Posted on 02/19/2009 6:07:46 PM PST by Publius
Paul Volcker, the former US Federal Reserve Board chairman who is now a member of President Barack Obama's advisory team on the economy, spoke in Toronto recently as part of the Grano Speakers series.
His topic, of course, was the extent of the crisis facing the US, and particularly what brought it about. (Solving it is another issue). He is the latest to suggest Canada is in far better shape, and has been far better served by the structure of its banking system, than the US, Europe and other regions.
"It’s interesting that what I’m arguing for looks more like the Canadian system than the American system," Volker said, pointing to strong banks focused on traditional commercial banking practices -- taking in money and providing credit -- that operate separately from the high-risk financial highwire acts that brought down Wall Street, and for which Volker has little respect.
Here is the speech in full:
I really feel a sense of profound disappointment coming up here. We are having a great financial problem around the world. And finance doesn’t work without some sense of trust and confidence and people meaning what they say. You take their oral word and their written word as a sign that their intentions will be carried out..
(Excerpt) Read more at network.nationalpost.com ...
10% down as a minimum, and no more than 40% of ones income to carry.
When the Liberals were still in charge they tried a 0 down thing for a while, (a year? 18 Months?), and *DUH* it didn’t work, so they stopped. Or maybe Stephen Harper stopped it. I don’t remember.
No problem at all :)
If the Gov't doesn't force it, there's no incentive for it to work.
I wish it had only lasted a year here too.
Some Canadians contend that the Canadian economy has equally serious problems to the U.S. economy. I believe that the Canadian economic outlook is far superior to the U. S. I am concerned that some Canadians are basing business decisions on the the above conclusions, particularly regarding the extent of potential Canadian mortgage defaults.
The Bank of Canada may eventually have $125 billion of mortgage assets on its books that it acquired from banks at face value since last September. The BoC categorizes them as “other assets”. The vast majority of those mortgages are 25- or 30-year amortization and were underwritten as 70% to 90% loan-to-value, although some of the 2007/2008 mortgages are 40-year and 100% loan-to-value. BoC Governor Mark Carney said yesterday that nearly all of the 40-year amortization borrowers would have qualified for 25-year amortization. These borrowers just concluded “why not” and chose 40-year amortizations. All of these mortgages have terms of several years, usually 5-years, so amortization only determines the interest component of the monthly payments.
Canadian Mortgage and Housing Corpoaration (CMHC), a Crown Corporation, backstopped by the federal government, guaranteed these mortgages when they were advanced. In a small number of cases, the guaranty is from AIG, which is now 90% controlled by the U.S. government. AIG is not going to default on its guarantees if borrowers default. The mortgages were transferred to CMHC/BoC to give the banks liquidity; they got government notes in return. Mortgages do not offer liquidity to banks in the current environment. One of the big 5 Schedule A banks has paper backed by high quality mortgages (still AAA rating even AFTER all the 2008 downgrades): no defaults and strict underwriting standards. They ask traders what they can get for them. They should get 100 cents on the dollar. The market comes back with 82 cents on the dollar. The market is just not functioning. That is why the government stepped in. They were only formalizing responsibility for what they had already guaranteed through CMHC.
Finally, Canadian mortgage arrears rates (default rates) are, to quote a banker “infinitesimal” compared to the U.S.: Canadian 0.23% (on our 3.9 million mortgages) versus U.S. Prime 3.75% and U.S. Sub-Prime 20%. Canadian defaults have no reason to follow the U.S. to their levels. Canadian mortgage underwriting standards are much higher than those in the U.S. and other countries. Unlike the U.S., Canadian banks have not incentivized employees to originate poorly underwritten mortgages. Commissions and bonuses to bank employees, and government commissions to mortgage brokers for arranging mortgages to red-lined areas, was a major factor in the compromising of U.S. mortgage underwriting standards.
A mortgagee who wants to walk away from a loan against a home that had fallen in value would also need to enter personal bankruptcy.
The credit card debt is a concern, but very manageable. Deloitte estimates that credit card losses of Canadian banks in 2009 will be $800 million. Canadian household debt / disposable income is 130%. High, but lower than the U.S. and Europe where it is ~175%.
Canada has a unique system of government-guaranteed mortgages. It also has low historic defaults through prior recessions and better underwriting. Canada is the envy of other countries. Former U.S. Fed Chairman Paul Volcker and an Obama advisor emphasized this when he spoke in Toronto last week.
I asked a banker what the government’s exposure is to its residential mortgage guarantees. He said “not much, if anything”. I asked if it could be $125 billion. He smiled and shook his head.
Canada does not have a toxic mortgage problem. Further, its “stimulus” program is proportionately one-quarter the size of the U.S. program: 0.7% versus 3.0% of GDP, so inflation will not kill future growth. ”Stimulus” dollars will be spent wisely by a small “c” conservative government. The U.S. “stimulus” will be spent by big government politicians on patronage to interest groups. That will work for Canadians, though, since the U.S. will be buying its resources.
Canada will have a recession, but a milder one than other countries.
Last night I was sitting with several successful immigrants from China. They told me that friends in China now want to emigrate to Canada and not to the U.S. for the above reasons. The reverse was true up to last Fall.
Federal debt as % GDP
* Canada 2008 25%. 2010 32%. 2013 28% (Jan 27/09 budget)
* U.S. 2008 42% 2010 60% (CBO)
Federal budget deficit as % GDP
* Canada 2009/2010 2.2% (Jan 27/09 budget-$33.7 Billion)
* U.S. 2009/2010 8.6% (CBO/Heritage Foundation-$1.22 Trillion)
I live close to the border in northern Maine. The city across the border is growing and thriving. So different from the US side. A couple years ago we took a ride to Quebec. I commented to my husband about the 18 wheelers on the roads. It was unbelievable. There were so many of them.
We’ll lend you Dodd and Franks for a year or two and then let
s see about the health of your financial system up there in the Great White North.
What a load of crap. Take a look at that chart.
Time to short everything Canadian! I mean, when have any of the clowns running the show NOT been totally wrong, eh?
Evil forces weren’t trying to take over Canada, they were trying to take over the US.
That’s why it was allowed to continue down there.
OK, my tinfoil is chafing, so I should probably sign off.
Have a good evening. :-)
CIBC is perhaps the best capitailized bank in canada. They had quite an exposure to CDO’s in the past however my understanding is they have moved on to a more traditional banking structure thus curtailing significantly their M&A activities. Merchant banking has cost them dearly in the past. I used to work on the brokerage side and still know quite a bit of olks who still do. A good measure of CIBC’s prospects is whether CIBC staff are taking advantage of incredibly low rates to finance stock purchases. Apparently they are through the roof. Take that to the bank. Good investment for the mid-term.
We have our fair share of socialist morons up here too. Hey I’ll swap Layton and Duceppe for Dodd and Franks anytime. Up her being labeled a socialist/commies is a badge of honor. The two are card carrying members.
You as well.
So I guess that means they were SIV-positive but have been cured.
Most home loans here are 15-25 years, renewed every 305 years. If you finance more than 85% or the home value you pay an extra insurance fee, and financing above 95% of value is extremely rare.
November 5, 1999
CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS
Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses.
The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it. (The legislation was signed into law by President Bill Clinton on November 12, 1999.)
The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.
''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota.
Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''
''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska.
One Republican Senator, Richard C. Shelby of Alabama, voted against the legislation. He was joined by seven Democrats: Barbara Boxer of California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of Iowa, Barbara A. Mikulski of Maryland, Mr. Dorgan and Mr. Wellstone.
In the House, 155 Democrats and 207 Republicans voted for the measure, while 51 Democrats, 5 Republicans and 1 independent opposed it. Fifteen members did not vote.
Thanks for posting!
In Canada there are two factors at play- the term of the mortgage is the contract at the specified interest rate and payment changes, while the amortization is the time at which the loan is paid off. The term is typically 3-5 years, while the amortiziation is usually 15-25 years. Whenever the term expires, the borrower has the option of paying all or part of the balance, renewing the mortage at a new rate and/or finding another lender. There are many strategies employed to pay it off faster than the amortization, the most common being to make lump-sum payments when each term expires to reduce the principal owing.
This was prepared for another purpose, but I thought it might contribute to the discussion.
A bank will lend if you have 15% down. If you don’t have that much, you have to buy mortgage insurance that will allow you to buy with as little as 5%.
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