Hard on the heels of my mention of foreigner bashing in BC and the interesting discussion that followed comes a Bloomberg story about Canadian mortgage fraud:
Evidence of mortgage fraud amid surging home prices and household debt has prompted S&P Global Ratings to lower a key risk metric for Canadian banks.
The credit ratings agency dropped its economic risk assessment by one notch due to evidence of residential-mortgage fraud at smaller Canadian banks, which could compound existing risks from the country’s hot housing market, according to a statement Friday. S&P lowered the Canadian banks’ economic risk level to 3 out of 10, with a higher number representing great risk, revising the trend to stable. That puts Canada in line with the U.S., but lower than the U.K. and Australia.
High housing prices and debt loads increase incentives for fraudulent activity such as overstating a borrower’s income to meet qualifying criteria. Additionally, a growing share of mortgages is being originated by brokers who don’t bear the credit risk for the loans like lenders, according to the statement.
That second paragraph is very poorly written (I think the reporters had problems with “higher” and “lower” as it related to the scale used by S&P), but given the rest of the article I conclude it means they have reassessed “economic risk level” so that it is less desirable than it was before.
The S&P statement also referred to a press release from Equifax Canada about a report that I can’t find on their website (I can’t find the press release there, either!):
Equifax Canada (NYSE:EFX) data suggests high-risk and suspected fraudulent mortgage activity is on the rise noting a 52 per cent increase in suspected fraudulent mortgage applications since 2013.
According to data from Equifax’s enterprise fraud management solution, ‘Falsified Account Statements’ and ‘Falsified Documents’ were the most prominent application tags, as reported by investigators. The other was ‘Conflicting Information’. Of those applications flagged, 67 per cent were from Ontario while the next highest was 12 per cent from B.C.
…
Little White LiesWith respect to mortgage fraud, the results of the recent Equifax survey showed:
•13 per cent of Canadians indicated they felt it was okay to tell ‘a little white lie’ when applying for a mortgage to get the house they want.
•16 per cent said they believe mortgage fraud is a victimless crime
•8 per cent admitted to misrepresenting the facts on a credit or loan applicationThe Cost of Buying a Home
When asked about housing prices, the results of the recent Equifax survey showed:
•84 per cent believe that the cost of home ownership is too high for first-home buyers today
•Nearly three-in-ten Canadians cite ‘more demand than supply’ (29 per cent) and ‘foreign buyers’ (27 per cent), as the main factors driving up home prices
•B.C. residents (compared to other provinces) were significantly more likely to cite foreign buyers as the top reason for home prices being driven up (75 per cent versus 42 per cent for all other provinces, respectively
So, we’ll see how it goes when mortgage renewal rates go up to 6%, which they probably will at some point, although not necessarily in my lifetime. I have a great personal interest in this matter, as every now and then a prospective client sneers at the pathetic yield offered by preferred shares and condescendingly informs me that he can get 8%, no problem, from a mortgage investment corporation. I don’t think these guys know about risk … but then, they don’t have to! Every one I’ve ever talked to is smart enough that he’ll get out before problems become apparent to the hoi polloi.
Don’t get me wrong! I’m sure that private mortgages are a decent enough asset class and I’m sure that there are some mortgage grantors who are better at their job than others. It’s just that I don’t think a lot of people enamoured of the sector know the ‘Capital Destruction Partners’ paradigm (where you make great returns for twenty years and get wiped out in the twenty-first); and all the MIC advertising I’ve ever seen plays to that ignorance.
For instance, let’s look at Income Trust One, which touts its 8.32% nine-year historical average return. The fund fact sheet refers to a “Weighted Average LTV” [Loan to Value] of 50.8%, which sounds pretty good, right? So I looked further down and got some more detail:
Click for Big
This puzzled me. How does an LTV of 50.8% square with historical returns of 8.32% (and over 7% in each of the three quarters to the 2017Q3 publication date)? So I sent them an eMail:
I would like some clarification regarding your calculation of Loan to Value as reported on your Fund Fact Sheet as of September 30, 2017.
How do your calculations account for the Security Position of your mortgages?
For instance, if a property is considered to have a value of $800,000 and has a first mortgage outstanding with another firm for $400,000 and you have a second mortgage on the property for $200,000, what do you consider the LTV for your portion of the mortgage to be?
… and they were kind enough to answer …
Thank you for your email. Good question.
The loan to value (LTV) is calculated as the total amount of loan been borrowed (not just our portion) on a property (1st mortgage+ 2nd mortgage+…) / the appraisal value of the property.
Using your example below, the LTV will be (1st mortgage balance $400,000 + 2nd mortgage $200,000)/property appraised value ($800,000): ($400,000+$200,000)/$800,000 = 75%
So that seems reasonable enough and is actually quite heartening … but it’s not the whole story because it does not account for the subordination of the second mortgage; it treats the first and second mortgages equally for LTV calculation purposes and so is obviously not a metric one would wish to use much for risk evaluation purposes.
For instance, in a first-mortgage-only situation, a LTV of 75% means that if the property loses 25% of its value, then the mortgage debt is exactly covered. This is also the case when the $600,000 loan is split as above. So far, so good.
But say the property loses half its value. In this case, the first mortgage is precisely covered and the second mortgage is wiped out. That is the crucial difference. This is the structured finance conundrum that led to a lot of people getting nasty surprises during the Credit Crunch, as discussed long ago in the post Hull & White on AAA Tranches of Subprime.
Now I don’t want anybody to think that I’m picking on Income Trust One – I looked at them only because I saw their ad in the paper on the weekend when I had a little spare time that I created by neglecting my programming duties. It may be the best investment ever. It might not be. To take an informed view, I would have to do some very detailed work on the component mortgages of the Fund – and this level of detail is not available in the fund’s offering memorandum or the audited financial statements. Then I’d need some kind of covariance model and all that other good stuff we learned about during the Credit Crunch. Also, one notices from the 17Q3 Financial Statements (unaudited) that the fund is levered up: unitholders’ equity of $127-million is boosted with a $43-million loan, so that has to be accounted for. I’m not going to do all that work.
And I don’t think any of the guys who have sneered at the paltry expected yields on Canadian Preferred shares have done all that work either.
A recent survey shows Canadians don’t know the difference between their bank and their mommy:
Among the most common types of advice retail bank customers seek are investment-related advice (47 per cent); quick tips to help improve their financial situation (45 per cent); retirement-related advice (42 per cent); advice to help keep track of spending and household budgets (32 per cent); and in-depth financial review (30 per cent).
In addition, almost 30 per cent of customers younger than 40 years old say they are “very interested” in receiving advice from their bank.
There’s a good drone story from the UK:
A man who crashed his car in freezing night-time temperatures was saved from hypothermia when he was found by a police thermal-imaging drone.
He was discovered in a deep ditch, 500ft (160m) away from his car on the A16 near Ludborough, Lincolnshire.
…
Sgt [Mike] Templeman said: “We didn’t know if this male had been picked up, [or] if he had carried on walking.“We did extensive searches in the [police] vehicles, obviously we are very rural and it was very dark so you’re limited in what you can see.”
The OPP has a similar system, but I don’t know how widely deployed it is:
The OPP and Georgian Bay Volunteer Search And Rescue (GBVSAR) have taken over the Wye Marsh in a training session today [November 29, 2017]. Volunteers and officers have set up a command post to search for two “missing” men at the marsh. The scenario details that the men didn’t return to their vehicle early in the morning and the OPP and GBVSAR have been deployed to help look for them.
The OPP are able to bring in a UAS (unmanned aerial system), aka a drone, to help aid in the search. The drone has the ability to go up about 400 ft off the ground and travel up to speeds up 16-20 knots. There’s a thermal imaging camera on board to help the operator on the ground track what they are seeing from the sky. The camera is detailed enough to show the operator when something is an animal or a person in possible need of assistance.
BC has a formal testing programme:
A year into a pilot project to test unmanned aerial vehicles (UAVs) — commonly known as drones — for search and rescue, the province says the jury is still out on the high-tech helpers.
Search teams in Coquitlam and Kamloops got the go ahead from Emergency Management B.C. (EMBC) to test the tools last December [2016].
…
But EMBC search and rescue specialist Andrew Morrison said the drones haven’t seen enough air time yet to draw any firm conclusions.“For example, Coquitlam Search and Rescue had zero deployments. Kamloops Search and Rescue had requested a UAV 18 times and deployed nine times,” he said.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4191 % | 3,055.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4191 % | 5,605.8 |
| Floater | 3.25 % | 3.46 % | 96,093 | 18.55 | 4 | 0.4191 % | 3,230.6 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0550 % | 3,157.9 |
| SplitShare | 4.70 % | 4.04 % | 62,172 | 3.33 | 5 | 0.0550 % | 3,771.3 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0550 % | 2,942.5 |
| Perpetual-Premium | 5.45 % | 4.96 % | 72,064 | 14.38 | 20 | 0.0000 % | 2,828.9 |
| Perpetual-Discount | 5.40 % | 5.42 % | 87,723 | 14.73 | 14 | 0.3650 % | 2,946.0 |
| FixedReset | 4.25 % | 4.56 % | 167,451 | 5.81 | 102 | 0.0780 % | 2,519.1 |
| Deemed-Retractible | 5.14 % | 5.72 % | 90,735 | 5.72 | 28 | 0.1746 % | 2,910.4 |
| FloatingReset | 2.94 % | 2.96 % | 38,172 | 3.71 | 10 | 0.0825 % | 2,769.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TD.PF.C | FixedReset | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-26 Maturity Price : 22.81 Evaluated at bid price : 23.16 Bid-YTW : 4.58 % |
| BAM.PR.T | FixedReset | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-26 Maturity Price : 21.30 Evaluated at bid price : 21.58 Bid-YTW : 4.85 % |
| BAM.PR.N | Perpetual-Discount | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-26 Maturity Price : 21.27 Evaluated at bid price : 21.54 Bid-YTW : 5.59 % |
| BAM.PF.B | FixedReset | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-26 Maturity Price : 23.49 Evaluated at bid price : 24.00 Bid-YTW : 4.87 % |
| TRP.PR.H | FloatingReset | 1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-26 Maturity Price : 17.30 Evaluated at bid price : 17.30 Bid-YTW : 3.46 % |
| BAM.PF.C | Perpetual-Discount | 1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-26 Maturity Price : 21.67 Evaluated at bid price : 21.99 Bid-YTW : 5.59 % |
| BAM.PF.D | Perpetual-Discount | 1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-26 Maturity Price : 21.90 Evaluated at bid price : 22.19 Bid-YTW : 5.60 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| IGM.PR.B | Perpetual-Premium | 204,350 | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-03-28 Maturity Price : 25.25 Evaluated at bid price : 25.41 Bid-YTW : 2.99 % |
| SLF.PR.B | Deemed-Retractible | 171,800 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.01 Bid-YTW : 6.41 % |
| MFC.PR.G | FixedReset | 138,271 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-12-19 Maturity Price : 25.00 Evaluated at bid price : 24.70 Bid-YTW : 4.19 % |
| PWF.PR.P | FixedReset | 103,114 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-02-26 Maturity Price : 19.72 Evaluated at bid price : 19.72 Bid-YTW : 4.38 % |
| MFC.PR.O | FixedReset | 73,200 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-06-19 Maturity Price : 25.00 Evaluated at bid price : 26.41 Bid-YTW : 3.69 % |
| MFC.PR.Q | FixedReset | 53,325 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.90 Bid-YTW : 4.78 % |
| There were 35 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TRP.PR.F | FloatingReset | Quote: 20.85 – 21.20 Spot Rate : 0.3500 Average : 0.2575 YTW SCENARIO |
| MFC.PR.N | FixedReset | Quote: 23.59 – 23.89 Spot Rate : 0.3000 Average : 0.2110 YTW SCENARIO |
| TD.PF.D | FixedReset | Quote: 24.16 – 24.41 Spot Rate : 0.2500 Average : 0.1680 YTW SCENARIO |
| CU.PR.I | FixedReset | Quote: 25.31 – 25.60 Spot Rate : 0.2900 Average : 0.2106 YTW SCENARIO |
| HSE.PR.A | FixedReset | Quote: 17.94 – 18.45 Spot Rate : 0.5100 Average : 0.4378 YTW SCENARIO |
| MFC.PR.O | FixedReset | Quote: 26.41 – 26.60 Spot Rate : 0.1900 Average : 0.1235 YTW SCENARIO |
much for risk evaluation purposes
Ah, the last time, the big credit crunch, aka 2008/2009, we saw a large increase in the HELOC loans which were all intents, are not folded into the overall LTV for mortgage purposes. This was imho the nut that went crunch first, in the last crunch.
This for existing home owners and the new lending standards for new buyers and the deposit changes, will be interesting.
:sipping cheap wine and now eating popcorn:
:sipping cheap wine and now eating popcorn:
You’ll have to change your name to grapes and yeast!