Peregrine

Just curious - what was the expiry date on that put?

Thanks for this Liberty. It's ironic how these problems surfaced as Home was trying to ramp up its insured mortgage business (Accelerator program), which is theoretically supposed to be a higher credit quality business.

I don't want to get into another back and forth. And you're clearly putting words in my mouth and taking a couple things I said and disregarding others. In my view, it's both a supply and demand problem. I've made the case that there are supply issues but there's no doubt that when prices rise like this price action follows as well. That is inescapable.

The cranes that you refer to are building condos and there aren't many that are saying that there's a supply concern with condos - though listings there have also tightened. It's single detached homes that are now increasingly uncommon and whose prices have risen 33%. Condo prices have risen near that much. From CREA stats: GTA Condos 29% YoY. GTA single family 30% YoY. Tell me more about supply. I find it tiresome to discuss with you because you automatically take something I said, conflate it and then present a gotcha-type conclusion. One year numbers can have plenty of noise, but take a look at the following graph and tell me what kind of housing units have been rising faster than others: http://creastats.crea.ca/natl/images/natl_chartC010_xhi-res_en.png I also said that condo supply recently has been tight, but the supply concern isn't chronic like it is with single family detached homes. You'll see a lot of condo completions this year and the next which will help to alleviate some of that tightness currently. In contrast, there is barely any forseeable development of single family housing in the city area. Anyway, I'm done talking to you about housing.

There are spill-over effects on nearby towns with populations of between 100,000-300,000 when their neighboring city with over 6.5 million inhabitants see detached prices rise by so much. Just a small migration of people priced out of the GTA or selling out of their homes in the GTA and relocating elsewhere will have outsized impact on smaller towns. They're migrating to London, Windsor and Thunder Bay? I think a lot of retired people are as well as younger people who find the cost of living in Toronto too much to bear. IF people from Toronto are moving to Thunder Bay, their population should be increasing substantially if prices are rising 30%. Meanwhile, if you look at the data, the population has declined by 0.4% the past 5 years. How do you explain that? https://www.tbnewswatch.com/local-news/thunder-bays-experiencing-low-population-growth-531010 5-Year (2011-2016) population growth rates: London: 4% Kitchener-Cambridge-Waterloo: 6% Barrie: 5% Toronto: 6% Thunder-Bay: 0% But anyway, that’s beside the point. If you’re incoming migration is quite a bit wealthier than the present population, it will affect housing prices. But if population growth is 0% who are the wealthy people migrating there driving prices up 30%? I dont understand the logic. You can have net immigration yet still a static population. The net immigration might simply be replacing the numbers of people who move elsewhere or pass away. I don't know the demographics but just looking at population statistics tell little about what's happening with home prices.

The cranes that you refer to are building condos and there aren't many that are saying that there's a supply concern with condos - though listings there have also tightened. It's single detached homes that are now increasingly uncommon and whose prices have risen 33%. Condo prices haven't risen near that much.

I don’t know much about the situation elsewhere so I can only venture a guess. In general, I think housing supply is fairly inelastic in the short run. Not only does it take time to build them but it also takes time to get the requisite permitting, the development approvals, etc. Plus, manufacturing completely new development on new land requires new infrastructure as well and that takes time.

There are spill-over effects on nearby towns with populations of between 100,000-300,000 when their neighboring city with over 6.5 million inhabitants see detached prices rise by so much. Just a small migration of people priced out of the GTA or selling out of their homes in the GTA and relocating elsewhere will have outsized impact on smaller towns. They're migrating to London, Windsor and Thunder Bay? I think a lot of retired people are as well as younger people who find the cost of living in Toronto too much to bear. IF people from Toronto are moving to Thunder Bay, their population should be increasing substantially if prices are rising 30%. Meanwhile, if you look at the data, the population has declined by 0.4% the past 5 years. How do you explain that? https://www.tbnewswatch.com/local-news/thunder-bays-experiencing-low-population-growth-531010 5-Year (2011-2016) population growth rates: London: 4% Kitchener-Cambridge-Waterloo: 6% Barrie: 5% Toronto: 6% Thunder-Bay: 0% But anyway, that’s beside the point. If you’re incoming migration is quite a bit wealthier than the present population, it will affect housing prices.

There are spill-over effects on nearby towns with populations of between 100,000-300,000 when their neighboring city with over 6.5 million inhabitants see detached prices rise by so much. Just a small migration of people priced out of the GTA or selling out of their homes in the GTA and relocating elsewhere will have outsized impact on smaller towns. They're migrating to London, Windsor and Thunder Bay? I think a lot of retired people are as well as younger people who find the cost of living in Toronto too much to bear.

There are spill-over effects on nearby towns with populations of between 100,000-300,000 when their neighboring city with over 6.5 million inhabitants see detached prices rise by so much. Just a small migration of people priced out of the GTA or selling out of their homes in the GTA and relocating elsewhere will have outsized impact on smaller towns.

The other question is, how do you distinguish real demand, as in families living in houses, from speculative demand, buying to flip? There really is no clear way to distinguish that, but I would argue that speculation in the Toronto market is way less than what many perceive it to be. Home sales activity isn’t all that much above its 10-year average and actually pretty low compared to the demand that we’re seeing. And the number of active listings is at historic lows. If speculation is indeed rampant and driving market mania, you would see substantial transaction volumes and listings – but the data doesn’t bear that out.

You just explained it yourself. It's nice and all that people's homes have increased so much in value, but if they sell they'll still need a place to live in and they'll still need to pay high prices for places in similar locales. And for most, rent isn't a substitute and they don't look at their primary residences as assets that they can flip for profits. The lack of supply in the city area for detached homes is definitely an issue. And that dearth of supply has in turn strongly affected the markets for townhouses and condos. It's the nature of densification.

As mentioned before, "global" cities everywhere are facing rapidly rising real estate prices. I don't think that price inflation is unique to Toronto and Vancouver alone, although recent price increases have been particularly sharp. As the following NYT article indicates, supply has simply not been able to keep up with demand in places like LA, San Fran and even Boston: https://www.nytimes.com/2017/02/10/upshot/popping-the-housing-bubbles-in-the-american-mind.html

I'm not surprised that this happened. New mortgage insurance rules last fall substantially reduced portfolio insurance on low-LTV mortgages. Banks, due to capital constraints, don't have the capacity to hold all of that on their balance sheet so private securitization is creeping back a bit on that excess. I do not expect this to be a huge development as there isn't much investor appetite for these kind of products and there isn't much of these 'excess' mortgages to go around. But this further shows the unintended consequences that follow from government action.

That's entirely fair.

It's not a double standard. Everyone is entitled to their own opinion and freedom of speech allows them to voice it. I do have a problem with deliberately obfuscating facts, such as parroting out the line that $2 billion of mortgages are fraudulent, when in fact that wasn't the case.

I have no problem with shorts talking their book as longs do that as well (although I don't like that practice). I do have a problem with spreading misinformation and deliberately misleading insinuation without any support. Cohodes, like many, is pretty good at publicizing his wins - but what about his losses? And you think he intends to do that just because he says so?

Funny how shorts always have a higher burden of proof and draw more suspicion with regard to their motives than longs... Be wary of that premise. There is no reason to suggest that shorts in general do more work than longs, although in general they seem to broadcast themselves more audibly. In my view, people are people. I've seen a lot of shorting based on driving fear in the markets and taking advantage of gullible investors by spreading misinformation. Often times, it can be a profitable strategy as fear tends to drive action fairly immediately. I know Cohodes's history - he has a history of doing this.

Liberty, it's probably not a good idea to get your information from twitter short-sellers - they're not exactly a very fair source. It's also probably not a great idea to base your view on a company by how its stock is doing on any single day. First National is the largest monoline lender in Canada by far and handle substantial underwriting and origination for the Big Banks - in fact, they are so good at underwriting, originating and servicing that their arrears rates are even lower than that of the Big Banks and that the Big Banks even outsource those functions to First National. Home and Equitable are the two largest federally-regulated lenders after the Big Banks and occupy dominant positions in a niche-type market. Check out their NPLs and loss rate history if you're worried about their underwriting. It's no wonder that short-sellers love these stocks - the float's small, they're not liquid and they're all pretty easy to manipulate given the narrative and fear over anything related to Canadian real estate. I'm sure it's because of the shorts that fraud and lax lending standards were uncovered, the second CEO in a short period was fired, insiders have been selling rapidly, and the company can't even earn decently in a huge real estate bubble in Canada. Based on what I know about the company, I don't trust their financials, so looking at them to be reassured isn't an option. But if you think they're so wrong, I expect you can make a lot of money with your variant perception by buying it hand over fist. Time will tell who's right. Meanwhile, the stock is at almost 5-year lows and falling fast... Personally, I have no position as I don't short. It seems to me that your perception and knowledge of the company has been framed by short-sellers, and I am not surprised that that has been the case. I don't care for changing your opinion but I do think that it'd be helpful to look at the actual facts than to repeat the distorted claims of others.

This is just my opinion: housing prices crashing alone will have little if any effect on the global financial system. Off the top of my head: 1) The majority of mortgages in Canada are insured fully by the full faith of the Canadian government. There are three mortgage insurers in Canada: CMHC, Genworth and Canada Guaranty. CMHC is by far the largest and is a Crown Corporation, or a government owned company. Genworth and Canada Guaranty are privately owned, but in event of a default by either, the government will reimburse 90% of mortgage losses to lenders. Both Genworth and Canada Guaranty underwrite at combined ratios of ~40-50% and have capital well in excess of regulatory minimums. Contrary to what many think, these mortgage insurers perennially operate at combined ratios unheard of in the insurance industry - they are tremendously profitable. A smaller portion of insured loans are securitized in the two government programs NHA MBS and CMBs. Private securitization is non-existent in Canada, unlike the US circa 2003-2006. There are also no derivative products such as CDOs and CDOs-squared that further leverage bets on mortgages in Canada. The Big Banks here do not carry massive derivative books and there is none of the webs of counterparties and systemic risk that exist between banks here, much less with other banks worldwide. 2) The other portion of mortgages in Canada are uninsured balance sheet loans - that is, banks, specifically the Big 6 Banks, bear the risk. Now, that risk is mitigated by: - Very low arrears rates, an attribute largely due to sound federal regulation of uninsured loans by OSFI and the concentrated nature of Canada's mortgage market - Substantial LTV cushions, typically around 50-60%. And at origination, maximum 80% (or minimum 20% down) - Full recourse in most provinces - you can't discharge a mortgage in bankruptcy - Substantial equity capital (CET1, total capital, etc)

I think NPLs and loss rate history during a period of consistently rising home prices have limited value in predicting what might happen if home prices dip significantly. Pre-crisis in the US, Golden West Financial had incredibly low charge-offs for fifteen years or more. For eight consecutive years from 1998 to 2005, they had 0% charge-offs! Wachovia acquired Golden West in 2006. Fast forward two years and Wachovia, which was one of the biggest banks in the US at the time, was destroyed by the losses in Golden West's option arm portfolio. I am not saying the Canadian lenders are like Golden West. But historical loss rates might be very bad predictors of future losses. You're right. Loss rates are not the best indicator of quality underwriting in a generally rising home price environment. But arrears rates and NPLs definitely are. If these banks are underwriting so liberally to the degree that their borrowers can't pay, then early arrears rates and ultimately non performing loans will show that in due time.

Liberty, it's probably not a good idea to get your information from twitter short-sellers - they're not exactly a very fair source. It's also probably not a great idea to base your view on a company by how its stock is doing on any single day. First National is the largest monoline lender in Canada by far and handle substantial underwriting and origination for the Big Banks - in fact, they are so good at underwriting, originating and servicing that their arrears rates are even lower than that of the Big Banks and that the Big Banks even outsource those functions to First National. Home and Equitable are the two largest federally-regulated lenders after the Big Banks and occupy dominant positions in a niche-type market. Check out their NPLs and loss rate history if you're worried about their underwriting. It's no wonder that short-sellers love these stocks - the float's small, they're not liquid and they're all pretty easy to manipulate given the narrative and fear over anything related to Canadian real estate.

This is an underrated point that doesn't get much play. So-called "global" cities everywhere are dealing with real estate price inflation with the local media decrying about housing bubbles. This is the case in New York, San Fran, Hong Kong, Singapore, Shanghai, London, Sydney, etc. On measures of absolute values, Toronto is considered cheap compared to others from the point of view of this foreign/global buyer. People want to move to these cities but in doing so, the demand is driving up cost of living substantially. It's an interesting dynamic.

I remember that there are similar problems with property taxes in lower-tier retail properties in Middle America. The taxes are assessed on property values that were based on values from years ago and were no longer current. I think that many of the property owners were also trying to renegotiate their property taxes.

Yes, I'm aware of remedial programs that Genworth (and CMHC for that matter) uses for mortgages in delinquency or default. These programs are there to help avoid foreclosure, which is a costly situation for both the homeowner and the lender.