A new financial meltdown is materializing before our eyes. And it actually has little to do (directly) with the COVID-19 pandemic.
A “subprime lending crisis” is now underway in Canada. Observers of financial meltdowns will experience a strong sense of déjà vu, like they have already seen this movie before.
In fact, they have.
Nightmare in Subprime Lending, Part I
debuted in the United States, beginning in 2007. It was at that time that the subprime lending Ponzi-scheme crafted in Wall Street (and facilitated by the U.S. government) began to seriously unravel. Via the Federal Reserve, the U.S. government ultimately committed itself to a bail-out package that exceeded 100% of U.S. GDP
To properly appreciate this horror sequel, a recap of the original is helpful.
While the mainstream media has done an admirable job of purging this from public memory, it was the implosion of U.S. “mortgage-backed securities” (and a mountain of derivative bets tied to that toxic paper) that triggered the U.S. financial crisis, ultimately leading to the Crash of ’08. A large chunk of these "securities" were derived wholly or in part from U.S. subprime mortgages.
Ever-increasing volumes of this rotten paper began to decompose into a cesspool of fraud
Starting about in 2005, Wall Street started bundling mortgages together into investment bundles. The initial offerings were greeted with great success, and soon everybody wanted to get in this new "product." So great was the demand for Mortgage-backed Securities (MBS, also called Collateralized Debt Obligations) that Wall Street started running out of mortgages to front-load the system! This led to the creation of the "sub-prime" mortgage; granting mortgages to people who normally would not qualify. Congress, themselves invested in the Wall Street firms that were profiting from selling MBS, passed an $8000 first-time homebuyer tax credit (actually a loan repaid in future taxes) to lure more buyers in which helped front-load the process even faster. This sudden surge in new homebuyers increased demand and home prices skyrocketed! This made investors and homebuyers even more confident, demand for homes and MBS soared even higher and a genuine bubble was being formed.
Demand for MBS was so great that as the supply of available mortgages began to dwindle, brokers started taking 'shortcuts'. Bear Sterns was pledging the same mortgages into multiple investment bundles; a clear case of fraud. Other brokers were blending mortgages into the bundles that were already in foreclosure. As the returns from the MBS failed to materialize evidence surfaced that the earlier earnings had not been genuine, but were "ponzi" payoffs, using money collected from new investors to send dividends to older investors.
The whole scam started to unravel in 2008 and here is where things took a dark turn. Because Congress had their own fortunes invested in the companies at the heart of the fraud, Congress decided to prop up the scam with taxpayer money and block any efforts to investigate or prosecute. That is why TARP was passed by the Congress despite 90% popular opposition. Congress were saving themselves at the expense of the taxpayers. The phrase "toxic asset" was DC-speak for the fraudulent mortgages backed securities, which were being repurchased in order to avoid investors seeking to jail the Wall Street criminals, which would have brought all of Wall Street down. Despite claims that the US taxpayer would be refunded when the "Toxic Assets" were resold at some point in the future, the reality is that none of those assets will ever see a penny of repayment, because they are all the product of the biggest financial swindle in history. Bigger than Tulip mania. Bigger than the Great South Seas Company disaster.
The Big Banks of Wall Street ran whining and sniveling to the federal government, demanding to be protected from the consequences of their own greed and corruption.
The cost of “bailing out” these Wall Street banks
that proved grossly incapable of managing their own finances
, as explained in 2011 by Professor L. Randall Wray of the Center for Full Employment and Price Stability.
The Fed’s $29 Trillion Bailout of Wall Street
Since the global financial crisis began in 2007, Chairman Bernanke has striven to save Wall Street’s biggest banks while concealing his actions from Congress by a thick veil of secrecy. It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get him to finally release much of the information surrounding the Fed’s actions. Since that release, there have been several reports that tallied up the Fed’s largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion.
…Here’s the shocker. The Fed’s bailout was not $1.2 trillion, $7.77 trillion, $16 trillion, or even $24 trillion. It was $29 trillion. That is, of course, the cumulative total. But even the peak outstanding numbers are bigger than previously reported.
A total of $29 trillion in hand-outs and “guarantees” was pledged to prevent the entire U.S. financial system from imploding as a consequence of the “subprime lending crisis”. Nightmare in Subprime Lending, Part I
Enter former Canadian Prime Minister, Stephen Harper. Harper was (and is) an unabashed cheerleader of anything and everything American.
In particular, Harper gazed with wondrous envy at the U.S.’s ultra-leveraged and grossly unstable housing sector. So right after
the U.S. housing bubble popped and U.S. banks imploded, Harper went about duplicating that system in Canada
He shredded Canada’s lending standards, allowing a “subprime lending” sector to mushroom in Canada’s housing market. He even cloned a Canadian version of Fannie Mae: the Canadian Mortgage and Housing Corporation.
It takes an idiot to copy a really bad idea. It takes the King of Idiots to copy a really bad idea – immediately after
that bad idea resulted in History’s largest financial crisis.
Of course, there is a difference between Nightmare in Subprime Lending, Part I
(the U.S.) and Nightmare in Subprime Lending, Part II
The original U.S. housing bubble (and resulting financial implosion) was created in an environment of relatively sane/normal interest rates.
Nightmare in Subprime Lending, Part II
is built atop a full decade of ultra-low interest rates – lower than any other period in history.
Anyone with even a mild understanding of real estate markets is aware that extended low interest rates always produce a real estate bubble because of the easy money available to borrowers. A decade of the lowest interest rates in history has (predictably) resulted in the most-extreme real estate bubble in history, as revealed in this December 2017 article from Global News.
Canada’s housing has never been less affordable than it is in Vancouver right now: RBC
On a clear day with the sun going down, Vancouver can look like a golden city as the light reflects off the glass facades of the buildings that line its waterfronts.
The golden hue is a fitting colour for a city that’s well known for having Canada’s most expensive housing.
But not only is it the priciest in the Great White North — a new report by RBC
has found that Vancouver housing is now the least affordable in any market in Canada’s history.
…But Vancouver isn’t the only B.C. city that’s struggling with affordability. Victoria hit a record high of 61.5 per cent, marking a 7.2-per cent annual increase, second only to Toronto.
The urban real estate markets of Vancouver and Toronto are universally acknowledged as two of the most-extreme bubble markets on the planet – within a sea of urban real estate bubbles.
Neither of these markets could have could have devolved into the horrendous real estate bubbles they are today without the efforts of Stephen Harper. And an ever-increasing percentage of mortgage debt in these grossly overpriced/highly unstable markets is being funneled toward subprime borrowers.
A June 2018 article provides some shocking information.
Subprime Goes To The Toronto Condo Market
As a result of apathy (or incompetence) the government doesn’t track subprime lending
. Shocker, right? However, if you wanted to see how it contributes to the market look no further than Toronto’s “healthy” condo market. We don’t have the number of subprime borrowers in that market, but we do have the interest rates being paid. Since we know that unusually high interest is charged by private lenders, we at least have a proxy to help us understand condo buyers.
Interest rates are just above record lows, but a lot of people aren’t paying low rates. CIBC Economics numbers show that over 1 in 10 Toronto condos registered in 2017 were attached to astronomically high mortgage rates. Over 17.4% of owner occupied condos registered in 2017 had a mortgage rate above 9%
. Over 16.2% of condo investors with units that registered last year were paying more than 9% as well
. That’s a lot of units with unusually high interest rates buying condos – not a great sign of buyer quality. These buyers are likely waiting to flip at the first sign of buying weakness, or don’t realize how difficult it’s going to be to make a profit at that rate. [emphasis mine]
Meanwhile, Canadian financial institutions have been doing their part to create a truly epic horror movie, as we see in this September 2019 piece from the CBC.
Home Capital Group to sell $425M worth of uninsured mortgage-backed securities
Alternative mortgage lender Home Capital Group plans to sell $425 million worth of its uninsured mortgages to investors
, its first sale of so-called mortgage-backed securities since the financial crisis and a move likely to be welcomed by the Bank of Canada
…Home Capital says the underlying loans are all residential mortgages to what it calls "near-prime" borrowers
, and the loans are uninsured. They will only be available to accredited investors, not the general public.
By bundling the loans to get them off its books, Home Capital can raise money to give out in new mortgages, and also spread the risk of default around. That's something that no less an authority than the Bank of Canada has said it would like to see more of
to make the financial system more stable. [emphasis mine]
Yes, that is exactly what U.S. banks were doing to make the U.S. financial system “more stable”. And we all saw how “stable” the U.S. financial system ended up being.
Instead of being a sober regulator, the Bank of Canada has been a reckless facilitator of this subprime gambling. Just like the Federal Reserve, in Nightmare in Subprime Lending, Part I
What is Home Capital Group (CAN:HCG)? It is Canada’s lending leader in uninsured mortgages. And thanks to Stephen Harper, it has also become a leader in subprime mortgage lending (remember Countrywide Financial?).
It didn’t require COVID-19 for Home Capital to implode. The company managed to do that all by itself – in 2017. HCG’s meltdown included a 60% collapse in share price over a single day
One of Canada’s Largest Mortgage Lenders Just Imploded, Here’s What Happened
One of Canada’s largest mortgage lenders just imploded, and it may have serious consequences for Toronto real estate. Home Capital Group, a publicly traded company that engages in non-prime (a.k.a. subprime) lending, saw its stock drop over 60% in a single day. The reason? They’re facing a liquidity crunch, as their capital for subprime mortgages dried up very quickly. This could be the start of a broader trend of investors derisking, and it may kill a significant segment of high-leverage buyers.
This didn’t torpedo the Canadian housing bubble in 2017, thanks to the fortuitous appearance of a sugar-daddy – Warren Buffett. Buffett injected $400 million into HCG
, acquiring a 38.4% stake. Home Capital lived to lend another day. The Canadian subprime lending bubble continued to grow.
Now, after a full decade, the fruits of the King of Idiots have not only ripened in Canada but are rotting on the vine. The Canadian government has already started buying up insured mortgages.
Ottawa to buy up to $50-billion in mortgages in move that harkens back to the crisis of 2008
In response to the COVID-19 virus pandemic, the federal government said Monday that it is preparing to buy up to $50 billion of insured mortgage pools through the Canada Mortgage and Housing Corporation (CMHC).
Ottawa said the move is “immediate, significant and effective action” to support Canadians and businesses facing financial hardship as a result of the pandemic and its impact.
“This action will provide stable funding to banks and mortgage lenders in order to ensure continued lending to Canadian consumers and businesses,” the government said in a statement, adding that it is meant to enhance other measures unfurled last week, which included an interest rate cut and easing up on the size of the capital cushion banks must maintain.
How long until the government starts writing cheques to bail-out uninsured
mortgages and the toxic, subprime paper held by Home Capital (and others)? Is the Canadian government willing to let Canada’s housing bubble go “kaboom” -- and watch $100’s of billions in home equity evaporate -- just as the coronavirus pandemic is ravaging the real economy?
COVID-19 is the pretext
cited by new Canadian Prime Minister Justin Trudeau to begin to pay for the idiocy of former Prime Minister Harper. Trudeau didn’t create this mess, but neither has he done anything at all to defuse these spiraling real estate bubbles – and reduce the colossal risks of an implosion.
Now all Canadians will start paying for Harper’s folly and Trudeau’s apathy.
Like many sequels, Nightmare in Subprime Lending, Part II
will be “bigger and badder” than the original.
This is a much bigger real estate bubble (in proportionate terms) than the first U.S. housing bubble. It is built atop even “badder” (worse) policies. And it has been ruptured by the ultimate puncture wound: a global pandemic.
Many people shun horror movies – especially the really gruesome ones. Unfortunately for Canadians, closing their eyes will not cause this real-life horror movie to go away.