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Global banks are facing a $4-trillion reckoning over the next two years as pre-crisis financing strategy comes back to haunt them, according to the International Monetary Fund (IMF), whose latest report, released Tuesday in Washington, sent out an unequivocal message that could be summed up this way: yes, the financial crisis is behind us, but there is razor-thin margin for error.
The IMF says governments should resist the urge to pull the plug on the support measures they created for their banks. Too many of the world’s financial institutions remain too shaky to be left to walk on their own. The bottom line is that financing costs for banks are almost certainly set to rise, putting a significant strain on the global financial system and representing a risk to the economic recovery.
“Funding is perhaps the major challenge confronting banks everywhere,” Jose Vinals, director of the IMF’s monetary and capital markets department, said at a press conference in Washington where he presented the fund’s latest bi-annual Global Financial Stability Report, where it was stated that:
“As foreshadowed in the April, 2010, GFSR, banks now face the greatest vulnerabilities on the liabilities side of their balance sheet. There has been little progress in lengthening maturity of their funding.”
This is primarily an issue for continental Europe, Britain and the United States. Moody’s ranked Canada among a handful of countries, including Japan and China, where banks have managed their financing requirements to keep the average maturity at more than five years. Rod Giles, a spokesman for the Office of the Superintendent for Financial Institutions, said from Ottawa that Canada’s banking regulator has no worries over the banks’ financing plans or their ability to tap markets.
Read More:
Banks hold most of the cards in mortgage game
John Greenwood,
Financial Post
As providers of more than 60% of home loans in Canada the big banks are major players, determining everything from who gets to be a buyer to what people can afford to pay.
It’s no surprise that mortgages are the biggest single asset class held by the banks. According to the Bank of Canada, the chartered banks had $495-billion of mortgages on their balance sheets as of this month, or about half of all outstanding home loans — and that doesn’t include the billions of dollars of home loans that the banks have sold into the Canada Mortgage Bond program.
Mortgage finance is big business for the banks, and it’s also a cash cow for several reasons. For one, because banking is an oligopoly in Canada, players pretty much get to decide how much they will charge. Unlike the United States where thousands of lenders compete tooth and nail for business, the industry in this country is concentrated in the hands of the banks and the credit unions, with a handful of smaller players focusing on borrowers the banks don’t want to deal with.
Bill Downe, chief executive of Bank of Montreal, recently explained it this way to an investor conference: “We don’t believe we compete on price.”
Another reason banks like the business is because the riskiest mortgages are insured by the Canada Mortgage and Housing Corp., a Crown corporation. In the event of a worst-case scenario, it is the taxpayer who shoulders the risk of default. The idea is to make mortgages cheaper and therefore more affordable for those at the lower end of the income scale.
In practice the banks don’t pass on all the positive lift from government support to their customers.
“The system is founded on a sovereign entity that guarantees risky mortgages,” said Peter Routledge, an analyst at National Bank Financial.
Read More:
http://www.financialpost.com/
Banks and the CMHC
On Mar. 23, Louis Gagnon, a finance professor at Queen’s School of Business and a former senior manager in risk management at the Royal Bank of Canada, published an article at the Globe and Mail, aptly called: “Why we need tougher mortgage rules“, in which the author hinted that:
“It’s time to pay our debt, not go further into it. A nudge from Ottawa couldn’t hurt”
Among the arguments used by Gagnon, we read the following:
“In Canada, more risky mortgages (those with a down payment of less than 20 per cent) are insured by the Canada Mortgage and Housing Corp., whose chief mandate is to “promote” home ownership. As long as CMHC is willing to “insure” the mortgages, there’s no stopping less picky lenders from lending. Essentially, CMHC provides a back door through which low-quality mortgages can creep into the system. And if something goes wrong and CMHC can’t absorb the losses, who will have to foot the bill? You guessed it: We will.
As long as CMHC is configured this way, the system remains vulnerable to the games the few are willing to play at the expense of the many. This explains why the Big Five insisted Ottawa handcuff the entire industry with tougher rules.”
And below you can read the comment we have selected, from the many that sprouted up regarding that article.
“The arguments against the Canada Mortgage and Housing Corp. (Why We Need Tougher Mortgage Rules – March 24) are fascinating in that they criticize the institution for insuring “risky mortgages,” while ignoring that CMHC has pledged to purchase billions in mortgage portfolios from lenders since the beginning of the credit crisis in 2008. This measure provided much-needed liquidity for mortgage lenders big and small. Now that the crisis has seemingly passed, the Big Five banks are exerting political pressure on the federal government to “rein in” CMHC, as if that institution were to blame for the global liquidity crisis.
Obviously, it was the business practices and risk management of global banks, including our own, that brought our international financial system to near collapse. CMHC intervention has been a major factor in bank profits since 2009. The banks’ own lax standards in providing credit to Canadians, while profiting from those practices, have put our country in its current debt-laden state.”
by Bruce Flanagan
Love Money and Mortgages
Love money is usually given by close family or friends to young couples who fail to meet the the capital requirements that financial institutions look for in borrowers. When applying for mortgages on a new property, love money is in many cases the only way a newly-married couple can get the sort of financing that would be just impossible to obtain through traditional channels. That way the financing is used for the down-payment so the couple can qualify for a bank mortgage.
However, one in two marriages end in divorce and that’s no secret to parents giving their young married children money to buy a house. So the best way of preventing future problems is by securing that money with a second mortgage. However care must be taken when registering love money as a second mortgage, because if the couple has already told the bank that their down-payment funds are a gift from immediate family, a “gift letter” signed by the donor is usually required (to confirm that the funds are a true gift and not a loan), while at the same time the couple are signing a mortgage themselves, in the future, if a dispute arises out of that mortgage, that gift letter could be used to challenge any paying back of the parents’ love money in case of marriage breakdown.
One of the ways of mitigating the problems associated with family mortgages is by formalizing the mortgage in a way that protects everyone involved. That involves implementing features found in any “commercial loan,” such as an interest rate, payment terms, term of the loan, etc. These are the kind of provisions that would prevent a departing spouse from failing to fulfill his or her obligations.
To that effect there are social lending services which gives friends and family a more structured way to lend or borrow money with each other. That way the recipient honors the payments based on the frequency and interest rate set by the family member lending that love money and the risk associated to missed payments is considerably reduced.
Do all these proceedings sound kind of churlish to you? That’s the result of mixing love with money and in many cases the best way for a young couple to avoid a family fight is to reject those generous offers from family members and instead borrow more money and buy mortgage insurance, if they could just afford it, that is.