Well, Canadian GDP growth/shrinkage mirrored that of the US during the crisis, although Canadian unemployment rose more moderately.
According to the Canadian Centre for Policy Alternatives, the Bank of Canada and the US Federal Reserve injected about C$75 billion in short-term money, and the Canadian government bought about C$69 billion in mortgage-backed securities (à la Fannie and Freddie). The loans have been paid back, but the CCPA suggests that the Canadian banking industry would have suffered without them. And I’m not sure what became of the assets purchased by the government.
But I am disputing your claim that the reason for the no-income mortgages was that, in your words “Since the lender would then sell your mortgage away, they weren’t holding the bag so why would they care?”
In reality the people who were holding the bag had standards that they imposed, so the lenders cared. And the reason for the no-income loans was that in exchange for the lower underwriting standards, the lenders charged more interest. So it was a trade-off involving high rewards for high risk, which you are undoubtedly familiar with, not just them not caring (and, as you assert, being insane and absurd).
[In addition to the above, I am generally highly skeptical of your claim that the no-income loans were the primary reason for the mortgage meltdown. Rather it has to do with the implosion of the RE bubble, as others have noted, and also the fact that many people - including those who had verified income at the time of the loan - later lost their jobs in the prolonged recession.]
Agreed. Clearly there was some incentive to to make and bundle riskier loans knowing you wouldn’t have to hold them to maturity, but it was fundamentally in a lender’s best interest to sell a “legitimate” (i.e., non-toxic) product. To say a lender couldn’t care less about quality is like asking why Toyota should care if their cars fall apart as soon as they’re driven off the lot. It’s not a moral / ethical question either - in the repeated game of business you’re not going to last long with a shitty product.
That said, the widely held belief that home prices (in aggregate) would continue to rise clearly had a a very real impact on bringing down lending standards.
It’s more than that (& here’s where I may have been a bit unclear). The companies who bought the loans from the banks were the ones who were “holding the bag”, and they set the standards for these loans, by saying they would not buy anything unless it fit certain criteria. Assertions like RickJay’s imply that the people who ran these companies were complete fools, who didn’t pay any attention to what they were buying, and allowed the banks to sell them anything and everything without concern. But in reality, as one might expect, these companies (e.g. Fannie, Freddie et al) paid a lot of attention, and set the standards for what could or could not be loaned. So to say that the lending decisions were foolish because they were made by people who were not holding the bag is erroneous.
That said, the standards set by these institutions were not tight enough, in hindsight. This is partially because, as mentioned, they had not factored in the economic downturn and the fall in real estate prices. (In addition, they were pressured to make loans to people in inner cities.)
There may have been no fools involved but they were certainly fooled. Absolutely without question, the market was acting irrationally with regards to the risks they were taking on - or, actually, in a lot of cases, they were being actively misled as to the extent of risk by the rating companies, who were rating subprime mortgage packages as being equal in trustworthiness to governments, right up to the point that the packages collapsed. To use your car analogy, they were told they were buying a Lexus but what they were given was a Lada.
If what you are saying is that people didn’t factor in the possibility that there might someday be an economic downturn, maybe they WERE fools.
This statement is not correct, for a couple of reasons. First, mortgage law is a provincial responsibility in Canada, not federal, so it’s not possible to generalise in this way. You need to look at the law of each province to determine if a particular province allows suing for the deficiency or not.
Second, some provinces do not allow suing on the deficiency. For instance, in Saskatchewan, the relevant legislation is The Limitation of Civil Rights Act, a piece of Depression era legislation which provides that if the lender forecloses, it can’t sue on the deficiency. I believe that the other two prairie provinces, Manitoba and Alberta, have similar legislation, since they were also badly hit by the Depression. Spoons, any comment on this point for Alberta law?
As well, in Quebec under the civil law, the equivalent to a foreclosure is a clause en dation de paiement. The Quebec courts have held that if the lender takes the house under this type of clause, it cannot sue for the deficiency.
I can’t speak for the other provinces, but the basic point is that it’s not correct to say as a general proposition that Canadian lenders can take the house and sue for the deficiency.
I don’t understand how you can have an undocumented mortgage, and I also don’t understand how in the US there can be mortgages that the creditor can’t enforce because they don’t have the paper, as I’ve seen referred to several times here on the boards and in the news. I don’t think that’s possible here in Canada.
I think it’s relevant that several Canadian provinces use the Torrens system, and the others have a strong land registration system. I’ll use my province to illustrate this point. Under Saskatchewan law, there are two principles that would come into play. First, contracts relating to land have to be in writing to be enforceable. Second, mortgages have to be registered under the Torrens system to protect the lender.
These two factors mean that if a lender lends money under the security of a mortgage, that mortgage has to be in writing and must be registered under the Torrens system. If the lender does not register that mortgage under Torrens, the owner of the land could sell the land to a third party and pass title, provided the third party acted in good faith. The lender could not try to reclaim the land from the third party. The lender’s only recourse would be against the defaulting borrower, who has just disposed of the land that was the security for the loan.
So, you couldn’t have an undocumented mortgage. As well, as a general rule, you won’t have the situation where the lender can’t produce the paper for the mortgage. What lender would risk losing their security by not registering it? Banks in Canada thus are operating under a different system that doesn’t permit the sort of shady dealing with mortgages that appears to be possible in the US.
First of all, I certainly agree that mortgages are provincial responsibility. It is impossible to make a statement about “mortgages in Canada,” as while banks are federally-regulated, they must adhere to provincial law as regards mortgages. Thus, one must understand the provincial laws about mortgages.
Okay, a couple of background basics: Alberta allows mortgagees to foreclose for any outstanding sums that are in default, but any equity that the mortgagor has built up cannot be claimed by the mortgagee, up to a maximum of $40,000. For example, a mortgagor has a mortgage of $200,000. He pays down $40,000, and defaults. The mortgagor forecloses, and seizes the property. It sells the property for $200,000. It must then cut a cheque to the mortgagor for the $40,000 in equity that the mortgagor had built up. Net to the mortgagee: $160,000 in proceeds from the sale, and $40,000 (plus interest, over time) from the mortgagor. It is even, with a little interest, and the mortgagor gets his equity (or at least a good chunk of it, if he paid down over $40K).
As for any deficiency, I believe that the mortgagor may not sue for it. However, I must admit that it has been a while since I handled a matter like this, and I am not up on current statute and caselaw. Still, the last time I did handle such a matter, I seem to recall that while the mortgagee was looking at a $20,000 deficiency as a result of foreclosure, it was not willing to sue on that deficiency–perhaps because while this claim could have been followed through Queen’s Bench (i.e. a superior court), its amount, and the equity that the mortgagee had built up, made the matter more appropriate for Small Claims. The mortgagor was willing to negotiate; and so, in the end, we negotiated a settlement that was acceptable to both the mortgagor and the mortgagee.
Perhaps the moral of the story is not to go gentle into that good night. Engage a lawyer to find out how much of your equity you get to keep. In Alberta, at any rate, you will get to keep some–it is not lost.
I will say, this thread has been a real eye-opener. There are people who enter into undocumented mortgages, as described upthread? I cannot imagine that, but I guess I have to accept it.
This is mandated by the Statute of Frauds (29 Car. 2 c. 3) (1677). This Statute may have been updated, adopted, and refined by various jurisdictions, but to the best of my knowledge in all common-law jurisdictions, its pith and substance remain just as how NP says: “contracts relating to land have to be in writing to be enforceable.” As mortgages relate to land, they must be in writing.
Different country but in a similar shitboat as the US; Spain did have both mortgages above and beyond the official value of the property (which can differ greatly from the sale value and is the one used as a reference) and undocumented mortgages. Heck, there were loan sharks giving mortgages to undocumented immigrants…
My case:
Savings were enough to put 20% down plus pay my part of the transfer taxes in the price range I was looking at. In one of the agents I visited, the owner insisted in “checking my numbers” and after doing so told me “don’t let an agent give you a loan - go to whatever bank you get your salary in; they’ll give you better rates and less commisions.”
In the end I bought two properties directly from their owner (a flat and a garage in the same building); the garage paid in full, the flat with 20% down and the official value matched the price (the appraiser asked how much we were going to have the sale for; the former owner and I looked at each other and said “no, you give us your estimate”; the sale price was smack in the middle of his range). Adding stuff such as working with the bank where I got paid and homeowner’s insurance which will pay off the mortgage in case of death or full disability brings my rate to below the reference rate. No comission if I make advance payments, a low one if I close the mortgage.
Littlebro:
130% of the flat’s value rather than 80%; he mortgaged both the flat and the parking spot in the building’s collective garage; his mortgage is in the bank where he gets paid, he’s got a similar insurance to mine, etc. Higher commisions, higher rate and of course he’s always been “under” and will still be under for a while.
The loans you could get from agents and loan sharks:
Up to 130% of the property’s value. No requirement to document income (documenting it wouldn’t bring the rate down anyway, not with these guys). The highest commisions and rates (they could be higher than for a personal loan from a regular bank); the commisions for advance payments or closing are so high that it’s recommended not to do it. And yes, people would get them. “Brick’s the best investment! It will only go up! Why rent when you can own?”
That’s very possible. I was just disputing your assertion that the basis was that they didn’t care.
I’m curious though as to whether you have any support for your assertion that rating companies were “rating subprime mortgage packages as being equal in trustworthiness to governments”. Unless you mean Third World countries, or countries with known debt problems like Greece. Do you have a source for this particular claim?
I’m sure they appreciated in general that there might someday be an economic downturn. But they didn’t appreciate the likelihood, timing, and severity, and the RE impact specifically.
I don’t know if that makes them fools, though. No one ever expects the Spanish Inquisition. I read an article in the NYT not so long ago which said that the “consensus view” of economists had failed to predict a single recession, ever (meaning the predicted likelihood of recession had never averaged above 50%). I looked around a bit and couldn’t find that article, but I did find this one about the inacuracies of economic predictions in general. And yet, smart economists keep making them and smart people keep relying on them.
[Aside: from my perspective as an actuary, I’m up with this. All actuarial predictions are wrong. And yet, there’s some value in them, because it’s the best we can do, and it’s better than simply blind guessing.]
I don’t have handy my copy of “The Big Short.” Read it. The fiscal crisis was not some “gosh, we never say it coming that housing prices could fall” thing. It was a collective screwup on par with the Dutch tulip bubble, a systematic walking of the plank that would have fallen apart even without real estate declining in value. Yes, Moody’s and S&P were rating subprime instruments as AAA. As being as reliable as the Federal Republic of Germany, or Canada. Seriously.
Heck, read the Wiki article. It’s well sourced and a nice summary.
Understand, AA+ to AAA+ is what these agencies are now rating stable governments. Indeed, as of this year, S&P still gives higher ratings to subprime mortgage instrumnents than they do to the government of the United States of America:
This is not true, the reason that the mortgage backed securities fell was because foreclosures rose and foreclosures are rare in a rising housing market. If a homeowner can’t make payments and the house is worth more than the mortgage then foreclosure is leaving money on the table. The owner can just sell the house, pay the mortgage off and pocket the appreciation. If house prices go down then the mortgage is worth more than the house and if the owner can’t make the payments then everyone is screwed. This is doubly so in the midst of a bubble since the expectation of a rise in housing prices is priced into the house.
Not as simple as you put it, apparently. From your Wiki link:
So it’s not like they were saying “we think sub-prime mortgages are AAA credit and as creditworthy as Germany or Canada”. It’s actually “we think sub-prime mortgages plus these various credit enhancements are AAA credit and as creditworthy as Germany or Canada without any enhancements”.
Obviously they were wrong about the value of those enhancements. But again, the point is just that it was not as stupid as you suggest.
Actually, having started a thread in this forum arguing that the US was most likely to eventually default on its debt, I wouldn’t quibble with the US downgrade. But ISTM that the S&P was just doing a bit of muscle flexing, and I don’t take that rating seriously.
I think there a bit of a chicken-and-egg thing here. Is the Canadian derivative market less sophisticated because the banks are more conservative with their derivatives operations? Or are their derivatives operations more conservative because the market is less sophisticated?
When I worked in a derivatives group at a Canadian bank, I think the general feeling was that we would have been delighted to make money hand over fist in credit derivatives (say) like Goldman Sachs, but by the time we could get the latest product approved by Canadian regulators (which mostly takes time, not any special effort or powers of persuasion) the U.S. banks would be dominating that market and a whole new moneymaking product would be coming down the American pipeline.
When did sophisticated start to mean “willing to take stupid risks”? By that definition, the cast of Punk’d or of Jackass are the height of sophistication.