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Originally Posted by ken0042
Right. I get all of that.
I just don't see how it is more of a risk "now that the market is getting frothy."
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Why are things more risky now? Because people are being forced into making bad decisions. They need a place to live, and some are paying way too much. Even if there is no statistical bubble for the housing market as a whole, there are going to be a larger than normal amount of individual properties that will bleed red ink on resale when the market slows down.
My point about froth is that the rapid acceleration in property value in a short period of time has made a mess of the comparibles. Some people are radically overpaying for property, and they won't know it until the market slows down.
I'm talking about bad location, bad condtion, and for-whatever-reason inferior property, that is currently selling for same dollar value as whatever the sellers can claim to compare to. When the market is hot, everything gets swept under the carpet. The discount for flawed property is reduced, eliminated, or worse, ignored and bid over.
Whenever a buyer has selection, they avoid leaky condos, they avoid ex grow operations, and a certain proportion of buyers will avoid a series of less dire factors (living next to sound barriers, pink stucco, split levels, wood basements, whatever...). Those that don't immediately walk away, are looking to pay less then the market average for the statisical comparibles. (sometimes much less, particularly on busy streets.) Also, and perhaps more importantly, in a normal market, buyers excercize more caution take their time, and get conditions on the property they are purchasing.
CMHC used to make free money, the review process was a 5 minute glance at some paperwork and a rubber stamp. This was because the market was operating more towards the buyers dilligence, and properties found their price given enough time and adjustment. Nowadays, they can't trust the market forces, and are in the bonafied insurance and risk business.
In the end, I think it's a moot point. CMHC's behavior has obviously changed. They are taking pictures, sending people out to look at houses, and are turning down applications with increased regularity. Obviously there is a change in risk going on.
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Originally Posted by ken0042
I just want to know why it's more risky for the lender today than it was a few years ago.
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Actually, it's not really much more risky for the lender today. They either get 25% down, or CMHC insures the mortgage. I think the lenders are part of the problem, though, and perhaps could be accused of being lazy, defering to CMHC to do the legwork. I wouldn't doubt it if there are some houses that the bank would scrutinize more if a person put 25% down, than if they put only 10% down. The banks should be liable for getting clearance from CMHC before giving people the false belief that they can clear their financing conditions.