2 ms·

I agree completely. I will say the Canadian banking system (as well as credit unions, which are regulated differently) is generally quite healthy and stable, I

by patmcc 4y ago

I agree completely. I will say the Canadian banking system (as well as credit unions, which are regulated differently) is generally quite healthy and stable, I don't think it's imminent risk of collapse. But I would certainly not count on this guarantee, it's very silly.

prottog 4y ago
I don't live in Canada but as your (very) southern neighbor, it seems that banks could be in trouble with the real estate market having been so out of control. As interest rates rise, isn't there a real risk of forced liquidations by leveraged property speculators resulting in banks sitting on a lot of losses?
- patmcc 4y ago
  It's possible; there really have to be two pieces for it all to come crashing down. The first is rising interest rates leaving people unable to pay, and the other is prices falling enough that mortgages would be underwater. I think the first is pretty likely, but not sure how many people that will hit. There are decent stress test rules so anyone who couldn't afford a 1 or 2 percent jump shouldn't have qualified. The second is less likely, I think. We've got an absolute minimum 5% down payment, and almost always more like 10%, and anything under 20% requires default insurance. So I think pretty low chances unless the housing market craters ~30% or more. Which might be what it actually should fall by, honestly, but the government will probably intervene way before that happens.
  - tenpies 4y ago
    Just to add some colour on the insurance aspect: > Mortgage default insurance protects lenders in the event a borrower defaults on their mortgage. It does not protect the borrower or a guarantor. If a borrower defaults, the insurer may oversee all legal proceedings and payment enforcement. In addition, the insurer compensates the lender should there be a shortfall after the property has been sold and expenses paid. The defaulting borrower remains responsible for any shortfall on the mortgage and the lender or mortgage insurer may pursue the borrower for any deficiency following sale of the property.[1] I just want to highlight that last part because the insurance is 100% not for the borrower, but for the lender. Just like when any other insurance policy is used, the insurance provider has a strong incentive to reduce how much of the policy's pay out it pays from its own reserves and that means going after the borrower. There is also a vague idea that because one of the major mortgage insurers is a government corporation (CMHC), they will pay out and not pursue the borrower. This is not true, and if Canadians know anything it's that no one loves taking other people's money as much as the government. To get out of paying you have to declare bankruptcy, much like the US. [2] So in short, the Canadian system is set up to have the borrower pay for the lender's ability to expeditiously be made whole in the case of default, and for the insurer to then pursue compensation from the borrower if the asset price is below the loan value. It's the most Canadian thing ever: the borrower is getting screwed but thinks it's a good thing. --- [1] https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Default_Insurance.pdf https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Defaul... [2] https://rates.ca/resources/does-declaring-bankruptcy-get-you-out-paying-cmhc https://rates.ca/resources/does-declaring-bankruptcy-get-you...
- Waterluvian 4y ago
  The 2008 collapse didn’t really happen up here. I think the big five banks are so heavily regulated that the bar is exceptionally high for catastrophe. The stress test rules around mortgages and mandatory default insurance for high ratio mortgages (less than 20% down) also help. Interest rates were incredibly low, but they still weren’t just handing out mortgages like we saw in the States in the previous collapse. Of course nothing is impossible.

by patmcc 4y ago

prottog 4y ago

I don't live in Canada but as your (very) southern neighbor, it seems that banks could be in trouble with the real estate market having been so out of control. As interest rates rise, isn't there a real risk of forced liquidations by leveraged property speculators resulting in banks sitting on a lot of losses?

patmcc 4y ago
It's possible; there really have to be two pieces for it all to come crashing down. The first is rising interest rates leaving people unable to pay, and the other is prices falling enough that mortgages would be underwater. I think the first is pretty likely, but not sure how many people that will hit. There are decent stress test rules so anyone who couldn't afford a 1 or 2 percent jump shouldn't have qualified. The second is less likely, I think. We've got an absolute minimum 5% down payment, and almost always more like 10%, and anything under 20% requires default insurance. So I think pretty low chances unless the housing market craters ~30% or more. Which might be what it actually should fall by, honestly, but the government will probably intervene way before that happens.
- tenpies 4y ago
  Just to add some colour on the insurance aspect: > Mortgage default insurance protects lenders in the event a borrower defaults on their mortgage. It does not protect the borrower or a guarantor. If a borrower defaults, the insurer may oversee all legal proceedings and payment enforcement. In addition, the insurer compensates the lender should there be a shortfall after the property has been sold and expenses paid. The defaulting borrower remains responsible for any shortfall on the mortgage and the lender or mortgage insurer may pursue the borrower for any deficiency following sale of the property.[1] I just want to highlight that last part because the insurance is 100% not for the borrower, but for the lender. Just like when any other insurance policy is used, the insurance provider has a strong incentive to reduce how much of the policy's pay out it pays from its own reserves and that means going after the borrower. There is also a vague idea that because one of the major mortgage insurers is a government corporation (CMHC), they will pay out and not pursue the borrower. This is not true, and if Canadians know anything it's that no one loves taking other people's money as much as the government. To get out of paying you have to declare bankruptcy, much like the US. [2] So in short, the Canadian system is set up to have the borrower pay for the lender's ability to expeditiously be made whole in the case of default, and for the insurer to then pursue compensation from the borrower if the asset price is below the loan value. It's the most Canadian thing ever: the borrower is getting screwed but thinks it's a good thing. --- [1] https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Default_Insurance.pdf https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Defaul... [2] https://rates.ca/resources/does-declaring-bankruptcy-get-you-out-paying-cmhc https://rates.ca/resources/does-declaring-bankruptcy-get-you...
Waterluvian 4y ago
The 2008 collapse didn’t really happen up here. I think the big five banks are so heavily regulated that the bar is exceptionally high for catastrophe. The stress test rules around mortgages and mandatory default insurance for high ratio mortgages (less than 20% down) also help. Interest rates were incredibly low, but they still weren’t just handing out mortgages like we saw in the States in the previous collapse. Of course nothing is impossible.