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Canada's Risk from Mortgage Portfolio Overvaluation

BURLINGTON, Dec. 16, 2015- Ross Kay Realty Consultants has released a report on the undisclosed risk contained in Canada's uninsured mortgage portfolios held by Canadian banks as of July 30th, 2015.
Highlights
*Canada's lenders are using faulty assessments for risk on their uninsured mortgage portfolios
*Risk exposure in Alberta and other housing markets that are correcting is massively under reported
*OFSI mandated multiple measures of risk are not being met
*Banks are now unnecessarily exposed to Billions in unrecoverable losses should housing markets correct

Since the release of the most recent risk assessments on mortgage portfolios held in Canada, Ross Kay Realty Consultants has reviewed the disclosures and reported loan to value ratios used to determine risk held within lenders' mortgage portfolios that are uninsured. Assessing risk by the lender issuing the mortgage was the focus. “We know the moment a mortgage is accepted it immediately exposes the lender to an additional 7 to 8% of valuation risk for the value of the property, at the time of origination of any uninsured mortgage. The lender is relying upon that risk being eliminated within a 2 to 3 year window through valuation growth secured through the impact of inflation. Immediately this turns a theoretical 64% Loan to Value ratio into a sale adjusted 69% LTV leaving room for only an 11% house price correction before said mortgage drops to the legally mandated level of LTV that would require a lender obtaining insurance.” stated Ross Kay, president and founder of Ross Kay Realty Consultants. While housing markets across Canada vary widely, the methodology used by virtually every bank in Canada to determine the risk contained in their uninsured mortgage portfolios across Canada is through an updated Loan to Value (LTV) ratio based on updated property values. The methodology used to update property values is thus of utmost importance to any shareholder of any bank stock that is exposed to risk through uninsured mortgages. Additionally, the Office of the Financial Superintendent (OFSI) was contacted to verify the requirements contained within legislation on how risk is to be assessed on mortgage portfolios and what expectations the OFSI had on measuring that risk. The required “shock test” scenario was also studied for its validity on risk assessment. Ross Kay Realty Consultants (RKRC) reviewed six of Canada's largest banks and their reports on their uninsured mortgage portfolios. RKRC research showed approximately Four Hundred and Fifty Billion in uninsured debt held by these banks was secured by an ownership interest in a personal residence. Universally the reliance on House Price Indices were the quoted measure for valuation change used by the banks, to determine risk, covered in this report. Recent concluded real estate trading cycles in the housing markets of oil producing provinces allowed this review of risk to be concentrated on the province of Alberta and the cities of Calgary and Edmonton. Calgary's recent trading cycle being a textbook case for how all Canadian housing markets must function, allowed a national conclusion to be extrapolated for when other market's trading cycles wind down. Ross Kay Realty Consultants has found current House Price Indices used to update Valuation of properties securing mortgage debt in Canada create a natural overvaluation of the homes used to estimate the mortgage portfolio's risk exposure. That overvaluation is a consequence of using a non-quality consistent measure of change. RKRC research previously identified flaws in current house price models which the OECD itself had flagged in it's thorough Real Property Price Index (RPPI) study where Canada was represented by Statistics Canada. “Non-Quality adjusted home price indices, which include all HPIs currently used in Canada, are rooted in flawed methodologies that consistently present a market valuation overview that is actually only reflective of less than 5% of the housing stock at any one time. That 5% being represented is always of the highest quality available leaving the other 95% of the nation's housing stock out of the mix.” explained Ross. “We know from experience average sale prices are tied to mortgage financing more than they are to home values. This is how an HPI that uses “repeat sales”, “benchmark homes” or average sale price will conclude home prices have not changed when in fact on the ground prices have already dropped 10% or more. Selling prices or current HPIs are almost never representative of any home's value ,what they are measuring is the amount of equity and debt being transferred through a housing market in order to acquire a higher quality home. Buyers always seek out the highest quality for their home buying dollar and always will.” When adjusted to replicate a measure of change that is quality consistent, Canada's current HPIs and ASPs overvalue the nations stock by around 20% when looking at Canada as a single market. Adjusting for regional market breakdowns the overvaluation increases in some instances to over 40% of the current average selling price being reported. The entire uninsured mortgage portfolio of the Banks reviewed holding mortgages in Alberta could find their entire uninsured portfolio, when averaged out, would legally be required to be insured if the valuations were simply measuring a consistent quality of the home valued at origination. Alberta's example shows Canada what should be expected when home prices begin to correct across the nation.

SOURCE Ross Kay Realty Consutants
For further information: Ross Kay, President,
Ross Kay Realty Consultants,
Tel.: 905-541-5297
E-mail: [email protected]
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RELEASED- December 16th, 2015

Burlington, Ontario, Canada