I was watching David Letterman on Youtube this week, and saw Bill Clinton do a lengthy interview in which he described his take on the sub prime meltdown, the economy, and how it came about. The interview starts off with him talking about his philanthropic efforts around the world, but quickly turns to the economy and provides a very clear description of the sub prime meltdown, the resulting economic crisis, and how it all came about.

I am going to post links to all three parts of the Clinton interview, and it is good (although relatively long) viewing. My comments on this interview will follow the three parts of the video. The links to the videos are below in the order that you should watch them.

MY THOUGHTS AND COMMENTARY:

First, I am going to do what a lot of viewers on Youtube are unable to do, and ignore Clinton’s past as presidency and past policy decisions. He is not throwing stones in this interview, and is instead simply describing what happened for the banking crisis to get this bad. Many comments seem to circle around the Gramm-Leach-Bliley act as a policy that Clinton was responsible for, and while this is true, it has NO bearing on the sub prime crisis “Description.” Is that act responsible for it? Sure it is, but that isn’t the point of this video and interview. The point is simply to show my readers Clinton’s take, as I thought it was a very good explanation, understandable by all, as to how this situation arose.

I think that Clinton does a good job of explaining how derivatives, and excess supply of money floating around were largely responsible for this. He doesn’t name Greenspan in this article, although clearly when he says, “we didn’t give them alternative investment opportunties,” he is referring not only to Greenspan, but to the entire American Administration as a whole. He makes a very good point that there weren’t enough incentives to pull money in other directions (such as tax breaks for investment in green initiaves and cleaner sources of fuel and energy). The only thing people understand is consequence and incentive. Consequences when they do something they shouldn’t and incentives when they do something they should. In the past real estate market, the incentives were all aligned with doing more mortgages, more loans, and more purchases, but the consequences of that are now coming to light. As money floods out of real estate, it will find a new haven, and those people who are forward thinkng are already moving their money there now.

Where is that new haven? I have no idea, yet, but I’m watching. As this crisis unfolds I’m sure we’ll see and learn something. We better…

There is a lot of talk amongs real estate “investors” and specialists saying that the key to buying real estate at low prices is to find foreclosures, pre-foreclosures, court ordered sales, and other distressed sales.

IS THIS A VIABLE METHOD OF INVESTING IN REAL ESTATE?

This is not an easy answer. The quick answer is NO. Otherwise, everyone would be doing it. The longer answer is “it depends who you know.”

Let’s address a few of the terms that are being tossed around, and see how they apply to the Canadian market.

FORECLOSURE

This is the process whereby a lender takes the property away from an owner if they miss too many payments. Usually, the process is about 6 months long starting with an “Order Nisi” into court and ending with an “Order Absolute” when the property is taken away from the borrower and given to the lender. Usually, it doesn’t get this far, and a “Order for Sale” is given and the lender will usually sell the place (possibly by also taking possession and kicking the people out of the home).

PRE-FORECLOSURE

This is a very misleading term that a lot of experts are telling clients to search out. Clients are being told to see out pre-foreclosure by looking for signs of “distressed sales,” or other terms that describe highly motivated buyers. Pre foreclosures are very, very hard to find without having an “in” in the industry. As a mortgage broker, often dealing with a lot of distressed sales, I cannot tell people about my clients in situations that they are being told to seek out. In other words, any broker telling you about specific foreclosures is often violating the confidentiality of their clients. There ARE cases, where the clients are OK with this (for example, when they want to sell desperately), but in most cases those people being foreclosed on don’t want to sell. They want to keep their home just like anyone else.

So where do you find pre-foreclosures? There are often several lawyers in town that deal with foreclosures, and they MAY be willing to provide you with names and addresses of properties that are nearing foreclosure. Alternatively, a broker (me for example) who deals with a lot of hard financing and hard situations may have some clients that are seeking to get out of the property. With proper written permission, I, or other brokers like me who deal with a lot of difficult financing situations, can provide you with people who are highly motivated sellers. However, dont’ expect this information to be widely available for the public at large. You are going to have to work for it, and it won’t be easy. If it was, EVERYONE WOULD BE DOING IT!

The last way to find pre-foreclosures is to look at what is being heard “in chambers” in the local provincial courts. For example, if you go down to the courts you can see what is being heard that day, and if you see “Royal Bank of Canada vs. John Michaels” (for example) you can be relatively sure it is because the bank is starting an action against Mr. Michaels, and it is usually due to a possible foreclosure beginning. This info is also available online on the provincial court websites (depending on what province you are in). However, it will NOT say “Foreclosure Hearings” conveniently labelled. It will take a bit of deduction and work to figure it out because you are trying to get very private info. Again, if it was easy, EVERYONE WOULD BE DOING IT!

COURT ORDERED SALE

Oftentimes, when there is a first and second mortgage holder, the clients may fall behind on payments to the first mortgage holder (often the larger of the two) and have problems making their payments. This will put the second mortgage holder at a disadvantage, because if the first mortgage holder gets an “Order Absolute” it will wipe out the second mortgage holder’s claim. This usually takes at least 6 months, and is a huge song and a dance from a legal perspective, so it tends to result in interest piling up and further equity being eroded. Now, this is a simplification of the process, but if the second mortgage holder sees their equity being eroded with interest (or a falling market) they can apply to the court for Conduct of Sale granting them the rights to sell the property for a fair price to pay out the first mortgage, and themselves, and ensure they don’t lose money on the deal. In order to be granted this, they usually have to demonstrate that their equity is in jeopardy by way of appraisals or other market valuation techniques accepted by the courts. In a falling market, with interest piling up, they will usually be granted an order for sale unless a massive amount of equity exists.

So, when reading and hearing about “Court Ordered Sales” you are hearing about highly motivated sellers. However, don’t expect to waltze in and pay pennies on the dollar. The court still overseas the sale price, and makes sure that the price that is received is fair market value. For this reason, just the fact that someting is a court ordered sale doesn’t automatically make it a “deal.” You still have to do your homework and find a motivated seller through the methods I list in the section above regarding pre-foreclosures.

SUMMARY

The process of seeking our foreclosure and “pre-foreclosures” is not a cut and dry issue whereby you can simply find someone willing to give you a “list.” It takes effort, ingenuity, or industry contacts to track them down, and even then, they might not be a great deal. You still need to look at the direction of the market, the cost of the property, and whether or not it is highly marketable in order to discover how good the purchase really is.

Remember, if it was super easy, EVERYONE WOULD BE DOING IT!

I’ve been made slightly crazy this week with clients telling me they have been working with a “TD Mortgage Broker” or a “RBC Mortgage Broker.” Why is this making me crazy?

Because, they are NOT Mortgage Brokers!

The very essence of a Mortgage Broker and our service, is that we are independent, not tied to any one lender, and able and willing to access lenders with the best rate, product, and service to fit a client’s unique situation. If you are dealing with someone from TD or Royal Bank or BMO who is a “Mobile Lending Specialist” or Business Development Manager, THEY ARE NOT A BROKER. They are just the same as the person in the branch. They are there to drive business to their respective institution, but they are given a slightly different mandate: They can come to you, at your house, or in a move convenient location. However, they are, and always will be, working for the institution with their parent company’s best interests ahead of your own.

A true mortgage broker does not deal with only one lender (or even two or three!). A true mortgage broker acts as a third party who has a fiduciary duty to their client. This is a duty to look out for the financial best interests of their client. If TD is offering a rate of 5.55% for a standard 5 year closed mortgage, and, all other things being equal, we can get you the same product at Scotiabank but at a rate of 5.25%, a mortgage broker will ensure that your mortgage gets done at Scotiabank. A TD “Rover” or Mobile Lending Specialist is only equipped (and heavily incented) to send the business to their own company.

Now, there are exceptions to this rule. I have seen TD Mortage Specialists that can’t get a deal done at TD, and then end up using a broker-channel lender once TD has declined the business. However, the business still gets first shot at TD.

I am naming TD here, not because of any inherent dislike of them, but rather because their TD Rovers and mobile lenders are often confused with mortgage brokers because many of them work out of real estate offices, and work non-traditional hours. Naturally, they don’t want to change this image of themselves as independent brokers, so they say little to contradict the rumour that their client is dealing with a mortgage broker.

Be very wary when dealing with a mobile lender that deals exclusively (or primarily) with one lender. As a true, independent, mortgage broker, I take your mortgage “to market” and shop for the best rate and terms at ALL lenders (except RBC, Coast Capital, and BMO because they won’t deal with mortgage brokers and have their own mobile lending staff which they feel is more cost effective). I have over 30 institutions that I can take your mortgage to: many you will have heard of, and many that you will not have heard of.

Lastly, a mortgage broker is a licensed individual, who is overseen by FICOM (Financial Institution Commission) who regulates and assures ethical practices amongst its member brokers. Most mortgage brokers also are members of their provincial and national broker associations. In my case, I am a Member of the Canadian Assocation of Accredited Mortgage Professionals (CAAMP) as well as the Mortgage Broker Association of British Columbia (MBABC). Lastly, I hold my AMP designation making me an Accredited Mortgage Professional, and this is the highest level of education, oversight, ethical training, and continuous education in the country for lending professionals. Your local bank employee rarely has any of the the above certifications that attempt to ensure ethical practices and ensure proper training and oversight.

When dealing with me, you can be sure that you are getting truly independent advice. I don’t favour one lender over another (unless they have the best rate or product in the market at that time) and always send my deals to whichever institution offers the best overall package. Rate is a very important part of the package, but it is by NO means, the only issue. Term, ammortization, pre-payment priviledges, flexibility, portability, assumability, and many other concerns need to be given equal consideration along with long-term plans, career aspirations, and credit worthiness.

Don’t mistake your local banks’ mobile staff members as brokers. They aren’t. Deal with a true broker, and you will receive superior rates, service, and product selection. Call us up, you’ll be glad you did.

There has been a lot of coverage on the news recently about “Main Street” and “Wall Street” and what each means, but I’ve never heard them define what those terms mean. In today’s post we’ll cover this little tidbit of info and explain how the media is using the term.

“WALL STREET” is referring to the investors, investment houses, and investment banks that put money (often their clients’ money) into certain invesments. When you hear a news reporter say, “there was a lot of pain felt on Wall Street today,” they are referring to the major investment banks and investment houses suffering losses. The name “Wall Street” comes from many historical references, but it is the location of the NYSE (New York Stock Exchange) as well as the name given to the financial district in New York.

“MAIN STREET” is referring to all the citizens of the US. When you hear a news report say, “the pain felt on Wall Street might not filter down to Main Street for quite a while yet,” you are hearing them say that the pain felt by the investment banks might not be felt by you and me for a while yet.

So essentially, Wall Street is the investment banks and financial companies, whereas Main Street is the “everyman” in the United States.

In the context of the US Sub Prime meltdown that is still occuring, these terms are often used on the news with little or no explanation of where they come from.

Now you know!

So I haven’t posted in over a week, and it’s been because i’ve had my head down working like a dog while reeling from the effects of the last week’s meltdown in the financial sector. Finally, after an up and down week, and Fed in the US approved the bailout. You would think that this is great news for the real estate industry, right?

I’m not so sure. What this plan effectively did is nationalize a private problem. There is a saying somewhere that when profits are made they are private, but when losses are taken, they’re public. I know that isn’t a direct quote, but it is close enough to get the gist of it. It is also very very true. So long as the market continued along unabated, with profits being made, private investors got to keep all their profits, spend it as they wished, and not have to pay anything other than taxes. When the problems set in, and the investors all stood to lose a lot of money, enter the Fed and a massive public bailout that effectively increases the national debt that took them over 100 years to build by 10% in a single blow. I don’t like the precedent that this sets, and hope that the bailout doesn’t totally bail out all the lenders and institutions that acted irresponsibly over the past 8 years. That said, I also don’t want the market to go into a tailspin and melt down.

A lot of the price appreciation we have seen in Vancouver Real Estate in the past few years is driven by the market being very desirable to live in, own in, and even rent in. As a result, prices have (and should have) risen. However, as someone on the front lines of mortgages and real estate, I DO think that prices have gotten ahead of value, and we are in for a correction.

Unlike the United States market, however, I do NOT think that prices will come crashing down around us. Our lenders up in Canada, (yes, even those based out of the US) were more conservative than there brethren in the US and required a borrower to have more than a pulse and sufficient body temperature to warrant getting approved for a mortgage.

Did we have true sub-prime lending in Canada? Yes, but only at a few lenders, and always at no more than 95% financing with most preferring to remain at less than 80% financing even on rock-solid properties. The US actually had lenders lending (in some rare cases) up to 125% of the purchase price with the hopes that property prices would continue to rise and put the clients back “into the black” in a few short years. While this strategy allowed clients to roll all their other debts into their mortgage as well, it only worked while prices continued their meteoric rise upwards. When they started to roll back, that was the end for those lenders (and insurers who insured the mortgages).

So where are we going from here? I met with a few other brokers over the weekend and we chatted about where the market is as well as some of the large pull backs in prices we have seen recently. Most of us agree that prices are likely still going to continue downwards for a while, and the fact that money is still getting tighter and tighter and guidelines more and more restricted will only compound this issue in the near future. CMHC is slated to release some new guidelines any time soon, and I suspect that their “Self Employed Simplified” program will disappear or reappear in a far more conservative form. This could make it far more difficult for self employed borrowers who show no income to get qualified. Given the very high percentage of self employed borrowers in BC, this will have a disastrous effect on real estate prices if we are correct. I hope that we aren’t.

So, if prices continue to decline, should you still buy?

The answer depends on your plans:

1. If you intend to buy and hold it for 5 years or more, then yes you should still consider purchasing rather than renting.

2. If you are buying an investment property, I would likely shy away from the Vancouver market in the next year.

3. If you are intending to flip the property, DO NOT get into this market. I have many, many buy-and-flip investors who have purchased properties, poured $100K into them, and cannot sell them for their original purchase price at this point. Buy and flip is not shrewd in this market unless you are buying at a substantial discount and putting essentially no capital into it.

The bottom line is that if you are buying a home, long term, you should always get into the market, buy as much house as you can afford, and let history, scarcity, and payments do the rest for you. You will always come out ahead, and I defy anyone to prove a 10 year period in Canadian history where if you purchased you would have been better off to have rented. That period doesn’t exist, and for that reason, buying property in Vancouver is still a good LONG TERM investment.

Happy hunting!

So this is the first time I have heard of this scheme, and I confess I am VERY impressed by the depth of deceit required to pull it off, and for nothing but information. In a mortgage broker professional magazine, an article was recently written by Vanessa Chris and reports on a new type of crime: that being perpetrated by Brokers.

How the scheme works:

In most cases, an established mortgage brokerage house receives an application from a seemingly perfect broker. In many cases, the applicant wows the hiring brokerage house by demonstrating their in depth knowledge of lender guidelines and underwriting criteria. Happy to receive such a qualified applicant, many brokerage firms do not do the necessary amount of background checking and reference checking due to the impressive nature of the original interview. The new broker gets hired.

Shortly thereafter, the new brokerage house receives a call from Equifax (the primary credit bureau in Canada) asking about an inordinate number of credit inquiries OR they receive a call from Equifax with a person claiming that they never applied for a mortgage yet received an inquiry on their credit bureau. When the brokerage house looks into it, they find that their new star employee has been doing many many credit inquiries on innocent people and recording their information. The offending broker is then never heard of again.

How does this happen?

Lenders publish their guidelines to all brokers, and it wouldn’t be difficult for a person to get a copy of the major lender guidelines from an innocent broker who is trying to mentor and train a new broker. Once they commit the guidelines to memory, they are easily able to wow and impress a hiring brokerage with their knowledge. Most hiring companies will be so impressed and blown away with a broker’s knowledge that they will rarely follow up in earnest on their references.

What is the payoff?

Now that the broker has a person’s credit bureau, what damage can they do? A person’s credit bureau contains all their personal information: address, SIN number. employer, other names, other accounts and account numbers, etc…  With this info, the perpetrators are able to make applications for other credit facilities, make a move towards their bank accounts, or do just about any other form of identity theft. On the open market, info this accurate and detailed is likely worth a fair amount to those in the know.

How can firms protect themselves?

The most obvious thing a brokerage house can do is to first limit the number of people that have access to credit bureau info credit applications. In smaller brokerage houses, this isn’t as vital as larger houses that have 40 or more brokers and where training and monitoring are vital

Brokerage houses that are hiring should also check ALL references and ensure that an applicant’s SIN number matches their identity so that the offending person can be tracked down and identified properly.

Historically, mortgage fraud has been comimitted by buyers that work with a group of other people to inflate property prices, and registere mortgages on unsuspecting victims’ homes. In this case, the perpetrators are actual mortgage industry professionals, many times with impeccable records and work histories. That people are willing to take such risks to get this information speaks to the value that such information has amongst organized crime.

So, if you are a hiring brokerage, take care and check the references of those brokers you hire. It doesn’t take that much time and effort and can save you a ton of headache.

If you are a client, you should be getting a copy of your credit bureau twice a year and going over all the inquiries on your report. Inquiries are all the companies that have looked at your credit bureau and obtaiined your info. For them to pull your credit, they require authorization, and if you see people or companies on there that are looking at your credit and to whom you did not give authorization, then you should contact Equifax as well as the offending inquiring company and track down why they looked at your credit.

One proviso on going after the companies looking at your credit: If you have existing accounts with, BMO, for example, and see an inquiry from BMO, don’t go all crazy immediately. Oftentimes, if you have an account with one lender, they will check your credit from time to time (often electronically and automatically with no human involved) to make sure you can still reasonably afford the credit facilities that you have. The time to be really worried is when a company you don’t recognize or deal with starts doing inquiries on your credit but you never did an application. In those cases, jump on it right away and make sure that your credit is clear and that your info hasn’t been stolen.

Until this happens, protect your information as much as possible and happy investing!

This last week has been perhaps the most harrowing in the financial industry that I have been around to see. The week came out of the gates with the 4th largest investment bank in the US (Lehman Brothers) going down after several failed buyout packages. Subsequently, when it appeared that Merrill Lynch was on it’s way out the door as well, the governement stepped in and bailed the out in an effort to restore confidence. However, the battered and bruised economy wasn’t done! Within hours it appears that many other investment banks, brokerages, and financial institutions were going down the bankrupcty road as well. AIG, one of the largest mortgage insurers in the country then gets a government bailout for $85 Billion dollars leaving many people shaking their head and asking, “why not Lehman Brothers?”

It appears the government is picking and choosing who will be left standing, and this does little for investor confidence. I came upon two graphs on the net today. Here is the first, and it shows in a graphical sense, the money the government has “printed off” to try and print their way out of this pending disaster.

The second chart is a visual representation of the losses taken by the major financial banks in the sub-prime crises. Remember, these are actual dollars that are lost. These numbers are staggering in their size, and the companies that lost the most stand out glaringly.

On the heels of all this news, the government has started issuing a guarantee for mutual funds as people are cashing out of them in a dangerously fast pace as they try to save their capital. The funds are guaranteed for one year, and in my opinion this is silly logic.

My point: EVENTUALLY, SOMEONE HAS TO PAY FOR THIS PROBLEM!

As I have said in earlier posts on this blog, those that pay will either be Government (you and me), Investors (you and me) or homeowners (you and me). You can see the trend here. We, the public, will ultimately pay for this. The only alternative is that the government buys and prints their way out of the problem, and from an economic standpoint this should totally devalue the US dollar and destroy confidence in it as a medium of trade if the government can just fabricate more of it in a fiat-economy sense. I strongly dislike it when government steps into the way of the market and tries to bail everyone out.

Please do not think that I am just saying this of Americans. The filtration effect that we see in Canada and mortgages in particular is a tightening of the monetary supply and availability of credit. This results in fewer buyers, and fewer buyers translates into lower real estate prices. As a home owner, I recognize that I am going to lose a lot of money, but I also enjoyed the ride up. What the government is doing is trying to give people the fun ride up, without the downside. Long term, this isn’t possible, and a financial reckoning is eventually going to happen to us. I hope it isn’t as harsh and hard a landing as I suspect, but eventually the piper has to get paid.

In the spring of 2002, the largest mortgage fraud in BC history was discovered and blown wide open. The name of Martin Wirick has been slung around and dragged through the mud since that time. Nearly any person in the industry that I talk to has heard of Martin Wirick and knows that he commited alleged mortgage fraud, but few people know the actual story. I am sure that the TRUE story will never be completely known, to anyone other than Mr. Wirick himself, but for my readers I would like to outline how the events unfolded and how this type of mortgage fraud occured in BC with such a strict land titles system.

The investigation into the fraud was so extensive, spanning 6 years, and covering over $30 million dollars in losses by lenders and homeowners, that the Vancouver Police Department actually had to form a joint task force with the Vancouver RCMP Commerical Crime Section and get a fresh start on things.

Martin Wirick was not alone in this alleged fraud. Tarsem Singh Gill, a local land developer had much of the funds funnelled through his various company accounts. They are both charged with two counts of fraud and theft against 77 different homeowners, and two counts of fraud and theft against lenders in 30 loan transactions.

Despite all this, the institution that lost the most money was the BC Law Society as a result of covering all the loses, and good on them for stepping up! They paid out $38.4 million in claims on account of Wirick’s alleged fraud. The society levieda $600 charge to all members of the law society (all lawyers) and has subsequently reduced this to $150 per year.

So you may be wondering what happened to these guys?

Wirick resigned in May of 2002 (the year the fraud was discovered) and declared bankruptcy. In a strange twist, he then took a job working for Koko’s Gourment Pet Foods in the pet food business. This is a rather large step down, which he appears to have taken of his own accord.

Tarsem Singh Gill has continued to develop property in the area. How this happens and is allowed to continue is very confusing to me. Granted, the charges are “alleged” at this point, but “where there is smoke there is fire,” and it appears to me that authorities should be able to restrict his continued development.

So how did the fraud work? The techinical details are beyond the scope of this blog, but I will summarise an article write up from the Vancouver Sun.

The method to the madness was Gill would develop and sell it to one of his nominees. This nominee would arrange a mortgage on the property and then sell it to an innocent purchaser. Once the purchaser arranged their own financing from their own bank, they would forward the funds to Wirick with an undertaking to pay out the mortgage and register a new mortgage. However, Wirick wouldn’t do this at all, and would pay the funds to Gill through Vanview group of companies.

Oftentimes, Wirick would provide falsified discharge documents, and he would hold back a portion of the stolen funds to make mortgage payments and keep anyone from figuring anythingwas wrong. The new mortgage holder would expect that they had a 1st mortgage, but often they had a 2nd mortgage, and in some cases this process was repeated over and over for far more than the property was even worth.

When the scheme finally caved in, the messy web of transactions, funds, hold-backs, and frauds was daunting (thus the joint task force between VPD and Vancouver RCMP Commercial Crime Section.

When the fraud occured the law society has  $17.5 million annual cap on client claims for lawyer fraud. To their credit, the law society removed this cap as i was clear that this would not be enought to compensate the victims of the fraud.

Since this time, the society has stepped up its auditing of this member’s (lawyers’) trust accounts and advised its members to tell the society when a lender takes undue time providing mortgage discharge documents which was one of the ways that Gill and Wirick managed to perpetrate this fraud.

So charges have been laid, the alleged villains arrested, (and released) but will they be found guilty. It will be interested to see how this legendary case unfolds…

The last few days in the financial markets have been complete chaos. First the 4th largest investment bank in the country files for chapter 11 bankruptcy, and immediately following this, the government bails out one of the largest mortgage default insurance companies in the country. It seems that the government is picking and choosing who they are going to bail out. For example, why not Lehman Brothers? No one seems to have any good answers as thousands of investors have eaten major losses in the Lehman Brothers failure, but then those invested in AIG have been bailed out. Why? There doesn’t seem to be any rhyme or reason, and if there is one thing in the financial markets that people don’t like it is uncertainty.

So how have these problems made their way up to Canada? Many people think that the sub prime problem is centered in the US and that we in Canada are isolated despite the US being our largest trading partner.

To understand the effect that the US crisis is having on Canada, you first have to be aware of how interconnected the banking and mortgage world is. For example, the government in US bailed out AIG, the largest single corporate holder of mortgage insurance. They are similar to CMHC and Genworth in Canada who allow lenders to lend more than 80% of the value of a property. AIG recently came up to Canada and launched aggressive new lending guidelines that revamped the face of the mortgage industry and cause CMHC and Genworth to also change their guidelines or risk being thrown to the side of a rapidly moving business.

Rumours have abounded for the last few months that AIG was no longer insuring mortgages in certain areas of Canada where it felt prices had gotten ahead of values. Although I have nothing to substantiate this claim, the two cities I heard most about were Calgary and Edmonton, both of which have experienced sharp price pullbacks.

So what is mortgage insurance and what is it for? Traditionally, banks could only lend up to 75% of a home’s value, but with the National Housing Act which set up CMHC in the 50’s (I think) banks were able to lend more than 75%. This type of mortgage is referred to as a high-ratio mortgage. What the insurance covers is default, or, in other words, when someone doesn’t make payments and the bank has to foreclose. In this case, the insurance company pays the bank any losses it incurs as a result of the foreclosure. Up until 8 years ago, only CMHC was around, but then GE (a division of General Electric) got into the market, and then recently AIG came up from the US. That makes 2 of the 3 of the insurers in Canada US firms! Should the US market start to take a dive, and should the insurers in the US (there are many more down there) start to take a beating, and start to go out of business, then we in Canada will likely see their Canadian arm disappear or retract and tighten up (as we ARE seeing). Should those companies fail altogether, it will leave Canadians with fewer choices for mortgage insurance, and we will likely see a major real estate correction. Fewer choices means less competition, and less competition means lower prices. It is simply supply and demand.

Add to this flux in the US the fact that rates in the UK have shot up dramatically in the past week. The LIBOR or London Interbank Offered Rate went from 3.33% to 6.44% in one day. That is nearly DOUBLE, and this is the rate that many mortgages in the US and Canada are pegged to. If this type of increase and volatility continues, you can expect banks offering variable rates to trim their discount dramatically. This is already happening with CIBC leading the charge and reducing their variable discount to prime – 35% (on average) and Royal Bank, TD, BMO, and many others following suit. We may soon see a time when variable rate mortgages are no longer offered below prime and could even be offered ABOVE prime if the volatility continues.

So that is the state of the mortgage world in Canada at the moment. I have a sneaking suspicion that the Sub Prime fallout is far, far from over, and that things will get much bleaker before they get better again. Ultimately, all this debt has to be repaid. It doesn’t just vanish, and whether it is investors (i.e. you and me), the governemtn (i.e. you and me), or borrowers (i.e. you and me) you can see that crunch time is upon us and will continue for some time.

I will try and update the status of this worldwide credit crunch more and more as it continues to be a major cause of concern for buyers and borrowers.

There was an article in the Vancouver Sun on September 15th 2008 that talked about the EXTREMELY LOW vacancy rates in Vancouver’s rental market. According to a recent report published by CMHC (Canadian Mortgage and Housing Corporation), vacancy rates for studio apartments and one bedroom apartments has plummeted to a 25 year low of 0.3%. In some cases, as many as 30, 40, or even 50 people are lining up hoping to get to rent a unit.

A researcher at Simon Fraser University, Kennedy Stewart, says that “it comes with urbanization. A chronically low vacancy rate is the sign of a city that has to adjust its expectations of lifestyle.” He went on to say that people wanting to live in in high density cities in their “teenage years” such as Vancouver may have to forgoe space and pets for the forseeable future. Apparently more than 50% of all units in Vancouver are rental units!

Pet owners are particularly feeling the squeeze as landlords are looking past them if they have pets of any kind. Until 2006 landlords didn’t have any right to select people if they did or did not have pets, but in Vancouver, with a relatively young housing stock, owners are more concerned about keeping their property in pristine condition and would prefer not to have pets in their units. Even visible minorities such as aboriginals and elderly are finding that they are being dismissed as potential tenants despite discrimination on these two factors being against the human rights code.

The article states that, “Even parents are finding it hard to find places to rent. “People act as if children are a disease,” reads a Craigslist post titled, “WHY DOES NO ONE ALLOW KIDS!!!”

The reality is that children are noisy, can damage things, and frequently are irrationally so on both counts, and it doesn’t shock me that landlords would prefer not to have them there. With the market awash with young professionals with great income and lifestyles outside of the home, why wouldn’t they have this preference? While I don’t morally agree with this practice, in the realm of investment, you SHOULD do whatever possible to protect that investment. With market prices declining across the board, landlords are feeling the squeeze to protect their investment more than ever and this is leaving women with children in a very tight spot.

The alternative, that no one likes to talk about, is an acknowledgement that not everyone can live in the high density areas. Politicians and media are loathe to make any claim that sounds “anti family” or “anti child” but the reality of the cold, hard, impassive dollar is that if I were choosing a tenant, I would prefer a young, single professional, to a single mother with children. It isn’t a moral judgment or a value judgment on my behalf, it is a judgment as to what is best for my investment. The day the government stands up and says how I can and can not invest, is the day that I pull out of rental estate, and the more owners that feel this way, the more compounded and difficult this issue will become. Stop gap remedies that force landlords to do (or not do) one thing or another to protect their investment are ill advised and rarely work. Again, this blog is all my opinion, and there it is.

Happy investing!