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Steven Eisman is Bearish on Canadian Housing, but Skittish on Details Why

9 May 2013

Hedge fund manager Steven Eisman became known around the States and Canada during the years of the financial crisis due to his ability to predict what was going to happen to the housing market down south. Now he’s looking towards Canada, saying things no longer look so good over here. The problem with his arguments though, is that while he seems to be adamant that we’re headed for doom and gloom, he doesn’t really explain why. Other than pointing the finger at CMHC.

It was when he appeared at the 18th Annual Sohn Investment Conference in Manhattan that Eisman touched on the Canadian mortgage market, and just how those insured mortgages are going to be the death of us here in the Great White North.

He mostly spoke about CMHC, which shouldn’t be surprising given the fact that he made his own name by attacking the subprime market in the States. But when it comes to the Crown corporation, Eisman says that it’s simply too big, and that this is evident by the $600 billion cap the government “recently” just imposed on the mortgage insurers.

“When something gets that big, even governments get nervous,” he told the group at the conference.

But Mr. Eisman has gotten his facts wrong on this one. That cap wasn’t recently imposed by the government and in fact, they’ve recently looked at increasing that cap. Deciding not to do so was a good thing indeed, considering that it’s already been raised to nearly the twice the cap limit it began with.

He also stated that our mortgage underwriting standards are “beginning to tighten,” and that this is worrisome for banks who have “zero” capital against loans guaranteed by the “mortgage finance giant.”

Does Eisman know that CMHC doesn’t actually finance mortgages, but rather insures them for the lender that does finance them? And does he know that our mortgage rules changed for the fourth time in just as many years last July? That was nearly a year ago, meaning that our underwriting standards have been getting tougher for the last four years, not just recently.

Then though, he switched over to targeting Home Capital Group, a mortgage lender that does specialize in sub-prime mortgages in Canada. He stated that half of the company’s $8.8 billion profit stemmed from their sub-prime portfolio,and  that these mortgages came at a time when prices were the highest – within the past two years.

But, that’s just our opinion, and it differs greatly from what many think of Mr. Eisman. After speaking at the same conference about his hope for the market in the United States, Eisman also stated that things were looking up in the States. He singled out the company Ocwen Financial, stated that he expects it to see more than $1 billion in cash flow next year. That, he said, represents “powerful” and “counterintuitive” thinking about the U.S. housing market.

After his remarks, Ocwen’s stock climbed 3 per cent.

What do you think about Eisman’s comments? Is he right or wrong?

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