The Globe And Mail published an article today "Federal officials told CMHC it could burden borrowers" that may have more far reaching consequences on home owners.
"Canada Mortgage and Housing Corp. officials ignored warnings from senior Finance Department and Bank of Canada officials during the past two years that its active business in high-risk mortgage insurance could overburden consumers.
According to sources familiar with the discussions, CMHC executives did not heed the warnings and continued to underwrite larger volumes of insurance policies for risky home loans with 40-year amortizations and minimal down payments.
The sources said the federal agency's executives disagreed about the potential risks and defended the creditworthiness of borrowers who were granted insurance for the riskier mortgage products".
Many critics cautioned the danger of the 40 years and 0% down payment mortgage that may hurt home owners in the event of home prices dropping significantly. These concerns are now a reality when home prices have dropped 12% to 15% in major Canadian city centers, especially places like Greater Vancouver, Victoria, Calgary and Edmonton.
Some home owners are in trouble
With home prices projecting to decline further over the next 12 months, home owners who bought with little equities will need to cover their losses if they sell their homes now. Those who could not keep up with their mortgage payments will lose their homes. When defaults start to show up, the losses suffered by Canadian banks will end up with CMHC and other mortgage insureres. CMHC will end up taking on huge mortgage default losses as over 70% of these 40 years mortgages were under-witten by CMHC the past 2 years.
Canada is now reported to be in recession with negative GDP growth. If the economy tank in Canada, many people will lose their jobs due to cut-backs and lay-offs. It is inevitable that foreclosures and bankruptcies will increase in the near future.
The loan loss for each default in the high-priced centers in Canada can easily exceed $100,000. A 20% drop in price on a $500,000 home will wipe off $100,000 value from a home. Together with interest cost, real estate/legal fees, etc, loan losses can piled up quickily.
Buying opportunities
There are many buying oppotunities for investors who have the financial resources. Home owners who could not hold on to their homes may be forced to sell at lower than market prices. Until more buyers return to the market, home prices will continue to decline. It's difficult to tell if the market will stabalize by the end of 2009 or 2010.
If you are looking for investment properties in Richmond, Vancouver or Burnaby, you can contact me at 604-721-4817 or email me.
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I find it shocking that the people qualifying these mortgages have been ignoring the warning signs for years.
One week ago today on 60 minutes they reported 1 in 10 Americans are behind in their mortgage payments. There is now a supply of 4.5 million housing units US wide, 110,000 properties for sale in South Florida alone.
70% of Option Arm mortgages will default in the next 5 years, as the interest rates are re-set.
When will this end, and when will our governments set up better practices to ensure this does not happen in the future?
I would like to bring a very important NASE survey finding to the attention of all. I have been trying to bring this to the attention of Washington because they must address the following topic as quickly as possible.
This relates to the upcoming wave of Foreclosures in 2009 that are due to the resetting of the "Toxic" mortgages.
Many fail to realize that there are millions of self-employed smaller businesses, who employ from 1-10 employees, that are holding these risky mortgages. So, here we have a major problem... Not only will these small business owners lose their homes, but there will be the resulting JOB LOSSES on their business failure. Note, although President-Elect Obama is stressing the need to create 3 million new jobs, we must understand that "JOB RETENTION IS AS IMPORTANT AS JOB CREATION".
Our priority should be to be PROACTIVE in addressing these small business owners' need to avoid defaulting on their mortgages. They require "Immediate and Specific Financial Guidance" to weather this storm.
The 2nd Wave of Foreclosures has made it to the mainstream Media. CBS's 60 Minutes had a segment on 12/14/08, but they missed a very important point. Here is a post which may have merit for your blog.......
I would like to bring a very important bit of information to your attention that relates to this economic crisis that was overlooked until now.
On Sunday, 12/14/08, CBS 60 Minutes aired a segment "The Mortgage Meltdown".
Scott Pelley's piece on the 2nd Wave of Foreclosures overlooked a critical fact.
The segment missed the fact that this next wave of Foreclosures in 2009 Will Take Self-Employed and Smaller Businesses who have these TOXIC mortgages. In fact, ALT-A, Option ARMS, Interest-Only, the TOXIC Mortgages that are considered the "Troubled" assets in TARP were specifically marketed to the self-employed who fell prey to them.
The upcoming defaults on these risky "Toxic Mortgages" will result in an increase in foreclosures. But worse, once these small businesses fail, the resulting loss of jobs will cause millions to add to the ranks of the unemployed. Note that self-employed business owners (16.2 million according to the SBA) employ between 1-10 employees.
An NASE survey at http://www.nase.org , was the first to provide compelling evidence of small business involvement in the upcoming toxic mortgage crisis. The survey was created by Prof. Samuel D. Bornstein and Jung I. Song, CPA of BornsteinSong Consultants in Oakhurst,NJ,and was conducted by the National Association for the Self-Employed (NASE) which issued a Press Release on November 21, 2008.
According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.
These small business owners will be at-risk of payment shock and default as their monthly mortgage payments skyrocket. Small business owners were especially targeted for these Alt-A loans which required little or no documentation of income which appealed to many small business owners who previously were unable to qualify.
The resulting defaults will be the cause of the upcoming second tsunami wave of foreclosures that will dwarf the subprime crisis and will take many homeowners, small business owners, and their employees at this critical time when our economy can ill afford it.
Thank you,
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Terry - The lost in trillions of dollars in real estate values will affect all home owners especially those who are up-side-down with the mortgages. The recession, trade deficit, loss of employments and no more easy money will result in maybe a lost decade for the US. It's such a tragic financial calamity for the US. The easy money, regulators sleeping on the wheel, greedy wall street financiers, un-necessary war, etc all contributed to the problem.
Sam - the mortgage meltdown and huge credit card debts problem faced by consumers threaten the livelihoods of all those too heavily indebted consumers and home owners. The loss of wealth, cut-back in consumer spending will hurt all businesses - large and small. You are right that small business owners are vital in their contributions to the well being of the economy, Yet, they are the ones most over-looked, and left out to fend for their own survivals.
Terry & Sam - I came across this blog post by Michael Lewis - author for "Liar's Poker". It is a great read.