More evidence coming out as a result of testimony to the Financial Crisis Inquiry Committee (FCIC) in the U.S., points to critical differences between American and Canadian home mortgage and housing markets – critical differences that are largely ignored or underrated by doom-and-gloom bear-market housing analysts who predict an inevitable U.S.-style collapse of housing prices – a view not shared by mainstream bank and government analysts.
While the FCIC has already uncovered widespread corruption amongst housing appraisers reporting to mortgage lenders (discussed here), further testimony to the FCIC has highlighted the critical role played by rating agencies charged with reviewing the risk of the shaky mortgages that were bundled together by U.S. banks and offloaded to third-party investors.
The New York Times reports that the major rating agencies dismissed “conclusive evidence” of the dubious nature of loans (including sub-prime, and so-called ‘ninja’ mortgages that were written without proof of jobs, income or assets) that were pooled together, securitized and sold off to large investors.
According to the NYT report, “D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the [FCIC] on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors.” Mr. Johnson told the commission that he took the data he had uncovered to the Big Three rating agencies, Standard & Poors, Moody’s and Fitch Ratings, but was largely ignored as “it was against their business interests to be too critical of Wall Street.”
“If any one of them would have adopted [his analysis],” he told the FCIC, “they would have lost market share.” The New York Times describes how the “ratings agencies have been sharply criticized for failing to properly assess the securities they were reviewing, and federal regulators are investigating the agencies for the role they played in the credit crisis.”
While Canadian housing prices rose at a pace that out-stripped historical norms and are now easing, conservative Canadian mortgage and banking regulations largely protected Canada’s mortgage markets from the abuses and misleading (or outright fraudulent) practices seen in the U.S. The argument that Canadian mortgage and housing markets are an asset bubble that is inevitably bound to burst in a U.S.-style housing bust largely ignores the underlying practices and market forces uncovered by the FCIC that distorted U.S. markets.
