Saturday, May 5, 2012

Sometimes we have to look past RE in our town

and look at the bigger picture. The 'and then some', in the title of this blog.

We know that the CMHC is finally going to be roped in, the question is, is it too late?

It may well be. The CMHC has accounted up to 60% of all mortgages in recent years according to it's $600 Billion Cap and the $1.1 trillion Mortgage industry.

That is an astounding number for one institution. Then when you learn that the institution is Government backed, you wonder if we live in North Korea or a few of the last bastions of Government run economies. Except this semi-socialist animal has in fact made a few (brokers, speculators, developers) very wealthy and spread the risk to many.

To many of us bloggers, it was obvious what a scam this was which was benefitting a very few people. here's how it goes:

1) Bank of Canada keeps rates at zero.

2) Savers get zero on deposits + banks sell bonds at near zero as  they have implicit Gov of Canada backing = accumulate a lot of cash which has to be put to work.

3) Banks offer mortgages to everyone with a back, high leverage, speculative, stated income, mortgage holiday etc etc

4) They get CMHC insurance - hence the bulk of the risk is transferred to you and I.

5) The banks sit back and clip coupons - getting 3-4% gross on each dollar lent, but since they are leveraged up, multiple times this amount.

6) banks look sound. Speculators, developers, mortgage brokers, bank CEOs and some realtors make great huge chunks of money.

The profit comes from the hide of savers (zero rates) + first-time buyers (higher prices) + the tax-payer (future liability)

No wonder they didn't want the golden goose to be killed. Several years ago David LePoidevin a money manager at National Bank pointed at the CMHC as the creator of the housing bubble. 

The CEO of National Bank jumped in to defend the CMHC and said that he did not share his manager's views. Who could blame him, the wagon kept on rolling and the bonuses kept on coming. A cool $5-6 Million a year, which is a lot for a small bank.

Since then the problem has been made a lot worse. About $300 Billion worse. 

When Flaherty doubled the CMHC lending cap, and dished out money to the banks, yes he saved Canada from the worst of the financial down-fall -But he knew what he was doing long-term.

- He was adding air to the housing bubble. A LOT more air. $300 Billion more in a $1 Trillion market! Now the bubble will deflate from a much higher level and cause a lot more collateral damage.
- He transferred risk into the future.
- He cynically backed a semi-socialist organ (which was set up after the war to help the poor get mortgages) and turned it into a financial megalith, a bonus generator for Bay Street.
- He bought Stephen Harper his majority.

In case any of you still think that it is wise to have a debt-burdened economy (and remember we are now at the same level of consumer debt that the US was before their collapse) then I would suggest you read this excellent summary from the most astute money managers in the US.

Economies which are debt laden from RE booms (think Japan, Spain, the UK and the US)  go through very painful adjustments. There is no reason why we should be any different.

The sad part is, it could have all been prevented. It is hard to imagine how we could all have been so foolish.