Is Canada Headed for a US-Style Subprime Mortgage Crisis.

Is CANADA HEADED FOR A US-STYLE SUBPRIME MORTGAGE CRISIS ? JAN 30, 2012 JAN 31, 2012 FEB 2, 2012 FEB 4, 2012 Bloomberg THE HUFFINGTON POST The Economist TORONTO STAR CANADA HOUSING MORTGAGE AFTER YEARS OF LECTURING AMERICA ABOUT LOOSE LENDING, CANADA NOW MUST CONFRONT A BUBBLE OF ITS OWN CANADA FACING SUBPRIME MARKET BEGINNING PULLBACK HINTS OF MORTGAGE RISK TO RESEMBLE U.S.'S HOUSING CRISIS SUBPRIME MESS WE HAVE THE RIGHT MIX OF INGREDIENTS ULTRA-LOW 1. HIGH HOUSING PRICES 2. INTEREST RATES AVERAGE RESIDENTIAL MORTGAGE RATES HOME PRICES 20% $400,000 U.S. 30-YEAR FIXED 16% CANADA 5-YEAR FIXED $300,000 12% $200,000 8% U.S. $100,000 CANADA 4% $0 0% SOURCE: CREA, NAR SOURCE: BANK OF CANADA, FREDDIE MAC "CANADIAN HOUSE PRICES ARE 25% OVERVALUED" "ROCK-BOTTOM MORTGAGE RATES HAVE BEEN THE - THE ECONOMIST FUEL BEHIND CANADA'S HOUSE-PRICE BOOM" - GLOBE AND MAIL RISING LEVELS OF 3. HOUSEHOLD DEBT 4. LOW INCOME GROWTH MEDIAN HOUSEHOLD DEBT-TO - INCOME RATIO AFTER-TAX INCOME 153% 148% 160% 142% $60,000 135% 127% 117% 121% 120% $40,000 80% $20,000 40% $0 0% 2005 2006 2007 2008 2009 2010 2011 SOURCE: GLOBE AND MAIL, MACLEANS MAGAZINE, STATISTICS CANADA SOURCE: STATISTICS CANADA "MEDIAN HOUSEHOLD INCOME HAS GROWN A CANADIANS' HOUSEHOLD DEBT REACHED A MERE 10% OVER THE LAST DECADE WHILE RECORD 153% OF DISPOSABLE INCOME HOUSING PRICES HAVE MORE THAN DOUBLED" - MOSHE MILEVSKY, MONEYVILLE - STATISTICS CANADA, Q3 2011 "IT (JUST) SPEAKS TO THE GENERAL EASING IN LENDING A PRICE CRASH WOULD REQUIRE "A TRIGGER," SUCH AS A SUDDEN SPIKE IN INTEREST RATES OR A SUBPRIME-LIKE SERIOUS EROSION IN MORTGAGE QUALITY, AND THE SEGMENT OF CANADA'S MORTGAGE MARKET THAT IS STANDARDS, WHICH HAS CONTRIBUTED TO A BOOMING CONSIDERED HIGH-RISK "IS STILL EXTREMELY SMALL" BENJAMIN TAL, CIBC WORLD MARKETS HOUSING MARKET" - DAVID MADANI OF CAPITAL ECONOMICS, WHO HAS PREDICTED HOUSING PRICES WOULD FALL IN 2010 AND 2011 BUT IS THIS OPTION 2: "IN OUR VIEW, THE [CANADIAN] NATIONAL HOUSING MARKET IS MORE LIKE A BALLOON THAN A BUBBLE. WHILE BUBBLES ALWAYS BURST, A BALLOON OFTEN DEFLATES SLOWLY IN BY 25% OPTION 1: HOUSING THE ABSENCE OF A 'PIN'" BALLOON - SHERRY CO0PER, BMO DEFLATES A BUBBLE OR HOUSING CHIEF ECONOMIST BUBBLE A BALLOON? BURSTS THE CANADIAN HOUSING MARKET IS CRASH & BURN AFFLICTED BY "OVERVALUATION, SOFT LANDING SPECULATION AND OVER SUPPLY" AND IS SHOWING ALL THE "CLASSIC HOUSING BUBBLE HOUSING BALLOON SIGNS" OF A BUBBLE - MERRILL LYNCH A COMBINATION OF LOW FACTORS SHIELD MARKET INTEREST RATES AND A FROM A BUBBLE BURST, SUCH LOOSENING OF CREDIT AS LONG-TERM LOW INTEREST STANDARDS FUELS RATES OR QUALITY HYPER-DEMAND UNDERWRITING THE DIFFERENCES THAT SHIELD CANADA FROM A HOUSING BUBBLE 2007 CRASH NOW *PERIENCED ВY THE SHIELD STRICTER FACT : THOSE WITHOUT 3RD UNDERWRITING #1 PARTY VERIFIED STANDARDS INCOME ARE NOT ELIGIBLE FOR 5% DOWN MORTGAGES FACT : 45% OF SUB PRIME > 45% STATED INCOME MORTGAGES < 5% AND ARE SUBJECT TO 50% HIGHER INSURANCE MORTGAGES MINIMUM DOWN PAYMENT WERE STATED NONE 5% PREMIUMS FACT : GOVERNMENT INCOME MAXIMUM AFFORDABILITY MANDATES NONE 32% (HOUSING EXPENSES/ HOUSEHOLD INCOME) CANNOT, EXCEED 32% SHIELD LEGISLATION #2 DIFFERENCES TAX DEDUCTIBLE YES NO INTEREST FACT : 23% 0F U.S. HOMES LENDERS CAN PURSUE WERE WORTH FORECLOSE RE-POSSESSION DEFAULTING LESS THAN THE AND WALK PROTOCOL MORTGAGE LOAN BORROWERS FOR FULL AWAY BY SEPTEMBER REIMBURSEMENT 2010 SHIELD LESS RISKY #3 PRODUCT TYPES FACT : IN 2006, INTEREST ONLY LOANS > 20% OF THE < 5% OF THE REPRESENTED ONLY SUB-PRIME 1% OF TOTAL MARKET MARKET ORIGINATIONS FACT : 47% OF ALL MORTGAGES IN CANADA. YES INTEREST ONLY NO FACT : IN CONTRAST, 20% OF MORTGAGE INITIATED IN SAN DIEGO COUNTY IN 2004 WERE INTEREST-ONLY YES "TEASER" RATES NO ORIGINATIONS IN LOANS THE U.S. WERE INTEREST ONLY SHIELD MORTGA GE-BACKED SECURITIES # 4 > 60% SECURITIZATION < 30% FACT : 70% OF MORTGAGES STAY CANADIAN INVESTMENT HOUSING ON THE BALANCE BANKS WHO ISSUED TRUST SHEETS OF THE LENDERS WHO (CMHC) ORIGINATE THEM FACT : BACKED BY A GOVERNMENT SUB-PRIME MORTGAGES UNDERLYING HIGHER GROUPED TOGETHER WITH BODY ASSET QUALITY MORTGAGES SAFER DEBT AND SOLD AS BLENDED SECURITIES CANADA'S PROTECTIVE SHIELDS MEAN THE MARKET BUT WILL COOL NOT CRASH HOUSING MARKET DEFLATION "WE HAVE THE LUXURY OF TIME - BECAUSE INTEREST RATES AREN'T GOING ANYWHERE" - BENJAMIN TAL, CIBC WORLD MARKETS "WHILE POLICYMAKERS AND PUNDITS HAVE BEEN WRINGING THEIR HANDS IN ANGUISH OVER THE POSSIBILITY OF A CANADIAN HOUSING BUBBLE, THE FACTS ON THE GROUND SEND A MUCH CALMER MESSAGE. THE HOUSING MARKET CURRENTLY LOOKS WELL BALANCED, AND IS BROADLY MODERATING ON ITS OWN ACCORD." - DOUGLAS PORTER, DEPUTY CHIEF ECONOMIST BMO FINANCIAL GROUP | SOURCES: FINANCIAL POST, CMHC, MORTGAGE ARCHITECTS, SUB-PRIME REPORT © RATEHUB. ARTWORK BY ANNZILLA 6661 000 2001 2002 2003 2004 2007 2008 6007 2010 2011 1973 666 0007 zooz 2003 2004 2005 9007 2007 2008 6007 Is CANADA HEADED FOR A US-STYLE SUBPRIME MORTGAGE CRISIS ? JAN 30, 2012 JAN 31, 2012 FEB 2, 2012 FEB 4, 2012 Bloomberg THE HUFFINGTON POST The Economist TORONTO STAR CANADA HOUSING MORTGAGE AFTER YEARS OF LECTURING AMERICA ABOUT LOOSE LENDING, CANADA NOW MUST CONFRONT A BUBBLE OF ITS OWN CANADA FACING SUBPRIME MARKET BEGINNING PULLBACK HINTS OF MORTGAGE RISK TO RESEMBLE U.S.'S HOUSING CRISIS SUBPRIME MESS WE HAVE THE RIGHT MIX OF INGREDIENTS ULTRA-LOW 1. HIGH HOUSING PRICES 2. INTEREST RATES AVERAGE RESIDENTIAL MORTGAGE RATES HOME PRICES 20% $400,000 U.S. 30-YEAR FIXED 16% CANADA 5-YEAR FIXED $300,000 12% $200,000 8% U.S. $100,000 CANADA 4% $0 0% SOURCE: CREA, NAR SOURCE: BANK OF CANADA, FREDDIE MAC "CANADIAN HOUSE PRICES ARE 25% OVERVALUED" "ROCK-BOTTOM MORTGAGE RATES HAVE BEEN THE - THE ECONOMIST FUEL BEHIND CANADA'S HOUSE-PRICE BOOM" - GLOBE AND MAIL RISING LEVELS OF 3. HOUSEHOLD DEBT 4. LOW INCOME GROWTH MEDIAN HOUSEHOLD DEBT-TO - INCOME RATIO AFTER-TAX INCOME 153% 148% 160% 142% $60,000 135% 127% 117% 121% 120% $40,000 80% $20,000 40% $0 0% 2005 2006 2007 2008 2009 2010 2011 SOURCE: GLOBE AND MAIL, MACLEANS MAGAZINE, STATISTICS CANADA SOURCE: STATISTICS CANADA "MEDIAN HOUSEHOLD INCOME HAS GROWN A CANADIANS' HOUSEHOLD DEBT REACHED A MERE 10% OVER THE LAST DECADE WHILE RECORD 153% OF DISPOSABLE INCOME HOUSING PRICES HAVE MORE THAN DOUBLED" - MOSHE MILEVSKY, MONEYVILLE - STATISTICS CANADA, Q3 2011 "IT (JUST) SPEAKS TO THE GENERAL EASING IN LENDING A PRICE CRASH WOULD REQUIRE "A TRIGGER," SUCH AS A SUDDEN SPIKE IN INTEREST RATES OR A SUBPRIME-LIKE SERIOUS EROSION IN MORTGAGE QUALITY, AND THE SEGMENT OF CANADA'S MORTGAGE MARKET THAT IS STANDARDS, WHICH HAS CONTRIBUTED TO A BOOMING CONSIDERED HIGH-RISK "IS STILL EXTREMELY SMALL" BENJAMIN TAL, CIBC WORLD MARKETS HOUSING MARKET" - DAVID MADANI OF CAPITAL ECONOMICS, WHO HAS PREDICTED HOUSING PRICES WOULD FALL IN 2010 AND 2011 BUT IS THIS OPTION 2: "IN OUR VIEW, THE [CANADIAN] NATIONAL HOUSING MARKET IS MORE LIKE A BALLOON THAN A BUBBLE. WHILE BUBBLES ALWAYS BURST, A BALLOON OFTEN DEFLATES SLOWLY IN BY 25% OPTION 1: HOUSING THE ABSENCE OF A 'PIN'" BALLOON - SHERRY CO0PER, BMO DEFLATES A BUBBLE OR HOUSING CHIEF ECONOMIST BUBBLE A BALLOON? BURSTS THE CANADIAN HOUSING MARKET IS CRASH & BURN AFFLICTED BY "OVERVALUATION, SOFT LANDING SPECULATION AND OVER SUPPLY" AND IS SHOWING ALL THE "CLASSIC HOUSING BUBBLE HOUSING BALLOON SIGNS" OF A BUBBLE - MERRILL LYNCH A COMBINATION OF LOW FACTORS SHIELD MARKET INTEREST RATES AND A FROM A BUBBLE BURST, SUCH LOOSENING OF CREDIT AS LONG-TERM LOW INTEREST STANDARDS FUELS RATES OR QUALITY HYPER-DEMAND UNDERWRITING THE DIFFERENCES THAT SHIELD CANADA FROM A HOUSING BUBBLE 2007 CRASH NOW *PERIENCED ВY THE SHIELD STRICTER FACT : THOSE WITHOUT 3RD UNDERWRITING #1 PARTY VERIFIED STANDARDS INCOME ARE NOT ELIGIBLE FOR 5% DOWN MORTGAGES FACT : 45% OF SUB PRIME > 45% STATED INCOME MORTGAGES < 5% AND ARE SUBJECT TO 50% HIGHER INSURANCE MORTGAGES MINIMUM DOWN PAYMENT WERE STATED NONE 5% PREMIUMS FACT : GOVERNMENT INCOME MAXIMUM AFFORDABILITY MANDATES NONE 32% (HOUSING EXPENSES/ HOUSEHOLD INCOME) CANNOT, EXCEED 32% SHIELD LEGISLATION #2 DIFFERENCES TAX DEDUCTIBLE YES NO INTEREST FACT : 23% 0F U.S. HOMES LENDERS CAN PURSUE WERE WORTH FORECLOSE RE-POSSESSION DEFAULTING LESS THAN THE AND WALK PROTOCOL MORTGAGE LOAN BORROWERS FOR FULL AWAY BY SEPTEMBER REIMBURSEMENT 2010 SHIELD LESS RISKY #3 PRODUCT TYPES FACT : IN 2006, INTEREST ONLY LOANS > 20% OF THE < 5% OF THE REPRESENTED ONLY SUB-PRIME 1% OF TOTAL MARKET MARKET ORIGINATIONS FACT : 47% OF ALL MORTGAGES IN CANADA. YES INTEREST ONLY NO FACT : IN CONTRAST, 20% OF MORTGAGE INITIATED IN SAN DIEGO COUNTY IN 2004 WERE INTEREST-ONLY YES "TEASER" RATES NO ORIGINATIONS IN LOANS THE U.S. WERE INTEREST ONLY SHIELD MORTGA GE-BACKED SECURITIES # 4 > 60% SECURITIZATION < 30% FACT : 70% OF MORTGAGES STAY CANADIAN INVESTMENT HOUSING ON THE BALANCE BANKS WHO ISSUED TRUST SHEETS OF THE LENDERS WHO (CMHC) ORIGINATE THEM FACT : BACKED BY A GOVERNMENT SUB-PRIME MORTGAGES UNDERLYING HIGHER GROUPED TOGETHER WITH BODY ASSET QUALITY MORTGAGES SAFER DEBT AND SOLD AS BLENDED SECURITIES CANADA'S PROTECTIVE SHIELDS MEAN THE MARKET BUT WILL COOL NOT CRASH HOUSING MARKET DEFLATION "WE HAVE THE LUXURY OF TIME - BECAUSE INTEREST RATES AREN'T GOING ANYWHERE" - BENJAMIN TAL, CIBC WORLD MARKETS "WHILE POLICYMAKERS AND PUNDITS HAVE BEEN WRINGING THEIR HANDS IN ANGUISH OVER THE POSSIBILITY OF A CANADIAN HOUSING BUBBLE, THE FACTS ON THE GROUND SEND A MUCH CALMER MESSAGE. THE HOUSING MARKET CURRENTLY LOOKS WELL BALANCED, AND IS BROADLY MODERATING ON ITS OWN ACCORD." - DOUGLAS PORTER, DEPUTY CHIEF ECONOMIST BMO FINANCIAL GROUP | SOURCES: FINANCIAL POST, CMHC, MORTGAGE ARCHITECTS, SUB-PRIME REPORT © RATEHUB. ARTWORK BY ANNZILLA 6661 000 2001 2002 2003 2004 2007 2008 6007 2010 2011 1973 666 0007 zooz 2003 2004 2005 9007 2007 2008 6007