Australia is following CANADA down the same path and damage to the economy will be the same...................BIG GAPS IN OUR BANK DATA

A vicious circle..the masses go into dept over their heads and that's what benefits the economy. If people

stopped using credit cards this minute, the economy would go into a tailspin almost immediately.

Mortgage lenders sidestep rules with 'bundled' loans

Deals pair regulated lenders with unregulated partners to let borrowers assume more debt

By Matt Scuffham, Allison Martell, Thomson Reuters Posted: Jan 11, 2017

http://www.cbc.ca/news/business/mortgage-lenders-bundled-debt-1.3930774

Canada's subprime mortgage providers are increasingly teaming up with unregulated rivals to sidestep rules designed to clamp down on risky lending.  The result of these partnerships are so-called bundled loans, which pair a primary mortgage with a second loan from unregulated groups called Mortgage Investment Corporations (MICs).

• Bank of Canada warns about huge mortgages, growing housing debt

The arrangements have proliferated, mortgage brokers told Reuters, as regulators have tightened lending standards to shield borrowers in case a decade-long housing boom goes bust.  The practice has grown fast because it allows borrowers to make down payments of just 10 per cent, dodging federal rules that require either 20 or 35 per cent down on mortgages not backed by government insurance, according to industry experts.

Packaging two loans together allows the regulated lender to skirt those rules.

Affordability falls, mortgage bundling rises

The rise of bundling reflects declining affordability after a long run-up in home prices, and could present a danger of defaults should prices fall. Such high loan-to-value mortgages are common when housing markets are about to implode, said David Madani, an economist with Capital Economics who has long forecast a housing crash.  "This is what happens at the late stage of a housing bubble — the quality of lending goes down," he said.

• CMHC stress test says house prices could drop 30% on interest rate spike

Bundled loans, however, do not violate any laws, a spokeswoman for the Office of the Superintendent of Financial Institutions (OSFI) said in a statement. Primary lenders are expected to take the extra debt from a second loan into consideration when evaluating the borrower's ability to afford the primary mortgage.

In a statement, the Department of Finance said it was monitoring co-lending activity, which it said represented a small portion of the mortgage market. It declined to comment on whether the practice had increased as an unintended consequence of tighter lending rules introduced last year. 

OSFI said bundled mortgages have existed for years and that it would revise its guidance as the market evolves.

Unregulated lending growing

The government does not track bundling, and the practice is sometimes carried out in a discreet fashion, with lenders working directly with the MICs or referring mortgage brokers to them to work out a loan with a borrower.

But Department of Finance data shows the share of unregulated lenders has shot to 12.5 per cent of Canada's

$1.6-trillion mortgage market in 2015, up from 6.6 per cent in 2007. 

"It's becoming prevalent with everybody. This is how they sidestep the loan-to-value issue," Guy Lew, a mortgage broker at CENTUM Metrocap Wealth Solutions said in an interview. He added that he arranged such loans for his clients.

• OSFI superintendent Rudin warns lenders against 'complacency'

In a report published last month, the Bank of Canada estimated that unregulated lenders have about $125 billion in assets, including auto loans and other products as well as mortgages. The vast majority of that total is held by companies not listed on public exchanges — meaning little hard data is available on their lending.

The bank report acknowledged that significant gaps remained in data about the shadow banking sector.

Canadian authorities have become increasingly concerned by inflated home values in Toronto and Vancouver, where prices have soared because of low interest rates, foreign investment and tight supply.  Prices in Toronto rose 12 per cent in 2016, according to the Toronto Real Estate Board. But prices in Vancouver, after many years of increases, fell in the second half of 2016, in part because of a tax on foreign buyers. Canada Mortgage and Housing Corporation (CMHC) has warned that both markets will cool in the next two years, leaving the most highly indebted borrowers exposed to losses.

Homeowners could find themselves 'in hot water'

Bundling has provided a way around two federal rules meant to control such risks. Regulated lenders in Canada are not allowed to lend more than 65 per cent of the value of a home to borrowers with bad or non-existent credit records.  They also cannot lend more than 80 per cent of a property's value — even to borrowers with solid credit

— without obtaining government-backed insurance. Under rules rolled out in October, that insurance requires the banks to run income stress tests on borrowers.

• Ottawa tightens mortgage requirements and targets foreign money

The MICs are financed mainly by wealthy individuals seeking higher yields. For borrowers with good credit, mortgage brokers say MICs typically offer rates that are comparable with what mainstream banks charge: five-year rates fixed at three per cent. For less credit-worthy borrowers, rates of seven to 10 per cent are common, brokers said.

Most borrowers would then look to refinance with a mainstream lender within the five-year period or revert to a variable rate thereafter.

"I would suspect that at least 10 per cent of homeowners who are taking out this type of product may find

themselves in hot water within the first couple of years of home ownership," said Scott Hannah, head of the

Credit Counseling Society, a charity that advises consumers on debt.

Subprime lenders using bundled lending

Canada's biggest six banks, which provide about seven out of 10 mortgages, told Reuters they do not offer bundled loans. But Home Trust, a unit of Home Capital Group and Equitable Group — two of Canada's biggest subprime lenders — said they participate in bundled lending.

Home Trust, which had assets of $20.5 billion at the end of last year, confirmed it provided bundled mortgages

worth up to 90 per cent of a property's value, with no mortgage insurance requirement. 

Home Trust said in a statement that bundling was a common practice, but declined to disclose how much of its business depends on it.

"Private lenders are satisfying market demand for uninsured mortgage products" with greater than 80 per cent loan-to-value ratios, the lender said. 

Bundling mortgages can allow lenders and borrowers to sidestep usual mortgage insurance requirements. (Sean

Kilpatrick/)

One of the unregulated lenders that Home Trust worked with is an entity called Brookstreet. Its president, Diana Soloway — the daughter of Home Capital's co-founder, Gerald Soloway — said growth in bundled mortgages started a few years ago when regulated lenders were looking for ways to share risk with unregulated entities.  "Not every institution either acknowledges it or wants to advertise it," Soloway told Reuters. She later added that Brookstreet "did it quietly, under the radar."

Regulators' discomfort

Equitable Group chief executive Andrew Moor said slightly less than one in 10 mortgages provided by the lender involve bundled arrangements.  Equitable disclosed its bundled deals with other lenders for the first time in its latest financial results, after Moor was interviewed by Reuters. Sinclair Cockburn MIC executive Chris Pridham also confirmed that his company bundles with Equitable.

Moor said Equitable, which had assets of $17.6 billion at the end of 2015, uses the products when it is not comfortable lending the full amount a borrower requires.  "We would use it in circumstances where we want to mitigate our risk by having some 'first loss' capital behind us," he said.  If a borrower with a bundle of home loans falls behind in their payments, the unregulated lender loses money first. The regulated lender has the first claim on any future payments or sale proceeds in a foreclosure.

When house prices remain steady, loan losses are not a big problem. Fewer than 0.5 per cent of residential mortgages written by Canada's biggest lenders are now considered delinquent. But borrowers can be at risk if they load up on too much debt at high rates of interest.

Nick Kyprianou, chief executive of the RiverRock MIC and a former president of Home Trust, said RiverRock has avoided bundling because of the risk. Three years ago, when he was CEO of Equity Financial Trust, OSFI was scrutinizing the practice across the industry.  "They were expressing some discomfort with those partnerships," he said, "so that could come up again."

OSFI confirmed it "did some extra work on this lending practice in 2012-13" as part of its routine supervision of

institutions, but declined to elaborate. 

Hannah urged regulators to ban the products.  "This is not a product that's going to help the vast majority of people using it to get ahead financially," she said. "That's the bottom line."

Bank of Canada warns about huge mortgages, growing housing debt

Nearly half of new high ratio mortgagees in Toronto owe in excess of 450% of their incomes

CBC News Posted: Dec 15, 2016 11:37 AM ET

http://www.cbc.ca/news/business/bank-of-canada-financial-system-review-poloz-housing-1.3897875

Nearly a third of recent Canadian homebuyers with so-called high-ratio mortgages wouldn't qualify for their loans under new rules recently implemented by the federal government.  That was one of the findings of a wide-ranging report from the Bank of Canada on Thursday looking at the biggest risks facing the financial system.  Known as the Financial System Review, the twice-a-year report from the central bank singled out a familiar theme that poses a risk to the economy: high debt levels related to inflated house prices.

• Average house prices up 7% in the past year, CREA says

In the past year, Ottawa has moved repeatedly to address high housing debt. As part of new mortgage rules, for instance, the government now requires that borrowers have their finances stress tested to gauge their ability to pay back mortgages in the event of a rise in borrowing rates. The new rules also stipulate that the total cost of a mortgage payment plus property tax and utilities must not take up more than 39 per cent of a borrower's gross income.

Almost one-third of high-ratio mortgages issued in the year up to September wouldn't qualify under tougher new

rules, the Bank of Canada said in its semi-annual report Thursday. (Justin Tang/Canadian Press)

Despite those moves, the bank says it has noticed an increase in the number of homebuyers who are borrowing more money than they can pay back, based on their income. A borrower would be considered a "high-ratio" mortgagee if he or she has less than 20 per cent in equity, and considered especially vulnerable if the total value of a loan is at least 450 per cent of annual income.

The bank calculates that almost half of new high-ratio borrowers in Toronto are above that threshold, and 39 per cent are in Vancouver.

In Toronto's case, such monster mortgages are spreading to nearby cities like Oshawa and Hamilton too. 

"In these cities," the bank said, "the proportion of high-ratio mortgages with ... ratios exceeding 450 per cent has more than doubled over the past three years, from around 10 per cent to roughly 25 per cent."

Across the country, the bank says, nearly a third of people who took on high-ratio mortgagees in the past year wouldn't qualify for their loans under the new rules.  "All else being equal, about 31 per cent of high-ratio mortgages issued nationally during that period would not have qualified."

• ANALYSIS: Fear and loathing in the Vancouver housing market

The report comes the same day as a report from the Canadian Real Estate Association shows that the average house price has risen another seven per cent in the past year, up to $489,591 in November.  The central bank noted that means house prices are now "just under six times average household income, their highest recorded level."

The good news on the housing front, however, is that the central bank thinks the new rules will eventually achieve the goal of bringing down debt levels.  "The policy measures introduced by the federal government in the autumn will, over time, have a constructive effect on the number of highly indebted households," the bank said. It also warned that "self-reinforcing price expectations may also be supporting price increases" in the major housing markets of Toronto and Vancouver.

Corrections

• A previous version of this story implied that almost half of all mortgage holders in Toronto have LTI ratios in excess of 450 per cent. In fact, only almost half of all new high-ratio mortgages in the city are above that threshold.

Comment.....A vicious circle..the masses go into dept over their heads and that's what benefits the economy. It was said that if people stopped using credit cards this minute, the economy would go into a tailspin almost immediately.