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Email this11:17 pm
kilarney said:
I am still waiting to see the darn interest rates tick up a bit.
From the sounds of it, there is a chance that the Overnight Rate may be raised on July 19, but from what I can tell, it is unlikely. It does appear likely that the rate will be raised on September 7 by 0.25% and by the same amount every announcement after that until the end of the year leaving the rate at 1.75% at the end of the year. I'm hoping this is true, but the predictions from economists last year would have put our rate over 2% by the end of this year so they have scaled back on their expectations.
Low rates just keep the housing bubble expanding.
Low rates ... and the CMHC. At 5% down, many mortgage lenders will give rebates and other incentives to effectively give 0% down mortgages, and they are still insuring 30 year mortgages. It would be nice to see this come back to 25 year / 10% down, or ideally, the end of CMHC insurance for future mortgages.
3:16 am
We're nowhere near the end, just going into a period of planned austerity. So in a sense you're right kilarney: get comfortable with eating Ramen noodles and paying more taxes -- especially 'green' taxes of which there can never be enough....yawn....meanwhile why would the bank raise a savings interest rate? Because they're philanthropic? :yell:
11:13 am
Anna Otkrita said:
meanwhile why would the bank raise a savings interest rate? Because they're philanthropic? :yell:
Here are some charts from an economics module at the U of T: http://www.economics.utoronto....../evin.html
If you look at Chart 2a showing the Inflation and Interest Rates, you will see that the Interest Rate tracks Inflation (as measured by CPI).
From the Canadian Encyclopedia (http://www.thecanadianencyclop.....RTA0004025):
In February 1996 the Bank of Canada adopted a new approach to setting the bank rate. It began setting the rate at the upper limit on a one-half-percentage-point range for overnight loans for financial institutions, over which it has more control than the rate on 90-day treasury bills. The range, or operating band, is fixed by the bank and only adjusted when it wants a change in other short-term rates, such as for consumer and business loans. For example, the bank rate was changed 4 times in 1998. At the end of 1998, the bank rate was 5.25%, which was the top of the 4.75% to 5.25% operating band. Other lenders usually quickly match changes in the bank rate with increases or decreases in their prime rates, to which consumer and business loans are tied.
In 1975 the Bank of Canada began trying to cut inflation by raising interest rates. This move was based on the theory that with high interest rates, consumers are unwilling to borrow for goods such as houses and cars, and businesses are unwilling to invest; thus a rise in interest rates cuts down the demand for goods and services, which reduces the upward pressure on prices. This policy (use of interest rates to cut inflation) culminated in 1981 when the bank rate rose above 21% and the prime lending rate was 22.75%.
Canadian rates might not have reached such levels had it not been for the rise in rates in the US where a similar monetarist policy was in effect (see MONETARY POLICY). When American rates rise and Canadian rates do not follow, money tends to flow to the US as lenders seek the higher return on their loans. This outflow pushes the value of the Canadian dollar down in terms of American funds. Imported goods then cost more in Canadian dollars, and this tends to raise the inflation rate in Canada.
I am arguing that inflation is going to be a factor in the coming times ahead and that is the reasoning behind the interest rate hikes. Banks are ultimately businesses that have to satisfy their shareholders. They do not do things out of philanthropy, but they do what is necessary to increase shareholder value and will raise rates to compete.
5:47 pm
November 8, 2009
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Anna Otkrita said:
meanwhile why would the bank raise a savings interest rate? Because they're philanthropic? :yell:
banks seem to me are like the local crack dealer. They push money in the form of debt and allow easy access to "new users" so the user can swim in easy cash. But if they keep giving out cash to anyone with very little interest and due diligence wont they just end up seeing the bubble go pop? We just went thru this in the states where banks ended up having huge losses from defaulted mortgages, loans and credit cards all ending up in bankruptcy and overall it wasnt profitable or sustaining. Nobody learns that the faster people burn thru cash the bigger the mess. The stock market is trending steadily down now and all over the world we have nervous bankers trying to decide what to do. Nobody ever learns...boom and bust cycle will continue...
6:26 pm
Hi Kilarney,
Actually, the banks have offloaded all the risk associated with their mortgages to CMHC. So, the Canadian taxpayer is on the hook for any and all defaults...
Cheers,
MG
4:26 pm
November 8, 2009
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mg said:
Hi Kilarney,
Actually, the banks have offloaded all the risk associated with their mortgages to CMHC. So, the Canadian taxpayer is on the hook for any and all defaults...
Cheers,
MG
Good Point!
Now isnt that just standard operating procedure for massive ultra profitable companys that make billions? Why should they have ANY risk as they ooze money? Let the good old schmuk taxpayer take the hit if they make too many bad loans to pump up their huge profits!!!:???:
8:48 am
mg said:
Hi Kilarney,
Actually, the banks have offloaded all the risk associated with their mortgages to CMHC. So, the Canadian taxpayer is on the hook for any and all defaults...
Cheers,
MG
Mortgage insurance is required only when less than 20% of the home's assessed/sale value is fronted as a down payment, so only these "high ratio" mortgages require insurance. Conventional mortgages (more than 20% down) have no legal requirement for insurance under the Bank Act. While CMHC as a Crown Corporation does carry some of the risk of mortgage default, the risk is nowhere near as great as what happened with Freddie Mae and Fannie Mac because Canadian bank lending policies are stricter and serve to keep most of the high risk borrowers out of the mortgage game.
10:35 am
According to the CMHC's financial highlights (http://www.cmhc-schl.gc.ca/en/.....lights.pdf), CMHC had an Insurance-in-force amount of $473 billion and a Guarantees-in-force amount of $300 Billion, totaling $773 billion of insured mortgages and securities for 2009. At the end of their 2010 plan, they expect to insure a total $915 billion.
From their 2009 Financial Statement (http://www.cmhc-schl.gc.ca/en/.....ements.pdf), it appears that they had $9.2 billion in equity.
According to Wikipedia (http://en.wikipedia.org/wiki/Freddie_Mac, they had $26.9 billion in equity at the beginning of 2008, and ended up with a loss of $50 billion that year.
I couldn't find Fannie Mae's financial statements.
It would appear to me that CMHC insures proportionately more (relative to population) than Freddie Mac and Fannie Mae did. With a measly $9 billion in equity, they are leveraged 100-to-1.
As for the quality of those mortgages, Ian Lee, a professor at Carleton University's Sprott School of Business had this to say:
I have an Op-Ed under review with National Post-Financial Post at this moment, dealing with CMHC and its alleged transparency - where BTW, CMHC will NOT provide an aged list of delinquency - by down payment e.g. 5% vs 7% vs 10%, aged by borrower's age, work experience, credit rating, location.
In the many years I have examined crown corps within the GoC universe, I have not found a crown more secretive than CMHC.
Source: http://worthwhile.typepad.com/.....l#comments
Don't forget that Genworth Financial and Canada Guaranty Mortgage Insurance Company also insure mortgages in Canada so the amount of insured mortgage is even higher than what's shown here.
Those numbers look pretty scary to me, but maybe it is just more pessimism porn and completely useless information. Will the real jeremywong please stand up and tell us if this is so?
9:00 am
Andrew said:
As for the quality of those mortgages, Ian Lee, a professor at Carleton University's Sprott School of Business had this to say:
I have an Op-Ed under review with National Post-Financial Post at this moment, dealing with CMHC and its alleged transparency - where BTW, CMHC will NOT provide an aged list of delinquency - by down payment e.g. 5% vs 7% vs 10%, aged by borrower's age, work experience, credit rating, location.
In the many years I have examined crown corps within the GoC universe, I have not found a crown more secretive than CMHC.
I'm not sure if this is the Op-Ed that Ian Lee was talking about: http://www.ottawacitizen.com/b.....story.html but it is an interesting piece. Ian Lee states that:
As CMHC is a "Crown corporation" owned completely by the Government of Canada, the CMHC insurance guarantees - which are liabilities of CMHC - are backed by the Government of Canada. Thus, Canadian taxpayers are liable for $500-billion to banks and mortgage lending institutions, in the event that Canada experienced a housing meltdown similar to the U.S. in 2008.
The $500-billion he mentions may be the Insurance-in-force I referred to in my last post, so perhaps the Guarantees-in-force I referred to shouldn't be included in taxpayer liability, bringing the leverage ratio down to 55-to-1. Anyways, hopefully he has his numbers right considering he is:
a former mortgage manager with Bank of Montreal in the late 1970s and early 1980s. He is a professor in the Sprott School of Business at Carleton University and the former MBA director (2007-2010).
7:57 am
Prag, you nailed it. I couldn't agree with you more. Many people I know have let the fast pace of the world speed on by as we concentrated our efforts at reducing, reusing, and paying off debt. We are focusing on family, friends and God. In the end we believe this is a very good time to be alive and look forward to our future. I have faith the Americans and Canadians can work their way through this economic reality.
Respectfully
Prag said:
In my opinion, none of the developed countries (not just the US) were ever sustainable at their former overly high, decadent standards of living and cost levels. It was just a matter of time until their populations were forced to scale back and reduce their material standard of living significantly.
You can't expect booming economic growth forever, as it demands increasing materialism and consumerism and a growing population. We should have been working toward figuring out how to foster an inflation-free, steady-state economy with flat population level once it became clear the factors that support growth were leveling off. We should have worked toward a land where $1 has the same buying power in twenty years as it does today, and where the same number of people are born as die so that demographics are stable across the age range, instead of greying demographics undermining the sustainability of social programs and health care and pension plans.
I also think that globalization, outsourcing, and automation, which used to destroy only blue collar jobs, but now destroys middle class jobs such as IT, has finally reached a point where a critical mass of people in the USA in both the lower and former middle classes can no longer afford to buy goods because their wages are so depressed, and won't ever be going back to what they were.
The good jobs no longer exist by choice; the North American companies chose to move them overseas to chase the cheapest labour, and we as a species keep choosing to automate everything. The end result of these trends is less and less jobs, especially as technology gets better and self-improving so that less techs are required to maintain each generation of it. There's a chance automation will bring a self-maintaining utopia to us all, but that won't be for a while if it does happen.
This has all been foretold by decades by people looking far ahead at the end result of the automation, outsourcing, and sustainability trends.
If you want to get people back to work immediately, then the companies on US soil need to stop moving their workers overseas. Production needs to return to North America, which should have a VARIED economy of both labour and white collar jobs. Until then, you can kiss goodbye to the late 20th century standard of living, although honestly it wasn't sustainable in the first place anyway. I think it's pretty clear that's we're never going back to how things were.
Get used to living in tiny houses, rooming houses, having no real disposable income, not being able to afford kids, and taking transit or walking (or driving a 20 year old car) to a minimum wage job. Though still employed in a middle class job, I started transitioning to living that way a few years ago when I noticed the unsustainable trends, and am now very glad I got used to living like that by choice instead of being forced into it now like everyone else is. Also glad I paid off all debts (including mortgage) last year so lack of work will be less of a disaster when it happens in the future.
I can assure you that simple living is still highly enjoyable, so it's not all doom and gloom. At this point, there's no going back anyway, so you might as well embrace it and start radically changing your lifestyle and spending habits into something that doesn't require more than a minimum wage job in the first place!
It's not just the US that's going to experience loss. The developing countries are also being shortchanged of their taste of late 20th century standard of living. The best they can expect to get is what we're adjusting down to now. Right now we're all living through a great equalization across the world to a livable but spartan standard of living for *all* people. That's the end result of globalization.
The end of the era of decadence is here, nothing more. It's the beginning of the era of frugality and of a more common standard of living across the globe. Like I said, it's not so bad. You still have family, love, friends, and enjoyment of nature's splendours even if you're living simply. Kicking and screaming about wanting to go back to the good old days is just going to make the transition hurt more than it needs to. Adjust to it, get frugal, develop a strong social network, and you'll be fine.
Please write your comments in the forum.