For a long time, the conservative mortgage lending standards in Canada, including a slew of new ones since 2008, have been touted as one of the reasons why Canada’s magnificent housing bubble, when it implodes, will not take down the financial system, unlike the US housing bubble, which terminated in the Financial Crisis.
Canada is different. Regulators are on top of it. There are strict down payment requirements. Mortgages are full-recourse, so strung-out borrowers couldn’t just mail in their keys and walk away, as they did in the US. And yada-yada-yada.
But Wednesday afterhours, Home Capital Group, Canada’s largest non-bank mortgage lender, threw a monkey wrench into this theory.
Through its subsidiary, Home Trust, the company focuses on “alternative” mortgages: high-profit mortgages to risky borrowers with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime borrowers.
So it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September: “falsification of income information.” Liar loans.
Liar loans had been the scourge of the US housing bust. Lenders were either actively involved or blissfully closed their eyes. And everyone made a ton of money.
So Home Capital revealed that it has suspended “during the period of September 2014 to March 2015, its relationship with 18 independent mortgage brokers and 2 brokerages, for a total of approximately 45 individual mortgage brokers,” who’d together originated nearly C$1 billion in single-family residential mortgages in 2014. That’s 5.3% of the company’s total outstanding loan assets, and 12.5% of its total single-family mortgage originations in 2014.
That’s a big chunk. The company, however, didn’t disclose why it took so long to disclose this.
It said an “external source” had warned it about income falsification on mortgage applications submitted by a number of brokers. Its investigation did not find any evidence of falsified credit scores or property values, it said.
It’s not hard for a lender to require income verification. Not requiring it is precisely what US lenders had done before the Financial Crisis. Add a little encouragement from a broker, and that’s how you get perfect liar loans.
Home Capital had already announced on July 10 (Friday afterhours!) that in Q2, originations of high-margin uninsured mortgages had plunged 16% and originations of lower-margin insured single-family mortgages had plummeted 55% because it had axed some brokers. Its shares plunged 20% the following Monday and another 4% the next day [read… Largest “Alternative” Mortgage Lender in Canada Plunges, Denies “Systemic Problem” in Housing Market].
At the time, HCG was the fourth most shorted stock in Canada. By July 29, the day before the current announcement, HCG had risen to the second most shorted stock. Today, massive short-covering set in, and shares soared 13%, but remain 42% below where they’d been during the halcyon days last November.
“Everyone had their ideas about what transpired in the past six months; this corroborates some suspicions but dispels some others,” Shubha Khan, an analyst at National Bank Financial told the Financial Post, adding – with Canadian understatement – that there were “still some questions.”
Among them, whether these insured liar loans would continue to be insured; and whether this was an isolated problem, rather than an industry issue in the Canadian housing market. In other words, is it just the tip of the iceberg?
Housing bubbles are money generators. Temptations are huge. Falsifying mortgage applications is easy if no one checks them. It’s a mad scramble to extract as much money as possible for as long as possible – but with a devastating aftermath.
Now liar loans are coming out of the Canadian woodwork. The much touted down-payment requirements in Canada have already fallen apart. Don’t have the money for even 5% down? Solutions are openly promoted, for example:
It is not a problem anymore!!! Canada Mortgage & Financial Group (CMFG) has a new product that now allows you to borrow your down payment from any source…. The only amount you need to show on your own is 1.5% of the purchase price….
With regulators breathing softly down their necks, banks might have become more careful in lending to people to buy homes that are among the most overpriced in the world. What has that accomplished? The rise of alternative lenders in the shadow banking system. They’re not subject to the same regulations as banks.
“There’s a lot more that can be hidden from the public, things that are not right could not be noticed early on,” Michael Dolega, a senior economist at TD Economics, told the Huffington Post of Canada. “The quality is slipping, and it’s far more questionable for some of these smaller lenders, but at the same time I think it’s still better than it was in the U.S., when it went south pretty quickly.”
Yes, this time it’s different.
But the patterns are crystallizing: Home Capital Group with liar loans on its books, CMFG with ultra-low down-payment loans on its books…. In banking, bad deals are made in good times.
Even the Bank of Canada, in its most recent Financial System Review in June, fretted over the risks in the shadow banking system due to its “less regulated nature” and outright “opacity,” and considered it a “particularly important vulnerability” to financial stability. While the sector is still relatively small, it would impact the overall economy, it said.
But it’s not so small anymore – estimated at 10% of Canada’s mortgage market and growing rapidly: A report by CIBC (Canadian Imperial Bank of Commerce), cited by the Huffington Post, found that lending by alternative lenders had doubled since 2012, and as of the Q3 last year, was still growing 20% year-over-year.
This comes at the worst possible time for Canada. The economy likely shrank in the first half. Hence, the Conference Board of Canada just downgraded growth to 1.6% in 2015, worst since 2009. It sees some deep problems, after a 15.5% plunge in business investment in Q1:
Oil and gas firms are expected to chop their investment by almost one-third…. Outside the energy sector, firms remain hesitant to invest. Purchases of machinery and equipment suffered a substantial decline in the first quarter of the year, and a decline in building permits suggests a downturn in commercial construction in 2015. Overall, business investment will drop by close to 7% this year.
Household spending is also expected to weaken, despite savings for consumers at the gas pump and federal tax cuts. Soft employment growth, weak wage gains, high level of household debt and job losses in oil producing provinces will combine to limit growth in consumer spending to 2.1% in 2015.
That would be the optimistic scenario. It assumes that the magnificent housing bubble can be maintained; but all bets are off if it takes liar loans, among other underwriting schemes, to maintain it. And when the housing bubble deflates, all these schemes that are forgiven as long as prices rise will turn into an unappetizing mess.
The problems are already spreading in the Canadian real estate sector. Read… Epic Glut of Office Space Crushes Hope in Canadian Oil Patch
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These “Liar” loans have been around, Vancouver at least for close to 10 years, interesting how nobody has said anything until caught.
That’s the way it works… Nobody asks any questions until things start falling apart.
You know the end cannot be too far away when creative loans are required to suck people into home loans.
I live in Vancouver and know a group of people who could never be approved for very large mortgages. There is a bank manager of a very large bank that has been taking cash bribes to fudge the income figures of these people and got them all approved. I know another immigrant that went into a major bank after being in Vancouver for 1 month. Along with his wife they wanted to see what they would need to qualify for a mortgage in a year or 2. They had about $25,000, no jobs and hadn’t even looked for jobs yet. Much to their surprise the bank manger started typing on his computer, turned around after a few minutes and said they were all approved for a $350,000 mortgage. Canada proudly has proclaimed that we didn’t do what the US did with the mortgage market. In reality we did everything our American cousins did but only more extreme. For every dollar an American took out in home equity loans Canadians have taken out 2. The mortgage market and real estate game in Vancouver is a cesspool just like the US market before it all imploded. It will not be pretty.
Vancouver BC area or Bellingham WA were the areas I thought about retiring later as I lived in Seattle area for 11 yrs before moving to SF area.
Pity that sheeples believe that it’s different this time and refused to learn from history which tend to repeat.
Liar loans in US at the end included negative amortization, interest only, adjustable loans given to anyone with a pulse and 2nd mortgage on top of that for even downpayment. We know how it ended rather badly in 2007/8 with foreclosure and short sales galore but NOT 1 banker went to jail.
Why would, or should, banker’s go to jail.
When the majority of the loans, and nearly all of the bad ones, were organized by, independent, Shadow banking, loan consultants.
Should people have gone to jail.
You are saying the Ceo’s of GM, should go to jail, as the aftermarket parts, fitted to the cars, by independent dealerships, failed, leading to injury’s..
Bankers should go to jail because they funded those loans and set the terms for lending it. They also made money securitizing and selling those loans to investors. They coerced the rating agencies to lie about the quality of the loans. Then they defrauded the investors who bought them.
“Bankers should go to jail because they funded those loans and set the terms for lending it. ”
Based on the lies, the brokers told them, so not guilty.
“They also made money securitizing and selling those loans to investors. ”
That’s what bankers in the US system do, so not guilty.
“They coerced the rating agencies to lie about the quality of the loans.”
They supplied the agency’s with the data, the brokers provided them.
The agency’s , wrote their reports, in the US, shininess report is the one we buy, system. Again banks not guilty.
There is a problem, we agree.
The problem Is not the soft target bank’s, but the regulators, starting with the democrat POTUS, who allowed the repeal of glass stegal.
And creatures like Bernie Frank, who kept blowing the bubble, Supported by the likes of O bummer. Who then ran with his husband when it popped. Those two have a several commonalitys with Keynes. Mainly no consideration that somebodys grandchildren will have to pick up the tab, as they will never have any.
If the regulators, dint allow Banks, to do these things, they wouldn’t.
They argument that the Banks own the regulators, does not fly as they dont, completely
The American system of personal, and special interest politics, is untenable in the modern world. Start with the roots of the problem. Campaign funding.
Not the results of the problem, the behavior of, Banks
They should go to jail because the reason most mortgage brokers exist is so the banks can have a shield against liability. By farming out due diligence the can plead ignorance. It has been this way for a long time.
Look, the banks are willing to swallow the cost of insuring conventional mortgages so they can securitize them and sell them of. Which in my opinion is a fraudulent conveyance on CHMC.
So they should go to jail as YOU dont like the way the legally make a profit, in a flawed system.
Dont jail the murderer, jail the guy whop sold him the Gun/Knife, as you dont like Knife sellers is what you are advocating.
The problem is not banks or the people who operate them.
The Problem is the People who regulate them, and the root of the problem is the idiots who elected them.
Want to see the problem, go look in the mirror. Then do something about it, other than blaming those who make a profit LEGALLY.
d, that is just it. It is not legal. If they know that these mortgages were originated under false pretences and then turned around and purchase insurance on them or sell them off, it is a fraudulent conveyance. Feigning ignorance is not a legal defence.
there is a thing called due diligence. And bankers are responsible for doing it when they sell on the mortgages. You think that banks who buy these bundles of mortgages, and sell them on, have no clue as to the content? That they just rely on broker’s say? They know brokers are lying, and they don’t care, because they are making money.
Yes, there is a problem, and it was partly created with the repeal of Glass-Stegal. But to say that banks have no responsibility for the mess because of that, is just excusing their behaviour. Who is buying Home Capital bundled mortgages? Whoever is buying them knows of the problems, but are buying them anyways, because they’re making money. Do you recall when you had to have 5% down, and banks turned around and gave 5% cash back mortgages? Banks will find ways around any limitations placed on them to lend more money.
Due diligence is up to the purchaser.
Banks in America, and a few other places, are allowed to sell these convoluted loan instruments, so they do.
The regulations allow them to. It is a bad system.
The problem is the regulators, not the bank’s, or their employees, who are doing what they are paid to do, legally making a profit.
Do you know there are many Countries that do not have this stupid Mortgage/Loan on selling system, As a result they do not have the huge loan issues, America regularly has.
The problem is not Bank’s, or their Employees.
Move along folks. Nothing to see here. No moral hazard anywhere. Just helping folks get into their dream homes. We are actually doing the work of the angels don’t you know.
I’m across the country in the southeast, US. Back in the early 2000s I figured since it was evident people were whacked out in their spending, houses and all, I would stay in my home and move into a retirement house when it all came back to earth. Well, not only did that not work out as planned, I got to pay the bill for making the miscreants whole. Am I bitter? Hell yeah I’m bitter. Old and bitter. But the fight ain’t gone out of me.
At least somebody was the scape goat. However, the cost to taxpayers for trials, makes the system a redundant Hippo. For example, let’s look at the Duffy trial. You know? Those guys and gals? Duffy theoretically owes under $700,000.00 in unclaimed tax. He is back in court this month, supposedly, after the trial took so long to get to the 1/3 point of what is what, they will start up this month again. So far, the Duffy trial has cost the taxpayer of Canada a whopping $23,000,000.00 ! Yes, 23 million! And not even half way through the mess! Rediculous as this seems, the reality is even worse. And, Duffy is only one in a line up of at least 6 others waiting to get to their court dates. How awfull can it get, with taxpayers being ripped off by the real scoundrels, the real criminals which I believe everyone knows who. Is there any justice? Perhaps?
Justice? Not since governments ‘sold us out’ decades ago. Why are we paying taxes for ??? New system, we pay for only what we can visibly see and use! From now on–period!
I don’t have any comment on the lack of jobs, but other than that, many banks have special mortgage plans for immigrants that require around a 5% down payment. I think in general these are not considered that risky, though of course immigrants with no jobs are a different proposition.
Also, a 350,000 mortgage in the Vancouver area will get you a nice starter home in Edmonton.
Canadians like to believe that our ‘regulations’ are more secure and we tell ourselves a nice, neat narrative that we side-stepped the worst of the Financial Crisis because of these; the truth, however, is very different. We have been pushing the envelope and over-stimulating our economy like every other sovereign on the planet. I wrote about our building subprime fiasco sometime ago (https://olduvaiblog.wordpress.com/2014/03/12/guaranteeing-a-housing-market-crash-in-canada/) but in true cognitive-reduction style, we lie to ourselves in order to believe that ‘this time is different’.
Infinite growth on a finite planet…what could possibly go wrong?
Doug Pollit does a good job asking the necessary questions, but the sender of the letter was probably ‘Alfred Little’
So what?, let them go down when the downturn hits. Yes, it will make the effect worse short term, but if the economy is that haywired together it deserves to bust and a spotlight needs to be shined.
In my home owning career I have had 5 mortgages. One at the RBC I ditched when they tried to get me to pay a $55 renewal fee 40 years ago. I told them to “go pound sand” if the profit they made off me wasn’t good enough. I then switched to a Credit Union and cannot be more pleased with my 30 + year relationship. I have paid off all the mortgages some time ago, and ten years ago when I bought some land they gave me temporary financing to swing the deal on the strength of my word and investments. It is the way banking used to be when my Dad was in business. You know who the manager is and they know who you are. They ask about your family and what everyone is doing? They also know they have me as a customer for life and appreciate our relationship. It is all about mutual respect and respect for our investments with them.
Private finance companies are no better than payday loan operations. Screw ’em.
We’ve been run by that full out corporate neocon Muppet Harper for most of this century… tar sands, relaxed environmental standards, war on social services, anti terrorist fear mongering (while Harper hides in the closet)…
And giving bankers and corporations whatever they need to better fleece the Sheeple with!
(btw, they also lied about no bailouts as they ordered our federal insurance agency to suck up most of the bad mortgages from our “Lilly White” major banks… who also got major swaps from the fed, like the rest of the world in 2008/9… hey at least we know what all those central banking mobsters do in their secret Basel meetings)
Vote these clowns out this fall Canada!
Smug comments are really justified, right now. Soon the many other shoes are going to drop, as our lying mass media, has to reluctantly admit that as bad as shadow banking will prove to be, it will be nothing to how bad it will be when our shadow government is finally revealed to be totally ‘in on’ the entire scam of ripping-off and then exploiting taxpayers via the ISDS investor-state dispute settlement clauses, part of every secretly negotiated trade agreement ever scammed to control taxpayers/banking customers monies. We will finally find ourselves to be no more than ATM’s for the 1% ers in each and every country. Most haven’t paid their true taxes owed in decades….Just think under NAFTA (and its ISDS), we taxpayers are on the hook for 2 billion in o/s lawsuits. Soon to be added will be all the other ISDS, to be triggered in CETA, TPP, TIPP, TTIP, FIPA and the ‘no more public (anything) services, programs —privatizing TISA…. All brought to you by your friendly corporate/banking/shareholder 1% ers. Oh, the banking sector told Harper to insert another bailout clause (page 145) in his 2013 omnibus Budget (google, 2009 Harper’s first bailout for 114 billion, interest-free Canadian taxpayer funds….). When has any bank offered interest-free anything?? Now, if you were Harper wouldn’t you lie too, all the way to any means possible–dirty tricks, etc, etc?