Shorting the Canadian Housing Bubble?
Granted, things work a tad differently in Canada but it's worth noting that the worst may be yet to come for our friends from the Great White North.
[W]hile it is technically true that Canada does not have its own publicly-traded GSEs such as Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to artificially inflate its housing market, it has the next best thing. The Canadian Mortgage and Housing Corporation (CMHC) is Canada's national housing agency used to provide mortgage insurance, which is fully integrated by the federal government.
Created in 1946 to address the housing needs of Canadian soldiers returning home from World War II, CMHC has long since outgrown its well-intentioned roots. These days, CMHC provides mortgage insurance on residential mortgages with less than 20% down-payments. This practice of course began in order to facilitate the emotionally appealing, yet economically unsustainable, goal of getting banks to lend to risky borrowers who would otherwise be unable to buy houses.
CMHC then securitizes all these Canadian subprime loans into MBSs that, unlike those of its southern counterparts, are fully guaranteed by the Canadian government, ensuring that Canadian taxpayers, and not MBS investors, will ultimately foot the bill in the event of default. After all, it's the polite thing to do.
Hey wait a minute, we have that too except for us, the Fed gets in on the action and taxpayers are still on the hook since our central bank can easily cut and run and leave us holding the bag.
Hey Canada, can you feel it in the air?