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Baby, we got a bubble!?

Thanks Dave for that very informative post.
I can see that my simplistic overall view to get a handle on how defaults might effect CMHC is clearly wrong but the result strangely appears somewhat similar (for all the wrong reasons).
Dave do you know what the default rate in the US was to put Fannie and Freddie Mac into negative territory and what the rate ultimately went to over the crisis. I don't know for sure but using Uncle Google it appears the default rate to be around 2% or more at present.
I found some articles suggesting at present 30 day behind loans are down to 7.4% from a peak of 10.1% in 2008.
Over 90 days, when banks start to foreclose: fell to 3.06% from 3.6% last year. Homes that are more than 90 days and received a foreclosure notice but not seized by the banks increased to 4.39%.

http://www.bloomberg.com/news/2012-...uencies-in-u-s-fall-to-lowest-since-2008.html

So even a slight meltdown could easily hit the 1% figures I would think in Canada and a 25% correction in price I would believe could make the default rate go higher.
 
Interested, I think the figures you referenced are for the 30+ day delinquency rates. I found this showing the serious delinquency rates (90+ days) at about 3% currently.

http://www.calculatedriskblog.com/2012/11/fannie-mae-freddie-mac-mortgage-serious.html
http://www.calculatedriskblog.com/2012/11/fannie-mae-freddie-mac-mortgage-serious.html

Note that they were consistently at approx 0.5% for the 10 years prior to 2008.

Again, I'd agree with yourself and others that we likely wouldn't see a default rate anywhere near as high as the US. But it does show how defaults can be stable and low for a LONG time, and then increase quite surprisingly.

As far as what was the rate to put Fannie Mae/Freddia Mac into negative territory? I don't think we can answer that from the publicly available data. The default rate jumped so quickly and so far in 2008 that its difficult to know at what point they moved into negative territory.
 
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daveto said:
Something else to understand is that the full $8b is not currently available to pay claims. Only $1b is available to pay claims, and the other $7b is for the future over the duration of the mortgages which the premium insures. So if we had a modest spike in defaults (less than 1%), that could quickly cut through the $1b. It would also likely require their actuaries to increase both their reserves to reflect updated assumptions for their future claims
Click to expand...

Actually, I think I mis-represented this.

Consider the example of a $10k premium, of which $1k has been earned (and partially applied to the $1b claim reserve) and the other $9k is in the UPR. If that mortgage defaults, then the future exposure would end and all of the $9k for that policy currently in the UPR would be released to pay any claim.

This is a little different than most insurance products where the UPR needs to continue to pay the premium for the future exposure period because the policy doesn't simply terminate when there is a claim (ie medical insurance, auto insurance, etc).

But for mortgage insurance, once the borrower defaults then the insurance coverage ends.

Again, just to clarify, only that portion of the $7B UPR that relates to the specific policies that default would be released to pay claims. So, in effect, the reserve practically available for any increased claims activity is still pretty close to the $1b.
 
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daveto said:
Interested, I think the figures you referenced are for the 30+ day delinquency rates. I found this showing the serious delinquency rates (90+ days) at about 3% currently.

I think I actually said that daveto but thanks for the references:

From my post: I found some articles suggesting at present 30 day behind loans are down to 7.4% from a peak of 10.1% in 2008.
Over 90 days, when banks start to foreclose: fell to 3.06% from 3.6% last year. Homes that are more than 90 days and received a foreclosure notice but not seized by the banks increased to 4.39%..
Click to expand...
 
I'm glad to see you corrected this however the remaining UPR has nothing to do with being released for paying a claim as it is not to be confused with claims reserves. the UPR is one of three components making up the earned premium and is strictly a revenue number on the books.

Berfore I explain, my credentials are: close to 30 years within the insurance industry as an accountant for a couple of the largest insurance corporations on the planet, the last 17 of those were responsible for financial operations which included P&C2 reporting to OSFI.

The $600b is insurance in force or the balance remaining on the mortgage. Hence it is the amount of mortgage balance remaining for the unearned premium, that is, the balance of the premium applicable to the remaining mortgage term. It has no correlation with the earned premium but neither is the unearned premium considered as an amount payable toward future claims, its only application against losses is to calculate a statistical ratio (EBNR/xC).

The claims provision is based on claims paid, reported not paid and unreported (IBNR). It is a number consisting of the in-force mortgage principal and interest payout net of recoveries either reinsured or through subrogation (sale of the property) calculated for spreading risk over an estimated X no of years, where current claims reported is blended with an assumption of known defaults and on past annual payout rates (loss experience) when settling on mortgagee claimed properties. Claims incurred is not an actual cash number in that it consists of claims paid, recoveries and that future amount that may or may not materialize. It is also not a static allocation year over year.

To your point, many do not understand that while CMHC may have an in-force in the hundreds of billions, it is not reflective of actuarially vetted losses which includes whatever may be reclaimed from the sale of the properties.

daveto said:
Actually, I think I mis-represented this.

Consider the example of a $10k premium, of which $1k has been earned (and partially applied to the $1b claim reserve) and the other $9k is in the UPR. If that mortgage defaults, then the future exposure would end and all of the $9k for that policy currently in the UPR would be released to pay any claim.

This is a little different than most insurance products where the UPR needs to continue to pay the premium for the future exposure period because the policy doesn't simply terminate when there is a claim (ie medical insurance, auto insurance, etc).

But for mortgage insurance, once the borrower defaults then the insurance coverage ends.

Again, just to clarify, only that portion of the $7B UPR that relates to the specific policies that default would be released to pay claims. So, in effect, the reserve practically available for any increased claims activity is still pretty close to the $1b.
Click to expand...
 
DaveTO, ISYM:

Gentlemen, what I believe I hear you saying is that the CMHC exposure to the mortgage market is much lower than $600bn, even in the case of a recession. The HuffPost link to the StatsCan report seems to support this (they modelled a major spike in interest rates and the losses don't look damaging (halfway through the report, Chart 17 I believe).

Any way of translating your comments out of insurance-ese a little more? I appreciate it's not easy.
 
I agree with RRR here.
I now know for sure (as if I didn't before) that I would not make it as an accountant.
I too would appreciate if ISYM or Dave could take these posts and give a simplified explanation of this.

I now understand that the result would be that the exposure would be a small fraction of the $600bn but still a very large number.

ISYM, do you know or have an idea of what percentage approximately of defaults or $ figure would be needed to put CMHC in the red. For e.g. if the default rate doubled from its present level to close to 1%, would that do it? If I understand this more correctly, it appears to me that it would require at least 2% or in fact much more which would be reassuring.

I appreciate that you will have to make assumptions about average numbers for each insurance and also about the amount of principle and this may not be possible. I just wondered if perhaps you might have seen something in your travels that may give a clue (without giving away proprietary information).

Thank you.
 
RRR/Interested, yes, lol, the insurance-ese has gotten ramped up a little bit. Sorry about that.

I think ISYM and I are saying basically the same thing in terms of the accounting/reserving of the CMHC. As far as a simpler answer to the question of what would it take for the CMHC to go into the red?

daveto said:
Rough numbers, but the CMHC has about $2b claims a year, and $2b of income (after paying claims). So doubling the claims would reduce the income to zero.

If we assume that claims=defaults, and that $2b claims=0.4% defaults, then one can see that above 0.8% the CMHC is in the red.
Again, just very rough numbers.
Click to expand...

I think this above is a good starting place. They currently have approx $2b of yearly claims, and $2b of yearly income. (after claims). If claims increase by more than double, then they go into the red.

It's a little more complicated than that, because their current income is based upon their current premium volume. With possibly lower premium volume it will be more difficult to cover expenses and income would likely decrease even without any increase in
claims. Thus, it might only require a less than doubling of claims to put the CMHC in the red.

I can't speak for ISYM's opinion on the matter, and I'm also curious to know what is his opinion on the possibility of CMHC losses.
 
daveto said:
RRR/Interested, yes, lol, the insurance-ese has gotten ramped up a little bit. Sorry about that.

I think ISYM and I are saying basically the same thing in terms of the accounting/reserving of the CMHC. As far as a simpler answer to the question of what would it take for the CMHC to go into the red?



I think this above is a good starting place. They currently have approx $2b of yearly claims, and $2b of yearly income. (after claims). If claims increase by more than double, then they go into the red.

It's a little more complicated than that, because their current income is based upon their current premium volume. With possibly lower premium volume it will be more difficult to cover expenses and income would likely decrease even without any increase in
claims. Thus, it might only require a less than doubling of claims to put the CMHC in the red.

I can't speak for ISYM's opinion on the matter, and I'm also curious to know what is his opinion on the possibility of CMHC losses.
Click to expand...


thanks daveto:

I don't think a doubling is all that unimaginable if we have a significant downturn.
Of course we have to remember that not all CMHC is downtown TO condos and Vancouver housing which are the most worrisome markets. I would have to think however that given that they are 2 very large markets and a lot of construction is going on in TO that it could represent a significant part ( though probably less than 25% ). Other markets are not so frothy so perhaps this also provides some further cushion.
 
I think this above is a good starting place. They currently have approx $2b of yearly claims, and $2b of yearly income. (after claims). If claims increase by more than double, then they go into the red.
Click to expand...


True, but there is no hard in CMHC being revenue neutral over its lifespan.
 
ISYM,
first of all, thank you for your explanation. I found it very informative.
But I'd appreciate a further comment on the following sentence:
"It is a number consisting of the in-force mortgage principal and interest payout net of recoveries either reinsured or through subrogation (sale of the property)..."
Word "reinsured". Was this just a general explanation, or are you referring specifically to CMHC here?
Thanks
 
^^^
Looking at the graphs, especially D3 in greenleaf's post; it would suggest that despite the increase I would think we have until 2015 or even 2020 before the under 15 and over 65 get to significant amounts that will be noticed by the real estate market.

As we have said before and as this article points out, demographics play a role but this rationale should dictate that stocks will also be out of favour. Where do people invest going forward....in other words, reading the tea leaves....is this saying to quote
the Barenaked Ladies: Is it "the end of the world as we know it because I feel fine".:)
 
I'm not seriously looking at buying at the moment even if buying anything made any sense right now; however, I wanted to get some reaction or clarification on some of the new mortgage rules I've been hearing about that greatly influence the investor side. I don't, nor have any intention of, investing in condos but it would seem to me that these rules will have a substantial impact on this investor class that you guys primarily discuss. Some examples include:

-Maximum of 5 residential mortgages held per person regardless of financial position
-Maximum 2 million dollars in residental mortgages held per person regardless of financial position or price of property
-$250,000 refinance cap on residential proeprty or up to 65% of property worth if property is less than $384,000 regardless of equity position in property or personal financial position

etc.

These rules would also seem to particularly impact the high end of the market. If I'm mis-informed regarding the new rules let me know. The rules are government imposed on bank lenders. However, I think you can still circumvent these and other rules using credit unions or private money.
 
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