Yesterday, I posted that BMO says there is no looming problem in Canadian House Prices, today the Finance Minister says he is concerned about mortgage lending... Connect the dots and ask if something is going to give. The mortgage lenders say the balloon will slowly deflate and not pop. Calamity will follow if things happen too fast but Canadian households need to act now, in order to avoid financial problems. It would be wise to reduce household debt and set some money aside for potential tougher times. No one wants to be left in the position where your banker asks you to top up your equity portion of your mortgage because the value of your home has declined. You need to be prepared for such possibilities by avoiding consumer debts for items you can live without.
Finance Minister Jim Flaherty said he shares the concern of Canada's top banking regulator that lenders are loosening their mortgage standards too much, but said any problems in the system are being corrected.
On Tuesday, Bloomberg released documents obtained through freedom of information requests that showed the Office of the Superintendent of Financial Institutions (OFSI) has some fears that loosening mortgage standards poses an "emerging risk" to Canada's economy.
In the 152 pages of documents, internal communications reveal that OSFI — the regulator in charge of all federally monitored financial institutions in Canada — worries banks are becoming "increasingly liberal" by handing out loans without requiring borrowers to prove they have sufficient incomes to pay them back. Such loans "have some similarities to non-prime loans in the U.S. retail lending market," the OSFI documents reveal.
This appears to be mirroring the slack practices that created America's Housing Crash!
Speaking to reporters in Tel Aviv, Israel, on Thursday, Flaherty echoed OSFI's concerns.
"OSFI's concern arises out of some work that OSFI has done as part of the ordinary course of its business to look at some of the loans being made by financial institutions," he said. "I was informed of what their assessment showed with respect to a few financial institutions, which is a matter of concern."
"That is being corrected," Flaherty said.
Subprime mortgages
The reaction from the finance minister came at the end of a busy week in which multiple stories cast some doubt on the sustainability of Canada's booming housing market.
On Tuesday, it emerged that the Canada Mortgage and Housing Corporation has committed to back $541 billion in mortgages — within striking distance of the agency's $600-billion limit.
The CMHC is the Crown corporation that ultimately backstops Canada's housing industry by insuring mortgages. Buyers are legally obligated to pay for CMHC insurance if they put down 20 per cent or less of the purchase price as a down payment. Approximately 40 per cent of Canadian homes are covered by CMHC insurance.
The limit was at $450 billion as recently as 2008, but Ottawa moved to raise it as a result of the financial crisis.
As that gap closes, it gets harder for Canadians to get new mortgages. Theoretically, at a certain point CMHC would have to deny new borrowers unless Ottawa moved to raise the limit — something which would prove difficult in a political environment where policymakers have repeatedly encouraged Canadians to get their debt levels under control.
Mortgage-backed securities
Part of the reason the CMHC is running out of wiggle room is that in recent years, Canada's big banks have moved en masse to purchase CMHC insurance for their mortgages even where the borrowers have more than 20 per cent in equity.
"CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance," CMHC spokesman Charles Sauriol told CBC News this week. That's giving lenders "the ability to purchase insurance on pools of previously uninsured low ratio mortgages," he said.
They're doing that so that they can turn debt — in the form of mortgages — into assets on their own balance sheet through a process known as securitization. These new securitized mortgages can then be sold to other investors.
The sale of such mortgage-backed securities was prevalent in the lead-up to America's housing crisis in 2007, but it's a practice that has been rare in Canada to this point.
Many experts have pointed to the securitization of mortgages — particularly subprime loans to borrowers who couldn't meet traditional standards — as a key catalyst in America's housing crash as the relationship between the lender and the home-owning borrower became increasingly blurred.
During the debacle of 2008 credit markets, Canada's politicians repeatedly bragged about how we avoided the disaster by having more conservative banking practices. Now we are being told some lenders are straying from such conservative lending and into the same trap that created the crisis in 2008.
OSFI's concerns stem from a fear that Canadians might be getting mortgages they won't be able to afford, if and when rates go up from their current lows. That, in turn, would hurt the greater economy and Ottawa's coffers as the taxpayers are ultimately responsible for funding any CMHC payouts for mortgages that default.
"We monitor CMHC as part of the general monitoring of the financial scene in Canada," Flaherty said. "Right now they're still below their lending limit."
Remember: Monitoring activity in the mortgage markets is the job of OSFI but ACTION must be taken be the offices of the Finance Minister Jim Flaherty.
Do our regulators see bubbles coming and will they Act to end dangerous lending practices?
"The mortgage and credit crisis was caused by the inability of a large number of home owners to pay their mortgages as their low introductory-rate mortgages reverted to regular interest rates.
While bubbles may be identifiable in progress, bubbles can be definitively measured only in hindsight after a market correction...
The U.S. housing market Bubble began in 2005–2006. Former U.S. Federal Reserve Board Chairman Alan Greenspan said "We had a bubble in housing",and also said in the wake of the subprime mortgage and credit crisis in 2007, "I really didn't get it until very late in 2005 and 2006."
http://en.wikipedia.org/wiki/United_States_housing_bubble
Meantime, warnings were issued by non-sell-side economists, ie. academic economists not employed by Wall Street firms selling mortgage backed securities with values predicated upon stable or rising real estate markets across America. WRONG Assumption!
"The Economist magazine stated, "The worldwide rise in house prices is the biggest bubble in history,"[52] so any explanation needs to consider its global causes as well as those specific to the United States. The then Federal Reserve Board Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) ... it's hard not to see that there are a lot of local bubbles"; Greenspan admitted in 2007 that froth "was a euphemism for a bubble."[34] In early 2006, President Bush said of the U.S. housing boom: "If houses get too expensive, people will stop buying them... Economies should cycle." *Wiki...
The Brilliant article on the Wall Street Economists' webpage tells us that there were abundant warnings by some high profile economists of storm clouds on the horizon.
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Wall Street EconomistsWho Predicted the Financial Crisis?
Research Questions:
Who predicted the financial crisis and the ensuing economic crisis?
Is there a documented evidence supporting their claims?
Were those who warned about the crisis lucky? Or did they have a clear logic behind their predictions?
Can we use their knowledge to predict future crises?
What are their future predictions?
How do their predictions compare with each other? Where do the experts agree and where do they disagree?
How accurate are their economic predictions? Can they be relied on for investment decisions?
Research Findings:
To answer the preceding questions, we started with the obvious question: Who predicted the financial crisis?. We Googled the question to identify specific prediction statements and warnings. We wanted concrete answers from credible experts. We did not consider generic theories and lucky guesses.
The following section summarizes our research results.
It is a globally accepted fact that top world governments, central banks, economists, investment bankers and financial journalists were caught off guard by the financial crisis and the ensuing economic crisis of 2008-2009. In the U.S., George Bush Administration, his top economic advisors, the Treasury Secretary, the Chairman of the Federal Reserve, and the world's top investment banks did not foresee the financial collapse on Wall Street until it was too late. Only a few experts emerged with credible early warnings, but they were ignored, dismissed or ridiculed by everyone else. These experts are the subject of this research section
The Difficulty in Economic Forecasting
Financial Economics is a young and developing science. We've found evidence of conflicting theories, decision models and opinions from many award-winning and respected economists. Unlike other sciences, the difficulty with the economics comes mainly from the predictive function in managing the supply and demand and the need for financial economists to forecast future performance of financial assets based on very large number of variables, economic indicators and events.
On the topic of the difficulty in predicting future economic events, we looked at the top two most well-known investors and the top two most well-known economists
The Top Two Most Well-Known Investors
The first investor is George Soros, who became one of the world's richest people by predicting the UK currency collapse and betting against it, and the second is Warren Buffett, who is known as the "Oracle of Omaha" for his ability to manage one of the highest performance investment funds until he was hit by the financial crisis.
George Soros acquired an ill-fated stake in Lehman Brothers just before the investment bank failed in 2008. (Source: Yahoo Finance)
Warren Buffet, the CEO of Berkshire Hathaway, and its investors lost billions of dollars during the financial crisis. In a May 2010 interview with the Financial Crisis Inquiry Commission (FCIC) that was created to examine the root cause of the Crisis, Warren Buffett, said "no one saw the housing bubble". Buffett defended the role that Moody's and other rating agencies played in the financial crisis, even as the industry missed the signs of an impending housing market collapse. "In this particular case, I think they made virtually the same mistake everyone else made." - He said that he underestimated the impact of the crisis and by the time he realize it, it was too late for him to do something about it. - (Source: FCIC.GOV Video Testimony andCNN Money News Report)
One must wonder how the "Oracle" and the manager of one of the world's largest investment funds, staffed with top economists and financial analysts, miss on systemic risks of such as large scale.
The Top Two Most Well-Known Economists
The US top economist, Ben Bernanke, the Federal Reserve Chairman, testified at theFinancial Crisis Inquiry Commission (FCIC). He said: "We knew all those numbers, of course. But a lot of smart people -- and you asked the question about anticipation, people like Paul Volcker (Former Chairman of the Federal Reserve) and others thought it was going to cause a crisis. But they got it wrong. They thought it was going to cause a dollar crash. It didn’t do that. It caused a different kind of crisis. Just another example of how difficult it is to predict. (Source: FCIC.GOV)
His predecessor, Alan Greenspan called the financial crisis “a once-in-a-century event” whose consequences proved far more devastating than had been widely expected. “We all misjudged the risks involved,” he said. “Everybody missed it -- academia, the Federal Reserve, all regulators.” - (Source: Bloomberg News)
Our Research Conclusions:
We believe that Alan Greenspan's statement “Everybody missed it -- academia, the Federal Reserve, all regulators.” is untrue. We found several credible early warnings and independently verified evidence outlining the risks.
Greenspan's statement “a once-in-a-century event” is erroneous. The Great Depression 1928, was followed by several financial crises and bursting bubbles in the '60's, '70's and '80's in the US and other markets around the world, shows that either he is misinformed or suffers from selective memory bias.
In the investment world, there are several anecdotal evidences showing that some investors made a lot of money and profited from understanding key functions and relationships in financial economics.
In the past, George Soros profited from predicting the UK currency collapse. The most recent example is John Paulson, who profited from betting on the burst of subprime mortgages at the heart of the housing bubble and 2008-2009 economic crisis.
There are also at least three documented cases of experts who foresaw the financial crisis and warned about its impact on the economy. To others, they seemed lucky, but the evidence suggests that these professionals knew something that others didn't and they believed in it to the point of risking their reputation and careers.
Who are the experts who predicted the financial crisis and the ensuing economic crisis? What were their warnings?
To find the answers, we started by Googling the phrase: Who predicted the financial crisis. We found many news stories and articles. Most of the articles were marketing articles rather than investigative journalism. The few academic research papers that we found were written by those who missed the crisis. The research papers were either incomplete or contaminated with biases justifying why no one predicted the crisis.
(Hindsight is 20/20 but makes little money and is of little consequence in avoiding a particular crisis.)
As researchers we were skeptical too. But unlike our professors, who we cannot name here for obvious reasons, we did not have ego issues to stop us from keeping an open mind. We also were wary of the many marketing statements associated with some of the economists such as Nostradamus, Dr. Doom, Economic Gurus, Oracles or Prophets. We understand the need of PR professionals to promote their clients or writers to attract the attention of the readers. But rather than believing or disbelieving these articles, we focused on the predictive statements from the experts and their dates.
Our initial research identified three credible early warnings and we suspect that we will find more by the time we complete our research project. The most well documented predictions come from three experts. They are, in order of prediction date; Dean Baker, Med Jones and Peter Schiff
(Nouriel Roubini added after being corrected by an email of IMF script. This proves that even really smart people like these guys can be wrong once in awhile... keep apprised of what your experts are telling you. Otherwise, you can make some mistakes acting on their advice.)
Housing Bubble Sitters - A warning by Dean Baker (August 25, 2005)
US Economic Risks 2007-2017 - A warning by Med Jones (June 2, 2006)
International Monetary Fund Seminar - A warning by Nouriel Roubini (Sept 13, 2007) -After initially removing Dr Nouriel Roubini from the list due to lack of documented evidence. We received an email on April 19,2011 with a copy of the IMF transcript. (please see Correction Note)
Fox News Debate - A warning by Peter Schiff (Dec 16, 2006)
Others? If you have more information about other experts who predicted the financial crisis and gave warning before August of 2007 please email us with the information to add to the list.
Who are these experts?
Dean Baker is an economist who warned about the crisis earlier than all the other experts, but was mostly ignored because he went silent on the topic in 2006 & 2007.
Med Jones, a strategy expert who is lesser known than the remaining expert but produced the most accurate predictions among them.
Nouriel Roubini is an economist and a media darling. He is the most popular among those who predicted the crisis, although recent journalistic investigation reports challenge the date and the content of his predictions. We are still reviewing evidence to determine whether to include him or remove him from the list. (See notes below the next table)
Peter Schiff is an investment manager, also widely covered by the media and is most popular with the Tea Party. He was the economic advisor of Ron Paul - A Republican Presidential Candidate - and a Tea Party favorite.
The most bearish of the four is Peter Schiff. The least bearish is Med Jones.
'via Blog this'
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