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Canadian Mortgage Concerns: Banks

I’ve often heard in business that once is a coincidence, but twice is a trend.

Canadian banks have performed quite well both during and after the credit crisis of 2008/2009 and despite a low interest rate environment have had robust mortgage numbers for a number of consecutive years. We’ve all heard Canadian politicians touting the health of the Canadian banking industry but I have to wonder at which point problems hidden in the closet might decide to come out for one or more of our prized banking institutions.

Recently I was surprised recently by two occurrences, in my hometown of London Ontario, when two peers of mine went to get both their pre-approval and final approval for mortgages for their first home purchase. Both individuals are under thirty, have dual modest incomes and are looking to purchase their first home with less than 10% down.

The shock I received was not that their pre and post approvals went through but that they weren’t asked or required to provide any form of income confirmation. They were asked details about income but no verification on their part was completed prior to their approval. The other disturbing fact was that both of these events happened at the same Canadian bank at different branches.

I’ve heard rumours of this sort of activity occurring from time to time in the mortgage market, but found it alarming that approvals were completed without this crucial step taking place. How common is this practice, which banks are participating and the risk exposure to the specific bank(s) is a worrisome problem for investors like myself who have exposure to at least three of our countries large Canadian banks.

I don’t have an invested position in the bank mentioned above (readers have a 50/50 chance of figuring it out) but this week I intend to make calls to the investor relation departments of the banks I do own to ask if this is common or uncommon practice and under what circumstances it occurs if it does.

Are our banks relying too heavily on CMHC for insurance in a market that already appears to be at a speculative bubble? It’s no secret that banks are attempting to strengthen market share for an inevitable rise in interest rates over the next 2-5 years, but at what cost and what risks are they taking to secure that market share?

The new homeowners certainly didn’t think the risk for not providing verification of their income was substantial enough to include it anyways which brings another question to the forefront; are home owners taking just as many risks as the bank?

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{ 7 comments… add one }
  • Scott March 22, 2010, 10:03 am

    It's not too comforting for any of us to hear that our bankers are still taking big swigs of the high risk, low probability Koolaid, but at the end of the day, someone will make these loans, so competitive pressures promote this sort of behavior. There is a certain smugness that if you can get away with it once, thanks to the generosity of the Canadian tax payer, you should be able to skate through again, no matter what obstacles litter the ice.

    Remember the cockroach theory: there's never just one. I suspect that all of our banks are guilty of these sorts of activities in some way, shape or form.

  • Anonymous March 23, 2010, 3:01 pm

    I'm not a betting man, but I'll wager $5 it's CIBC.

    Those guys always manage to step on the rake. They're the Homer Simpson of Canadian banking system.

    Ps. Still waiting for the Real Estate bubble to burst, though it's almost been five years.

  • Anonymous March 25, 2010, 4:55 pm

    how do you know the bank doesn't verify their employer through a) canada revenue b)third-party credit reporting c)directly through the employer?
    anyway, the "big-5" canadian banks are essentially a financial cartel the way colombian drug lords were a cartel. they have total control of the region, co-operation with the government and a resource rich country- there is never going to be any stopping them (short of a military invasion) and the stock prices currently reflect the trend.
    congrats to your friends if they didn't have to bother with this step- the vast majority of people still do. for your sake, i hope bank share prices do meltdown again so you can purchase the yield.

  • Nurseb911 March 25, 2010, 7:27 pm

    Anon,

    I was present while one was finalized and trust the the other wasn't verified because one of the two incomes didn't have guaranteed hours or any permanent position. The point I'm trying to make is that in both situations the lending qualifications seemed quite minimal and surprising considering the current market environment we find ourselves in and the fact that both homes were purchased with under 15% equity.

  • Richard A. March 25, 2010, 10:55 pm

    Hello,

    Could you please update your DivG Top 10 Holdings or at least put a date of when it was last updated.

    THANKS!

  • Financial Uproar March 26, 2010, 1:20 am

    Often when someone applies for a mortgage at the bank they do their banking at, the loans officer is allowed to look at the history of the account. If they see income coming in that matches what they were told, they use that as proof of income.

    It's hardly a perfect system, but the banks seem okay with it.

  • Financial Power March 29, 2010, 5:19 pm

    Most likely the bank has their own surce of income verification. I don't think that this is common in our banking sytems. Today more then ever they check verify incomes.

    It could of been a mistake, I guess or they might have their own source for income verification.

    Someone said the 5 big banks control everything in Canada. I agree. We should have more banks for competition.

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