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Thread: Imbalances in housing finance

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    Imbalances in housing finance are at the top of Bank of Canada’s list of vulnerabilities, according to senior deputy governor Carolyn Wilkins. She also said that regulation and supervision were keys to aiding economic recovery.

    What is your opinion on this?
    This thread is currently associated with: N/A
    Last edited by bobbyreyes; Sat, Sep 27th, 2014 at 06:15 AM.


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    Bean bun going offline Ciel's Avatar
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    I'd like you to state your opinion first bobbyreyes before you ask others to put theirs forth. I have noticed you are starting many threads but it seems to me that you not putting yourself into them.
    bobbyreyes likes this.
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    Hi Ciel, thanks for your reply. My opinion is that government should look first at the credit card rates and limits. This is a far more complex problem than our mortgage standards.

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    Bean bun going offline Ciel's Avatar
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    It's wonderful that the governor has the time and means to debate all the concerns related to housing. Unless one is in the same circles or work/lobbying relates to the issue, many people are not following the academic/political aspects of the issue. Life requires most of their waking attention to other people, getting their own needs met and sometimes making money stretch when more needs than cash/credit exist.
    The only time housing finance would become a real concern for me is if I was in the position to move towards home ownership and finding out many financing options were not available to me.
    It'd be a marvel if Canadians who have experienced housing financing problems had the governor's attention to relate any oversights or short-comings with existing financing matters, should any regulations be revised or up for discussion.
    2021-Bring on the sunshine, sweets & online shopping.

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    Quote Originally Posted by bobbyreyes View Post
    Hi Ciel, thanks for your reply. My opinion is that government should look first at the credit card rates and limits. This is a far more complex problem than our mortgage standards.
    I disagree quite strongly.

    Obtaining a credit card is more or less optional (it may be convenient but in most cases it is not a necessity). Carrying a balance on your credit card is entirely optional. Housing is a need.

    Having said that, I think that one of the biggest problems with housing is a direct result of the CMHC. CMHC is a stupid setup that protects banks and only the banks. It does not protect buyers. It does not protect sellers. It does not protect the person who took out the mortgage. If the buyer cannot keep up the payments, he does not get any coverage from the insurance, the bank just gets to hand off the bad loan to the CMHC, the bank gets their money, and the CMHC will try to exact money from the owners up to and including foreclosure.

    And even more insidious than that, it causes some pretty severe distortions. Let me give you an example:

    Two people want to buy two identical $500,000 houses. Buyer A has a 30% down payment in cash - a cool $150,000. Buyer B has a 5% down payment in cash ($25,000) given to him from his parents. Now, anyone with an ounce of common sense realizes that buyer A is a far safer borrower than buyer B. With more "skin in the game", buyer A has a lot to lose by walking away from a house. Buyer B has far less.

    It's pretty clear to which buyer you would rather lend your own money. But what about the bank? They are in a position where the bank is better off to loan the money to buyer B - even if the two buyers had the exact same interest rate. Why? Buyer B has to get CMHC insurance, with takes over 100% of the bank's risk in case the buyer defaults. Buyer A - the better risk - has the entire risk fall on the bank. And Buyer B even has to pay for the insurance the covers the bank's potential loss.

    Thus, the bank is encouraged to loan money to people who can afford the loans less. Likewise, they are better off to encourage people who have scraped together a decent down payment to pay more for a "better" house so that they have to get CMHC insurance, making the loan bulletproof for the bank.

    It is an odd situation. But I don't blame the banks for this. They are just doing the logical thing in response to the rules that the government has put into place. The problem is the CMHC, not the banks.

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