Author Topic: Garth Turner - Real Estate in Canada  (Read 430800 times)

SharperDingaan

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2860
Re: Garth Turner - Real Estate in Canada
« Reply #1770 on: September 29, 2018, 07:13:48 AM »
Keep in mind that Canadian RE shares little simlarity with the US. Loan structure, recourse/non-recourse, regulatory oversight, and a host of other things are completely different. Hence, you're trying to compare apples to oranges. Yes they are both fruits, but that's about it.

SD

SD - can you elaborate when you say sound regulatory oversight? As someone who works in the compliance world, I think the regulatory oversight in Canada is a joke.

What makes you say that the regulators do a good job in Canada?

In Canada. The vast majority of mortgages are issued by federal FI's regulated by OSFI, working closely with the BOC and provincial regulators. Financial stability is maintained by OSFI /BoC stress testing FI capital against various scenarios, and changing the rules as required (new mortgagers passing a 200 bp stess test before the morgage is issued). You do as you're told, when you're told, as your federal FI operates at the 'pleasure of her majesty'. A Provincial FI is subject only to the rules of the Province, usually a lot less strict. But if the Provincial FI is selling mortgages to others outside of the Province, there will be an OSFI 'overlay'.   

So long as a Province 'X' FI meets local requirements it can originate a mortgage in Province 'X'. It can re-sell it to anyone it wants, but a Federal FI will have limits on how much of these Province 'X' mortgages it can hold (originate or purchase). Hence you can originate as much dog-sh1te as you want, but you need an other than federal regulated FI to buy the bulk of those mortgages. So you securitize what you couldn't sell, and it becomes the mortgage investors problem - not that of the Canadian financial system.

The US doesn't have anywhere near this crisp a level of seperation. So when there's abuse - it's easier to achieve system wide 'contagion' and force a financial system 'bail-out'. We burn the investors, and originating Province instead. A scottish thing.

SD

Have you asked yourself why the stress test was brought in? I'll tell you. It's because they found out that mortgage fraud is a serious problem in Canada. There is a reason why CMHC is asking the CRA for people's incomes now. https://business.financialpost.com/real-estate/mortgages/exclusive-canada-housing-agency-pushes-for-better-income-checks-to-catch-fraud. It's because its very easy in Canada to lie about your income and most mortgages brokers out there get paid on volume so they don't care whether you can really afford the house or not. Many people were doing this.

The OSC and OSFI were tipped off by whistleblowers about the mortgage fraud going on at Home Capital a year and a half before shit hit the fan. They sat on the information and did absolutely nothing. They only acted on it when the information was leaked to the Globe and Mail and it was published in an article. Is that good oversight to you? Now, even today, most people think Home Capital was a short and distort lol and the reason they do is because OSFI doesn't give the information to the market. The only way you would know this is if you knew an OSC/OSFI employee or someone who left Home Capital, which is how I know. The CMHC knew Home Capital was a problem. They knew there was a lot of fraudulent mortgages pumped into CMHC but even they did nothing. They kept approving them. Not sure how that is good oversight?

Things don't get done on the frontpage of the newspaper in Canada and you will never hear when there is a issue in the financial world unless it is leaked. The reason for this is because OSFI believes that our financial system is small and because it is small, our system can collapse a lot easier. If one bank goes down in Canada, were fucked. If one bank in California goes down, doesn't mean the US banking system goes down. Now, you can argue whether this is the right way to do it or not but I believe all information should be given to the market so people can make informed decisions. People were going long home capital thinking it's short and distort and I don't blame them because how would they know? It wasn't short and distort, there was serious fraud going on there.

Home Capital is just one example where mortgage fraud is a problem. There are others but the market doesn't know about them yet. You will find out when this cycle ends.

The other major problem in Canada is money laundering. The money laundering departments of all FI's in Canada are dog shit. I'm not sure why they even have these departments because the employees in them don't do anything. And I'm talking about the big banks, not casinos in BC. The regulators know about this but don't do anything lol. Even the compliance departments at most banks are a mess. They're mostly country clubs.

The stress test was way too late. That should have been brought in years ago but I'm glad they did it and I hope they get even more strict. They waited way too long.

Just for completeness ...

Yes Home Capital had mortgage fraud. But the possibility of mortgage fraud is part and parcel of the morgage issuing process, every issuer is exposed to it, and how much of it there is in the given FI is controlled by the FI's management. When the FI's management isn't acting to contain it, you get whistleblowers. A very good thing.

Home Capital was a big fish in a niche business, but the proportion of their issued morgages compared to all mortgages issued in Canada was small (<5%). A problem for Home Capital, but not a big enough problem to immediately bring down the Canadian financial system. The smart response is to publicly do nothing, privately investigate system wide, quantify and develop potential solutions, 'sniff test' against the major players, THEN make an announcement. But to the whistleblower nothing seems to be happening.

Yes Home Capital was a problem - but it was defused very elegantly.
C-Suite changes, broker network changes, standby pension fund & 'others' investment , tighening of mortgage issuance criteria, and a great many employees jobs saved. Employees that would lose their livelihoods, yet had nothing to do with it - they just worked for the wrong FI. That didn't just 'happen', it was planned.

FI stress testing is an on-going quarterly (or more) process, than has gone on for decades. The tests are done by both the FI, the regulator, and 3rd parties in other jurisdictions. All the people involved know their stuff, know how to 'hide' the undesirable, and serve as a check on each other. You might be able to beat them, but you have to be extremely good.

Of course good analytics don't mean anything, if you can 'politic' your way out instead.
Much harder to do in Canada versus the US, as it's a much more 'one-sided' conversation. There's 'flexibility' but you'll do as you're told, when you're told. Or we'll find someone else.

Grating to a US audience but perfectly in-line with the scottish 'clan' system (mafiosi in skirts ;)) of Canadian banking.
Hence what happened in the US is not really comparable.

SD


 
« Last Edit: September 29, 2018, 02:31:52 PM by SharperDingaan »


alertmeipp

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2534
Re: Garth Turner - Real Estate in Canada
« Reply #1771 on: September 29, 2018, 08:39:06 AM »
Mortgage fraud
Fake income statements pay stubs
Moving money around from relatives just before mortgage approval.
Fake employment letter

Were the norm

The motto was get in before itís too late.

Now itís too late.

50centdollars

  • Sr. Member
  • ****
  • Posts: 398
Re: Garth Turner - Real Estate in Canada
« Reply #1772 on: September 29, 2018, 08:56:42 AM »
I'm not sure how you can say the regulators did a good job when they knew about the mortgage fraud at home capital and did NOTHING about it until 1.5 years later when it hit the newspapers. They weren't going to do anything about it otherwise. If that is sound regulatory oversight I don't want to know what bad is and Home Capital is not the only place it is happening at. There are many others.

The problem is that once its get entrenched in the system you can't do anything about it. Mortgage fraud is legal in Canada.


« Last Edit: September 29, 2018, 08:58:21 AM by 50centdollars »
50centdollars

Cigarbutt

  • Hero Member
  • *****
  • Posts: 1122
Re: Garth Turner - Real Estate in Canada
« Reply #1773 on: September 29, 2018, 09:07:22 AM »
...
The stress test was way too late. That should have been brought in years ago but I'm glad they did it and I hope they get even more strict. They waited way too long.
...
Hence what happened in the US is not really comparable.

When "reflecting" on the housing bubble, US "wise" men suggested that they could have done better, maybeÖ (government and regulations). But who wants to take the punch bowl away these days? Read this morning, article title: "Why are so many Canadians obese? Thereís not an epidemic loss of willpower" and from the article: "Blaming people doesnít do us any good...it just makes it worse". In fact, discussing this financial obesity issue is really only possible on an anonymous board such as this one.

What happened in the US was different mainly because of securitizations and some mass scale deleterious aspects of many mortgages but key ingredients are shared: ultra-low interest rates, very significant credit expansion and IMO irrational expectations about home prices. Whichever way one looks at this, home prices have decoupled from sustainable earning power of significant segments of buyers.

IMO, the real estate outcome is baked in the cake. In another life, I was asked to prepare reports/testimonies on the validity of cause and effect relationships. In some cases (baked in the cake), an outcome happens and one tries to allocate for a trigger factor. In these cases, one can use the practical example of an apple that is ripe enough to fall. When sitting under a tree (thinking of a gravity theory or whatever) and seeing an apple falling, you may think that it's the wind, people walking around or even you looking at the apple...But, one may need simply to realize that the apple was ripe for detachment. I would say that the best time to harvest apples is during the fall, which I plan to do today. :)

Opinion: Public oversight should be more pro-active and counter-cyclical but who wants to be a party pooper?
Canada real estate was not ripe in 2007 but IMO it is now.
Contagion goes both ways.

50centdollars

  • Sr. Member
  • ****
  • Posts: 398
Re: Garth Turner - Real Estate in Canada
« Reply #1774 on: September 29, 2018, 09:37:20 AM »
...
The stress test was way too late. That should have been brought in years ago but I'm glad they did it and I hope they get even more strict. They waited way too long.
...
Hence what happened in the US is not really comparable.

When "reflecting" on the housing bubble, US "wise" men suggested that they could have done better, maybeÖ (government and regulations). But who wants to take the punch bowl away these days? Read this morning, article title: "Why are so many Canadians obese? Thereís not an epidemic loss of willpower" and from the article: "Blaming people doesnít do us any good...it just makes it worse". In fact, discussing this financial obesity issue is really only possible on an anonymous board such as this one.

What happened in the US was different mainly because of securitizations and some mass scale deleterious aspects of many mortgages but key ingredients are shared: ultra-low interest rates, very significant credit expansion and IMO irrational expectations about home prices. Whichever way one looks at this, home prices have decoupled from sustainable earning power of significant segments of buyers.

IMO, the real estate outcome is baked in the cake. In another life, I was asked to prepare reports/testimonies on the validity of cause and effect relationships. In some cases (baked in the cake), an outcome happens and one tries to allocate for a trigger factor. In these cases, one can use the practical example of an apple that is ripe enough to fall. When sitting under a tree (thinking of a gravity theory or whatever) and seeing an apple falling, you may think that it's the wind, people walking around or even you looking at the apple...But, one may need simply to realize that the apple was ripe for detachment. I would say that the best time to harvest apples is during the fall, which I plan to do today. :)

Opinion: Public oversight should be more pro-active and counter-cyclical but who wants to be a party pooper?
Canada real estate was not ripe in 2007 but IMO it is now.
Contagion goes both ways.

I agree with you cigarbutt. Nobody wants to take the punchbowl away and I'm sure that the people at the regulators own a home too and don't want it to go down. Same thing with regards to politicians. They wont do anything either because they will be voted out. However; as a regulator you're supposed to make sure that there is oversight and you stop problems from becoming big issues. If you don't do that, what are you doing?

I spoke to an ex-wells fargo executive around 6 months ago and he told me that it wasn't the big problems that caused the bank's issues, it was the small problems. People cut corners here and there and small issues snowball and become big issues and once there big you can't stop them anymore.

I am disappointed in our regulators that they learned nothing from the financial crisis. It's the same thing with sales practices at the branches. The regulator came sniffing around the banks when the CBC started publishing articles about it. At that point, it's too late to do anything about it. In compliance, we knew it was a problem but nobody wanted to do anything about it because the bank makes money off of it. Everyone looks the other way and takes their cut.

You think money laundering is only happening at Dankse Bank? They had an ethical employee who tipped off the regulator to the money laundering going on. That's how they got caught. You think the executives didn't know it was going on? They got good bonuses to look the other way. Money laundering is a big problem in Canada and no one seems to want to do anything about it. It's probably because its entrenched in the system now and its part of our GDP and it can't be stopped. What do you think would happen to BC's economy if they clamped down on money laundering?

It's too late to stop these issues when they get big. Like you say, the regulator needs to be proactive but they never are.
« Last Edit: September 29, 2018, 09:43:36 AM by 50centdollars »
50centdollars

SharperDingaan

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2860
Re: Garth Turner - Real Estate in Canada
« Reply #1775 on: September 29, 2018, 03:08:37 PM »
Keep in mind that regulation is RE-active, not PRO-active.
FI's are expected to self-regulate within the rules of the sandox (set by the regulator), in return for hands-off regulation (letting the market solution prevail wherever possible). The regulator is just there to preserve the robustness of the system as a whole, and limit any aggregate net abuses. By and large it works well.

There will always be fraud, and money-laundering. All that regulation can do is try to make it more visible, more difficult to execute, and shut it down where practical. But as in the drug trade, it is unrealistic to believe that you will ever get 'ahead' of the dealers.

Not all provinces have the same view. BC is notoriously lax, and can do what it wants within its own borders - the Vancouver property market being an example. But if bad things happen there it will be BC and investors that take the brunt of the hit, not the Cdn banking system.

Not what folks want to hear, but this isn't the US banking system.

SD





Viking

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1301
Re: Garth Turner - Real Estate in Canada
« Reply #1776 on: September 29, 2018, 04:38:48 PM »
It looks to me like the many significant changes that have been implemented in the mortgage market over the past 8 years have been needed. Too late? We will see. However, i do think today as far as mortgages rules go we are far from where the US housing market was in 2006 (in terms of regulation). Perhaps we can say the regulators have been caught napping a number of times; however, over time they have addressed a number of issues as they became more obvious.

I agree Sharper,  it is very difficult for regulators to be early. It would be like playing a game of whack a mole, not knowing with alot of guessing involved.

clutch

  • Sr. Member
  • ****
  • Posts: 296
Re: Garth Turner - Real Estate in Canada
« Reply #1777 on: September 30, 2018, 05:34:59 AM »
Mortgage fraud
Fake income statements pay stubs
Moving money around from relatives just before mortgage approval.
Fake employment letter

Were the norm

The motto was get in before itís too late.

Now itís too late.

What evidence do you have that these were the NORM, not a few instances?

Cigarbutt

  • Hero Member
  • *****
  • Posts: 1122
Re: Garth Turner - Real Estate in Canada
« Reply #1778 on: September 30, 2018, 07:11:37 AM »
It looks to me like the many significant changes that have been implemented in the mortgage market over the past 8 years have been needed. Too late? We will see. However, i do think today as far as mortgages rules go we are far from where the US housing market was in 2006 (in terms of regulation). Perhaps we can say the regulators have been caught napping a number of times; however, over time they have addressed a number of issues as they became more obvious.

I agree Sharper,  it is very difficult for regulators to be early. It would be like playing a game of whack a mole, not knowing with alot of guessing involved.

Opinions voiced about the relative "appropriateness" of regulators' actions may be correct.

Relative contrarian opinion here is that the potential for infrequent but significant shocks is underestimated (through insufficient reserves against surprises and through recency bias) but I may be wrong. But, if a significant shock were to occur, the "real estate eco-system" happens to be in a very vulnerable posture. So, a variance of opinions is possible and depends on the weighting one attributes to various scenarios and their potential severities.

Interestingly for context, in a typical fashion for the years preceding the GFC in the US, here's a link which shows how the "regulator" may have suffered from looking too heavily in the rear-view mirror.
Speech from Federal Reserve 2006:
https://www.federalreserve.gov/newsevents/speech/kohn20060518a.htm

So, this was an environment of tolerable gyrations within a Great Moderation frame of mind, despite real, growing and significant risks within household real estate (at least relatively apparent to modest contrarian observers). This was also an era where reliance on market discipline was to become challenged shortly after by issues where bank nationalizations were considered as potential remedial measures.

When dealing specifically with the prevention of crises:

"A third principle is that the actions taken to prevent a crisis should not raise the odds of creating more problems in the future. In particular, the problem of moral hazard is a significant concern. If market participants begin to rely too much on regulators and central bankers to manage possible future crises, they may act in a way that has the effect of raising the risk of a financial crisis. For example, they may fail to engage in adequate due diligence when extending credit to other market participants or to maintain adequate capital for the risks they undertake. And they might come to believe that the government possesses more tools and resources than are actually available to shield them from the consequences of poor risk management."

I would humbly submit that their assessment of moral hazard was VERY wrong. Collectively, their assessment was precise but quite inaccurate.

Also, when you look at USA-based and European surveys and ivory-tower assessments done around 2005, 2006 and even 2007 versus the potential trouble brewing in US real estate and potential spillovers, the wording is almost exactly copy and paste compared to what is presently reported by the Bank of Canada (2018):

"More broadly, participants in the Bank of Canadaís Financial System Survey were asked about their confidence in the Canadian financial system if a large shock were to materialize. Most survey participants remain confident in the current resilience of the financial system."

Enough doom and gloom for this topic.

BTW, whack-a-mole is one of my family's favorite game when we see one. In a terribly competitive environment, I usually get the second score and my son typically gets first prize. What's your recipe? You have to get your rhythm and anticipate the moves, he says. Easier said than done.
« Last Edit: September 30, 2018, 07:17:50 AM by Cigarbutt »

alpha

  • Jr. Member
  • **
  • Posts: 94
Re: Garth Turner - Real Estate in Canada
« Reply #1779 on: October 02, 2018, 06:01:33 PM »

Latest Vancouver RE data shows sales dropping with inventory building, and BOC expected to accelerate rate hikes into 2019.


https://business.financialpost.com/real-estate/real-estate-board-reports-metro-vancouver-home-sales-down-sharply