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?