Canadian Banks Will Exploit Gutted U.S. Mortgage Underwriting

Canadian Banks Will Exploit Gutted U.S. Mortgage Underwriting. 

Canadian banks see the newly dismantled underwriting safeguards and risk-shedding experiments at Fannie and Freddie as a way to keep the party going, with the risk passed along to the U.S. taxpayer directly…

Canada’s banks are in trouble. Their mortgage portfolios are filled with time-bombs called “fixed-payment” mortgages. Despite the name, the loans contain rate-hike triggers that are causing payment shocks for borrowers. High interest rates and falling home values mean borrowers north of the border aren’t able to refinance out of these toxic mortgages.

Short sellers are even targeting one Canadian bank, Toronto-Dominion Bank, better known as TD Bank. It’s fast becoming the GameStop of banks.

Canada’s banks, says one source south of the border, are now looking to hedge their bets. To that aim, they want to increase mortgage originations at their existing banks in the United States and to acquire new regional banks south of the border. They see the newly dismantled underwriting safeguards and risk-shedding experiments at Fannie and Freddie as a way to keep the party going, with the risk passed along to the U.S. taxpayer directly and as systemic risk in the global economy.

The $13.4 billion takeover bid of Memphis-based First Horizon Bank by Canada’s Toronto Dominion Bank is likely part of that strategy, says the source. TD has also stepped up its charitable giving to U.S. housing nonprofits in anticipation of the coming bonanza. The takeover bid is now under a regulatory microscope due to the recent bank collapses in the United States.

The problem with Canada’s “fixed-payment loans? The amortization schedule changes behind the scenes when rates go up or down. All the while, payments remain fixed – that is, until high index rates threaten to take the loan into negative amortization territory. That triggers the “fixed payment” to adjust, resulting in a payment shock.

In November 2022, one-third of Canada’s total outstanding mortgage debt was in variable-rate loans, up from one-fifth in 2019. According to the Bank of Canada, most variable-rate mortgages have this fixed-payment feature. Other Canadian mortgages are reported to have fixed rates for only the first two to five years.

By November of last year, half of all such mortgages had hit their trigger rate, estimated the Bank of Canada. By February of this year, as many as 80% of variable-rate mortgages had hit their trigger rate, estimated National Bank Financial economists Stefane Marion and Daren King.

Several Canadian banks have established a presence in the United States over the years through acquisitions of existing banks or by opening new branches. TD Bank has expanded its presence in the northeastern United States through a series of acquisitions, including Banknorth, Commerce Bancorp and Carolina First Bank. RBC (Royal Bank of Canada) has grown its U.S. operations through the acquisition of City National Bank, a California-based bank that focuses on serving high-net-worth individuals and businesses.

Other Canadian banks with a presence in the United States include Scotiabank, BMO (Bank of Montreal), and CIBC (Canadian Imperial Bank of Commerce), among others.

Certain mortgages will reach their trigger rates sooner. Those that were originated or renewed in 2021, for instance, will tend to reach their trigger rates earlier, mainly because they were issued at extremely low interest rates and often with amortization periods longer than 25 years. Households that took on a 30-year mortgage during the Covid 19 pandemic when variable rates were extremely low will generally see a larger increase in mortgage payments.

In Toronto, mortgage volumes fell by 44.3% year over year. In Vancouver, they fell by 52.3% year over year. As the newsletter Quill Intelligence pointed out in December, Canadian households’ debt-to-GDP ratio pierced 100% in 2015 and has remained there.

One observer involved in banking services, who asked his name not be used, sees TD’s play to acquire First Horizon Bank as part of the effort to cash in on the moral hazard created by Fannie and Freddie’s dismantled underwriting norms.

Recently, under the protective camouflage of their federal conservatorship, Fannie and Freddie began eliminating critical checks and balances in a radical experiment with U.S. taxpayers’ money and the U.S. economy on the hook. Fannie has scrapped or weakened long-accepted underwriting safeguards like standard FICO scoring, title insurance, mortgage insurance, downpayments and appraisals.

Fannie is even encouraging a new form of the “liar loan,” a product promoted with a perfectly straight face by mortgage brokers during the lead-up to the 2007-2008 financial crisis. Fannie’s new liar loan, called “Value Acceptance,” accepts a collateral value pulled out of the ether by the lender or a third party with a stake in gaining a commission or pleasing the customer. But don’t worry. Fannie checks the stated values against its algorithm – the equivalent of a “Zestimate.”

Fannie then dumps the resulting risk into capital markets via junk-rated credit default swaps it calls “CRTs.” This practice is relatively new for Fannie, which has found itself propping up an over-the-counter marketplace for the synthetic derivatives.

Jeremy Bagott
Jeremy Bagott

Jeremy Bagott

Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.

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13 Responses

  1. Avatar Caleb says:

    Well well well… looks like we the taxpayers are going to be screwed royally thanks to Fannie and Freddie!!!

  2. Avatar Pat says:

    Write your Congressional representatives

    • Retired Appraiser Retired Appraiser says:

      They are all tied up removing statues, burning school books, and investigating investigators at the moment.

  3. Avatar jaydee says:

    Bankers, Fannie, Freddie, and the politicians all in bed together. What a non-surprise. Liar loans……appraisers hinder our making more money. We’ll destroy the housing market again on top of everything else and watch “our country” implode. Meanwhile the invasion force has been entering. Change my mind, I’ll wait.

  4. Avatar Truett D.. Neathery says:

    Who is the invasion force mentioned by JAYDEE on here ?????

    • Avatar jaydee says:

      There are 38,000,000 ILLEGALS and the swarm continues.

      • Baggins Baggins says:

        IW covered the coordinated migration issue just this week. The migrants are enticed then shuttled around, each individual receiving approximately $10k worth of taxpayer money to subsidize their trip. Those facilitating the trafficking are taking kings shares. 1,000 people a day, and climbing. NumbersUSA Roy Beck called it well over a decade ago with the gumball explanation video. We’ve digressed so very very far from his well versed guidance since then. Equity! “How’s globalism working out for you personally?” I wonder if people are actually enjoying their subscription to fascism, and if they will actually renew. From migration to politics to banking, we’re reaching peak corruption.

        One more time; Where in the hell does the actual money come from?

      • Avatar Truett D.. Neathery says:

        Thanks, JAYDEE!!! Sleepy “s private army!!!

  5. Baggins Baggins says:

    “They see the newly dismantled underwriting safeguards and risk-shedding experiments at Fannie and Freddie as a way to keep the party going, with the risk passed along to the U.S. taxpayer directly and as systemic risk in the global economy.”

    Jeremy did it again. Oh Canada! One more time; Where in the hell does the actual money come from?

  6. Baggins Baggins says:

    Sorry, this is off topic but worthy of your attention please.
    Please fill out this petition for meter opt out options.

    These damned smart meters are open air microwaves. Environmental Health Trust, Americans For Responsible Technology, Childrens Health Defense group, and many others, continue to make headway on this issue. This is extremely unsafe technology which creates long term cumulative health risks, alongside proven damages to all organic matter which otherwise is harmed by high frequency microwave radiation.
    ‘Cornet ED88TPlus 5G’, is a recommended tool to observe and document the issue.

    In most states there is no opt out option to an analog meter. These devices have the ability to function on an administrative level which may control any IOT device within the range of it’s connective capability, which is substantial. These meters create privacy and safety concerns, allow implementation of corrupt billing practices, are fire and health hazards, and use far more energy and resources just to be put in place and then function compared to analog, so there is negligible net energy and resource savings overall. They sell these as smart grid accompaniment items. The devices train people to accept a future of starkly reduced energy availability with increased costs, tracking your usage down to the minute, documenting and recording what specific device used energy. We want to opt out, Excel is forcing this meter on peoples homes despite a decade of objections by a substantial portion of the user base. Thank you.


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Canadian Banks Will Exploit Gutted U.S. Mortgage Underwriting

by Jeremy Bagott time to read: 3 min