Friday, January 29, 2010

And the largest sub-prime lender in the world is... Canada?

What do the mid-recession housing boom and the Harper Conservatives' rise in the polls have in common? Answer: the Canada Mortgage and Housing Corporation's massive sub-prime mortgage scheme that is keeping up the appearance of an economic recovery. Reading the newspapers these days, you have to wonder whether Canada was on another planet when the global credit crisis hit. House prices have actually increased in some provinces and now there is a shortage of houses for sale in southern Ontario. Credit is flowing everywhere.

But what few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world. What's almost as alarming as this reckless policy is that no one in the financial media is talking about it, even though everyone knows the facts. I was alerted to the scandal by David Lepoidevin, a financial advisor with National Bank Financial, in a warning letter to his clients.

The facts are that over 90 per cent of existing mortgages in Canada are "securitized." That is the practice of pooling mortgages (or other assets) and then issuing new securities backed by the pool -- MBSs, or Mortgage Backed Securities. That's what happened with the sub-prime mortgages in the U.S. which (because the whole pool was so diversified) received triple-A ratings by the rating agencies. Losses around the world amounted to hundred of billions of dollars

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