Hi Jim, My Neighbour the appraiser just pointed me to this alarmist article from that left wing wacko Diane Frances, who writes for that left wing rag The Post (POP... sound of my tongue coming out of my cheek ;o) Interestingly he was talking about this the other night and he thinks the 1 in 20 appraisals are highly optimistic stats.. He also gave examples of many frauds he has encountered.. and does regularly
National Post
Tuesday, November 3, 2009
Presented by
CMHC needs to review policies
Diane Francis, Financial Post
Last week, I wrote about how Ottawa has been creating a housing bubble in Canada with taxpayer money, which is why residential real-estate prices rise in defiance of rising unemployment and recession.
The bubble, I concluded, is the result of low interest rates and Canada Mortgage and Housing Corp.'s dramatic increase in mortgage backstopping for people who put only 5% down. In January, CMHC was allowed to insure up to $600-billion in mortgages, up from $450-billion the year before.
The issues raised were solvency because of the ease of credit, market distortion, and the fact that CMHC represents an indirect and increasing bailout to Canada's profitable banks.
I have been flooded with emails and letters from high-ranking people who agree with my concerns and raise others from the real-estate, mortgage and securitization sectors.
In response, the Post published a letter last week defending CMHC from Karen Kinsley, its chief executive, who summarized her agency's role: "Unlike many other countries, Canada's prudent lending and mortgage insurance practices have allowed Canadians to continue to enjoy the benefits of home ownership."
There is no question CMHC has enhanced home ownership, with economic benefits for all. But here is what a mortgage expert, David O'Gorman, president of MortgageLand Inc., wrote about mortgage execution in Canada:
-Only one in 20 properties are physically inspected if mortgaged by CMHC, according to industry guesstimates. This is because CMHC and lending institutions rely on the use of automated valuation systems (AVMs) and risk-assessment theory systems (RATs). They use other databases such as MLS to create "values," then appraise without physical inspection.
-There is nothing wrong with using AVMs and RATs as backups to evaluating properties, but not doing physical inspections each and every time despite the lending of hundreds of thousands of dollars is not what a lender, whose loans are not insured by CMHC, would likely do.
-The result of using these computerized systems is to accelerate approval rates for the banks, which receive CMHC mortgage backup.
-One of the characteristics of the mortgage/real-estate meltdown in the United States was the speed of credit approval as a result of the over-use of AVMs and RATs.
Another characteristic similar to the U.S. meltdown is the fact AVMs, RATs, no physical inspections and speedy credit approvals enhanced a form of mortgage fraud known as "boost and flip."
In Canada, these frauds are "rampant," said O'Gorman. They involve a homebuyer obtaining a stolen identity, buying a property at a value higher than true market value of the property and approaching a lender with a 5% low downpayment and getting a CMHC-insured mortgage. Identity fraud is lessened in Ontario because of its online title system but not elsewhere in Canada.
If the property is bought quickly for $450,000 (and worth only $365,000) without physical inspection, which would slow down the process, the deal closes and the fraudster disappears with the $85,000 difference in value minus the 5% downpayment, for a net profit of $62,500 per unit.
By the way, this was a fraud perpetrated on a large scale involving thousands of Miami condos.
dfrancis@nationalpost.com
nationalpost.com
which was a followup to..
National Post
Thursday, October 22, 2009
Presented by
CMHC bubble is 100% made in Canada
Diane Francis, Financial Post
Ottawa has been creating a housing bubble in Canada with taxpayer money, which is why residential real estate prices rise in defiance of high unemployment and recession.
Ottawa's low interest rate policy and Crown agency Canada Mortgage and Housing Corporation's dramatic increase in mortgage backstopping, for people who put only 5% down, have pushed up activity and prices.
Some, such as Post reader and accountant Derek Bruce, worry that the Tories are allowing CMHC to become like Freddie and Fannie south of the border, a rogue financial institution the size of one of our Big Five commercial banks.
In March, CMHC was allowed to insure up to $600-billion in mortgages, up from $450-billion the year before, a CMHC spokesman said yesterday.
"Last year alone, CHMC did 919,780 deals worth a staggering $148-billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to $600-billion, or about double what it was two years ago," wrote author and former MP Garth Turner.
This is a looming problem that flies in the face of Ottawa's smugness about its superior regulatory regime and Canadian banking conservatism. For starters, CMHC is as big as a bank and not regulated.
It's a mortgage slush fund that distorts the market. It allows banks to lend recklessly without consequences and pushes up the price of housing for everyone. It rewards those willing to speculate with leverage and discriminates against those who are prudent. It's unfair because the Canadian banks charge the same mortgage interest rates to those who put only 5% down with CMHC backing as those with skin in the game and large down payments.
Thus Canada's real estate markets are hitting highs in the middle of the worst recession since the Depression.
"Since CMHC is insuring so many mortgages, the banks have no incentive to test the credit-worthiness of home purchasers. Then the mortgages can be neatly packed into MBS securities and have a CMHC 100% Canadian guarantee on the back of the investments, thus insuring end-investors these papers are insured from loss," Bruce wrote.
Some may argue this is simply another stimulus strategy, but this is cancelled out by the fact that it encourages bad and unfair behaviour and banking practices. It also has serious monetary/currency implications because air will eventually have to be let out of the bubble by imposing higher interest rates. This will mean a higher Canadian dollar.
The question is why should taxpayers be involved in this when it shoots them collectively in the foot? Why shouldn't banks have skin in the game? And homebuyers? If not, why shouldn't they share the upside with taxpayers? This amounts to a subsidy to our highly profitable commercial banks, real estate developers and speculators. The greater good would be served if housing prices fell to where a fair and unfettered market dictates, thus squeezing out real estate inflation and creating sound ownership opportunities.
A similar bubble was attacked by Australia, where interest rates jumped to 3.25% (from 0.5%) and damage, as a result of a higher currency value, resulted.
Clearly, CMHC must be reined in and regulated properly.
dfrancis@nationalpost.com
nationalpost.com
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