Banks in spotlight amid rising housing debt

Banks in spotlight amid rising housing debt

Construction continues on new homes in the Arista Homes and Fieldgate Homes Vaughan Valley subdivision outside Toronto in Vaughan, Ontario, Canada, on Monday, Nov. 30, 2009.

Norm Betts/Bloomberg

Construction continues on new homes in the Arista Homes and Fieldgate Homes Vaughan Valley subdivision outside Toronto in Vaughan, Ontario, Canada, on Monday, Nov. 30, 2009.

John Greenwood, Financial Post · Wednesday, Jan. 26, 2011

Amid rising uncertainty around the Canadian economy many analysts are quietly expressing concern about the banks and their exposure to ballooning consumer debt.

One statistic that gets bandied about is the value of outstanding mortgages which recently passed the $1-trillion mark.

What happens if employment starts to deteriorate and a lot of borrowers suddenly find themselves unable to make their payments? How would such an event impact real estate prices?

The good news for investors is that a major chunk of the riskiest home loans is guaranteed by the CMHC (read taxpayers). That’s great because mortgages represent the lion’s share of consumer debt.

But what kinds of other consumer debt do the banks hold and how much risk does that expose them to?

In the old days the answer would have been a simple ‘not much,’ but in recent years lenders have had huge success with so-called HELOCs, probably the second biggest category of debt after mortgages.

We say “probably” because there is limited public information. Apart from TD which provides good transparency (a total of about $58-billion of HELOCs outstanding) and to some extent Royal, the Canadian banks reveal very little about their HELOC portfolios even when they represent a significant chunk of total assets.

HELOC stands for home equity line of credit, or loan secured by your house. The key to their appeal is the flexibility of not having to make regular principal payments.

Earlier this month the federal government announced plans to stop allowing banks to get CMHC insurance for HELOCs, which came as something of a surprise to the market as it was not generally known that such loans were ever eligible for government guarantees.

Leaving aside the question of why CMHC insures HELOCs in the first place, the obvious question is how many of those outstanding are backstopped by taxpayer?

If, as with mortgages, the majority of risky loans are insured, investors can stop fretting. If, on the other hand, there’s only limited protection maybe it’s time for lenders to shed more light on the issue.

But the answer to that question is not easy to find. The CMHC, hardly a paragon of transparency at the best of times, does not disclose the information. Nor do the banks.



About Tariq Sultan
Dear Readers, I am a dedicated Toronto, Ontario based real estate professional who has been successfully meeting and exceeding the needs of his clients for past several years. I am actively involved in the insurance, financing, and mortgage industry. Real estate is not only my career – it is my passion. I strive to continuously provide my clients with exceptional service to ensure they are fully satisfied when it comes to their real estate needs. For any real estate related inquires contact me today, I will be happy to assist you. Best wishes, Tariq Sultan

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