Reuters

Canada’s housing agency said on Friday that it has set aside less money to cover bad mortgages as the economy improves, even though concerns about a housing bubble persist.

Comment: Really? Are will still talking about the non-existent bubble? Seriously?

The Canada Mortgage and Housing Corp. (CMHC) said provisions for claims dropped by $19-million to $895-million during the third quarter and were down $101-million for the first nine months of the year as expectations for bad loans fell.

Comment: I wonder why expectation for bad loans had increased. The mortgage default rate in Canada has been pretty much nailed down at 0.34-0.35% for generations. That number basically doesn’t change. Who expected a multi-decade trend to suddenly change?

“We have seen improvement in the economic indicators that underlie all of that, so for example, unemployment has improved and home price inflation, which obviously influences the severity of claims, has improved as well,” Brian Naish, CMHC’s chief financial officer, said on a conference call.

Setting aside less money for bad mortgages helped CMHC boost profit by 20% in the quarter to $452-million, and total insurance in force dipped slightly to $559.8-billion. By law, CMHC is limited to insuring $600-billion in mortgages.

Comment: For all those who are afraid that CMHC does not have enough money, note that they made a PROFIT of $452,000,000 in just one quarter. Extrapolate that for an entire year and they generate a PROFIT close to $2 billion.

The strong quarterly showing included an arrears rate of just 0.33%, a touch below 0.34% at the end of 2012. But it comes as concerns about Canada’s robust housing market continued.

Comment: Who is concerned, exactly? The mortgage default rate is down, employment is up… where is the bad news here?

Economists consistently say Canada’s housing market is overvalued and though most have ruled out the risk of a U.S.-style correction, some fear the Canadian government will be on the hook for big losses if the market collapses and CMHC is forced to pay out on the mortgages it insures.

Comment: And yet no one can explained how the market is over valued. And anyone who compares our market to the US does not deserve to have an economics degree. Their market collapse was fueled by greedy lenders forcing people into loans they could not afford, so that they could lie and sell them to other investors and make tons of money while people went into foreclosure and pension funds went broke. The only similarity to our market is that there are houses involved. And that is where it ends. Stop comparing Australian uranium mining to the price of pasta in Milan. They have just as much relation…

Mortgage default insurance is required for all homebuyers in Canada whose down payment is less than 20%. CMHC, which controls about two-thirds of the mortgage insurance market, profits from the premiums paid, but it is at risk if defaults rise dramatically because it has to reimburse lenders – typically big banks – when a consumer defaults.

Comment: Sure, it is at risk IF defaults rise. IF. But for the fact that the average home equity in Canada is like 40% or more. So if the average owner defaults, the bank sells the house for market value. The bank gets their 60% and the owner gets their 40% and CMHC never pays out a cent. They only pay out to cover a shortfall in what the bank is owed and what it receives. If you owe $300,000 on a house that sells for $280,000, then CMHC pays the extra $20,000 to the bank. But if that house sells for $400,000, then CMHC never pays out a cent. That is why they make money every year, even with a 0.33% default rate. They probably pay out $0 in an average year.

Earlier this week, the International Monetary Fund said Canada should consider scaling back the CMHC’s mortgage insurance role, turning the business over to private mortgage insurers, because it exposes the government to financial system risks and may distort the market’s use of capital.

Comment: Yeah, because private mortgage lending worked so well in the US. No, keep it regulated please and thank you. Never mind the fact that we have Genworth already providing private mortgage insurance.

Shrinking the CMHC and handing its insurance business to the private sector has long been advocated by fiscal conservatives, but some analysts say the system provided confidence and stability during the 2008-09 financial crisis, when the U.S. mortgage market crashed.

Comment: No kidding! Their loose and criminal banking system almost destroyed the world economy. That is much better than the 3 months of uncertainty we had here. Much better than being held up as a paradigm of banking safety and economic solidity around the world. Why are we talking about changing something is not only not broken, but works very very well?

In its third-quarter results, CMHC said insured volumes of purchased homes climbed 11% in the quarter, while refinancings dropped 81% in response to federal rule changes introduced in July, 2012, that made it harder for homeowners to borrow against their home equity.

Comment: Which is what everyone wants, isn’t it? Stop using the house as an ATM. Pay down the mortgage, build equity, lessen the potential for problems if values every drop (which they won’t). It is harder to get a mortgage now, harder to get a home equity loan, everything is stricter and safer.

The Conservative federal government has tightened mortgage lending rules four times in five years to cool the housing market and prevent homebuyers from taking on too much debt.

CMHC said the average outstanding loan amount was $141,175, a slight increase from the end of 2012. The average equity in the homeowner loan portfolio was steady at 45%.

Comment: Right, there you go. So even if everyone in Canada foreclosed tomorrow, CMHC should not have to pay out a cent.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
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