mark77]

I am really tired to read this citation...
Let's imagine that we have 200 people with 30 year mortgages and 0 downpayment, including 100 people that tomorrow pay their last payment and 100 people that yesterday paid their first payment. In average this group of people has 50% of equity. What would be the default rate for this group if today the RE prices drop by 50%? For some reason you believe that an average 45% equity is good and would result in an extremely low default rate. My guess is that 20-30% of this group will default (assuming the 0% downpayment).

True. CMHC's appraisal system may also be, to say the least, problematic.

I think the problem can be approached from the general concept of, "equity that is not earned will eventually cease to exist". As in any Ponzi scheme, people who get into the Ponzi scheme early enough actually see, at least on paper, some pretty good investment returns. Early entrants to a classical Ponzi scheme often see their money double, triple -- or in some cases, experience infinite returns, as is the case of a few of my friends in Calgary who bought the moment that the CMHC allowed 0% downpayments circa 2004 (of course, they normally couldn't rub two nickels together after all the partying, weed, booze, etc.)

Using the doctrine of 'unearned equity eventually ceases to exist', my booze-swilling, weed-chain-smoking, financially irresponsible friends in Calgary will see their equity go from roughly 50-60% -- back down to 0% in a full correction.

The fact that 'only 2% of all CMHC borrowers having less than 5% equity' actually does not disapprove my claim. If we are talking about 50% reduction of RE prices, we need to take CMHC borrowers that have less than 50% of equity rather than 5%. I would guess that roughly half of the borrowers have less than 50% of equity, which makes the expected default rate much higher, probably in the range 5-20%.

At such low interest rates, even relatively minor swings in interest rates make a huge difference to the cost of financing.

Reductions in equity typically would be associated with interest rate increases, if not from the BoC, then from the market itself as higher spreads are demanded by market participants. So pressure for defaults will come from 3 areas:

a) Employment loss due to economic restructuring (ie: Realtors and retail layoffs.....replaced perhaps a few engineers finding jobs as capital is liberated from the housing industry).

b) Higher interest rate spreads (inflation isn't very likely....) causing existing loans to extract far more from every mortgaged family every month.

c) Declining equity.

[rob444]

I am really tired to read this citation...
Let's imagine that we have 200 people with 30 year mortgages and 0 downpayment, including 100 people that tomorrow pay their last payment and 100 people that yesterday paid their first payment. In average this group of people has 50% of equity. What would be the default rate for this group if today the RE prices drop by 50%? For some reason you believe that an average 45% equity is good and would result in an extremely low default rate. My guess is that 20-30% of this group will default (assuming the 0% downpayment).
The fact that 'only 2% of all CMHC borrowers having less than 5% equity' actually does not disapprove my claim. If we are talking about 50% reduction of RE prices, we need to take CMHC borrowers that have less than 50% of equity rather than 5%. I would guess that roughly half of the borrowers have less than 50% of equity, which makes the expected default rate much higher, probably in the range 5-20%.

Sure you can "imagine" any scenario that you want. But of course the CMHC portfolio is NOT made up of extreme cases of only people with 100% equity and 0% equity. If you actually read the CMHC report (which you should probably do before commenting), you would see the breakdown of both low and high ratio portions of the total portfolio that make up the 45% overall number.

Basically for your typical high ratio borrower (who present the most risk), the average equity is 33%. The majority of these people fall into the 70-90% LTV range... next majority are in the <70% LTV range, and finally the rest in the >90% LTV. In fact the 2% stat of borrowers with less than 5% equity does not even include the low ratio borrowers that will see their mortgages dropping off in the near future. If you included them, the stat would fall to 1%. But of course a big chunk of mortgages are the low ratio ones, which have their majority at greater than 50% equity.

And your 50% prediction for a market drop is a speculative made up number. Even if people did go to even or slightly negative equity, why would that cause a massive default rate?? Do you also expect the Canadian economy to completely fail resulting in widespread job losses meaning people can't afford their mortgage payments anymore?

For low ratio borrower the average equity is 56%, and the majority of these people are in the less than 50% equity range.

[Mark77]

Basically for your typical high ratio borrower (who present the most risk), the average equity is 33%. The majority of these people fall into the 70-90% LTV range... next majority are in the <70% LTV range, and finally the rest in the >90% LTV. In fact the 2% stat of borrowers with less than 5% equity does not even include the low ratio borrowers that will see their mortgages dropping off in the near future.

This makes no sense whatsoever. If 2% of the overall CMHC insured pool is >95% LTV, just how do you arrive at 1% when "the low ratio borrowers that will see their mortgages dropping off in the near future".

Certainly you also understand that CMHC insurance only remains applicable on a mortgage renewal with no cash-out, no refinancing of other debts, and no deviation from the original amortization period (ie: a 30-year amortization becomes a 25-year amortization upon the first 5-year term rollover). With all the transactional activity in the marketplace (ie: moving, upgrading), as well as the prevalance of HELOCs, this number is certain to be quite low.

If CMHC is claiming an average of 55-65% LTV across their portfolio for the insurance/guarantees in force, this means there is likely a huge concentration of 50% LTV loans that have been voluntarily insured. Which is pretty ominous given that insurance is certainly being purchased for a reason....

And your 50% prediction for a market drop is a speculative made up number.

50%, with some markets down 60-70% is based on mean reversion (in prices, in interest rates, in housing debt levels as a function of inflation and economic growth, as a historic relationship between incomes and prices, and based on the long-term relationship between Canadian and US housing prices. It is no more 'made up' than claiming that an entire city block has experienced massive appreciation because a mere 1 house on it sold at a premium.

This is an important point because one cannot "short" the housing market to bring prices back in line if they get out of whack. Price discovery is very innefficient, and innefficiency on the upside has its downside -- on the downside.

Even if people did go to even or slightly negative equity, why would that cause a massive default rate??

For starters, HELOC money basically goes to zero under negative equity. Its like a cancer -- the boat dealer and RV dealer doesn't make any sales, so they lay off a few salesmen. The salesmen start sucking on EI, and they run into trouble paying their own mortgages. And so on and so forth. Negative equity also implies much higher interest rates applicable to such debts because the debt becomes partially unsecured. The US experience is a great case study in what happens when negative equity occurs -- and its not pretty!

Do you also expect the Canadian economy to completely fail resulting in widespread job losses meaning people can't afford their mortgage payments anymore?

Yes. In many cities/areas, you'd be hard pressed to find much else in terms of economic activity other than housing/retail/government. And as I explained, the income earners of the FIRE economy, are quite different than those associated with a different kind of economy that may occur going forward.

[rob444]

Well, I said that CMHC's clients aren't particularly credit-worthy because they don't bring much of a downpayment with them, if at all. And you pounced on me for that, claiming that they have good "credit scores".

What horrible faulty reasoning. So you are basically claiming that anyones who leverages to invest is not credit worthy, end of story. Just because they borrowed to invest.

Many people buy houses with less than 20% down just want to get into the market. Sure they could wait a few more years and save more... but they just dont want to. That doesnt mean anything to someones credit worthiness. I jumped into the market with 10% down a long time ago, simply because i wanted to get into the market asap. And it turned out to be a great investment as my home increased 50% in value by the time i sold.

The 2nd borrower, the one who has cancelled accounts, missed payments, etc., is *less* of a risk to the lender if that individual has a healthy equity position and brought a downpayment. The first borrower's situation goes downhill very fast if they have no equity, an underwater asset, and lose their job because of an economic re-alignment.

LOL i swear now you are just arguing to be difficult.

When it comes to credit, people with a checkered past of missed payments and defaults are obviously more likely to default again should the opportunity arrise. If both borrowers lost their jobs tomorrow, the one with a strong credit history is more likely to try and continue making regular payments. A whole history of the lending industry agrees with me here.

If i was a lender and had to pick one of 2 borrowers... one bringing 20% down with a bad credit score due to prior delinquincies or a recent bankruptcy or something... and the other 10% down but a great credit history... guess what, 10 out of 10 lenders go for the good credit history.

Because you're trying to convince me that the downpayment doesn't matter

No i'm not. Of course it matters.
I'm talking about credit scores though... and you've thrown in downpayments which is a whole other issue.

It speaks not to the capacity to make future payments, especially during periods of distress economically

As i said, this is exactly what credit scores do... try to put an easy numbered risk assessment to making future payments. Again the whole lending industry agrees with me here.

Rob, the problem is, you start off with an argument, e.g. "Canada is different than the US, because in the US people could just walk away from their homes". Then over a series of pages of posts, your argument slowly deteriorates. In this case, it gets pointed out that only 20% of US states are non-recourse states. More importantly, California, New York and Florida are not included in those (huge populations). The reality is, most of the USA is recourse. Then it is also pointed out that some places in Canada are non-recourse also, like Alberta. So I'm not really sure what you think you're correct about anymore, and I don't think you even know anymore either.

That was never a main argument... just 1 of many. And the point is still valid, that in the US there were more non-recourse mortgages than currently in Canada. That's it. Just one of many many factors where Canada is shown to be better than the pre-crash US overall. Of course you can dismiss it... but every little difference matters no matter how small as they all add up in the end.

I post stats all the time on here (like the Richmond stats above). You never address them.

I've never questioned the fact that any market, RE included, goes through ups and downs. But a few months worth of stats is nothing to get excited at. Should your numbers continue as they are over the next year... well then they could be indicitave of a more serious problem and your prediciton may look to come true afterall.

[rob444]

This makes no sense whatsoever. If 2% of the overall CMHC insured pool is >95% LTV, just how do you arrive at 1% when "the low ratio borrowers that will see their mortgages dropping off in the near future".

Please actually read the CMHC report and chart!!

They distinguish between high ratio and low ratio borrowers that are making up their portfolio. For the high ratio borrowers, 2% of them are at less than 5% equity. Of the low ratio borrowers, 0% are at less than 5%. So the overall CMHC average is 1% (this shows there is approx a 50/50 mix or high and low ratio borrowers in the portfolio today)

Yes. In many cities/areas, you'd be hard pressed to find much else in terms of economic activity other than housing/retail/government. .

And as i've stated, i would also predict a pretty big crash should the Canadian economy collapse, since the "demand" side would be severaly reduced with massive job losses. However i guess i dont have the same doomsday scenario for our economy that you do!

[Mark77]

What horrible faulty reasoning. So you are basically claiming that anyones who leverages to invest is not credit worthy, end of story. Just because they borrowed to invest.

No, that's not my claim at all. My claim is that the credit-worthiness of a particular credit is heavily based on the quality and quantity of collateral pledged to the lender.

My stock broker will gladly lend me hundreds of millions of dollars at practically the BoC benchmark rate to buy the highest quality stocks and bonds.

But they won't lend me a dime to buy penny stocks.

Why? Because they've made an assessment of those various investments, and determined that some are riskier than others.

Yet with the CMHC -- they don't charge different premiums to different types of houses, or in different areas. Or to borrowers in different professions. Its a one-size-fits-all approach. Which is fundamentally flawed as people are different, as are houses.

A downtown Toronto condo or house probably deserves more credit. But to apply the same credit standards in, say, Milton, or Chilliwack -- hardly seems appropriate.

[rob444]

Yet with the CMHC -- they don't charge different premiums to different types of houses, or in different areas. Or to borrowers in different professions. Its a one-size-fits-all approach. Which is fundamentally flawed as people are different, as are houses.

A downtown Toronto condo or house probably deserves more credit. But to apply the same credit standards in, say, Milton, or Chilliwack -- hardly seems appropriate.

What you are suggesting is impossible to implement. You can't have the Canadian government speculating on the housing market and employment sectors. Imagine the government telling you your CMHC insurance premium is twice as high as the average becuase they have no faith in the industry you're employed in and expect it to fail!! Not the best message for any government to be sending out. Or imagine them speculating Toronto condo prices were going to go way down based on many analysts reports from 3 years ago... and hiking up the premiums then. Would have been a complete fail. Not to mention the extra efforts and costs it would take to constantly be analyzing all market data as it changes for different home styles, regions etc.

While its not perfect, the one-size-fits-all CMHC insurance approach i dont think is going anywhere.

[Mark77]

What you are suggesting is impossible to implement.

No its not. The private sector does it all the time. If the CMHC didn't exist, the private sector would allocate credit efficicently amongst different borrowers for housing as well.

The fundamental problem with the CMHC is that they don't even attempt to allocate capital on an efficient basis. The entire raison d'etre of the CMHC is to create an unnatural allocation of capital -- by insuring loans that the private sector (ie: banks) wouldn't touch with a ten foot pole otherwise without insurance. This distortion costs Canada majorly in terms of economic performance and productivity.

While its not perfect, the one-size-fits-all CMHC insurance approach i dont think is going anywhere.

I believe the CMHC approach will collapse upon itself, as it is essentially an example of communism and central planning. Which has been discredited many times the world over.