Faulty Models & Mortgage Fraud

Steve Saretsky -

The closely watched US Consumer price index surprised to the upside last week. Consumer prices rose by 0.4% in September, and while inflation is decelerating, down to 8.2% year-over-year, it remains extremely elevated. The recent advance was broad based, with Shelter, food and medical care being the largest contributors.

Shelter inflation is surging, at least according to the Feds models.

Yet everyone knows the housing market is rolling over. House prices are now falling on a month-over-month basis for the first time since 2012. Meanwhile, according to three of the largest residential REITS in the United States, rents have peaked and in some cases are now falling!

  • AvalonBay Communities: “We’ve assumed that [rents] will decline, just at a more modest pace than pre-COVID periods would typically dictate.”
  • Essex Property Trust: “What we are expecting is normal seasonality. We do have headwinds from tougher year-over-year comps. Last year, in the first half, our blended lease rate was -4%. But in the second half, it surged to about +13.25%. That’s the tough year-over-year comp.”
  • Equity Residential: “We assume we’re going to have rents peak somewhere in this first or second week of August and then have a normal kind of trail off in rents until you get to that January period.”

In other words, the fed is using lagging data to form policy decisions, which is incredibly eye-opening when you consider the fact the shelter inflation accounts for nearly 35% of the CPI basket.

Don’t be surprised if the Fed makes another policy mistake, this time on the tightening side.

Meanwhile, Tiff Macklem at the Bank of Canada is along for the ride. Macklem is closely watching the Fed and the US dollar. “We’re certainly going to be watching closely how the US economy evolves, how inflation in the US evolves and what  the Fed does with their rates. And we’ll be factoring that in as we take decisions in Canada.”

“The US exchange rate is the one that matters the most for us. The majority of our trade is with the US. So we’ll see how long that lasts, we’ll see what the persistence is. But certainly, if it persists, it does mean that imports from the US and Canadian vacations in the US will be more expensive. So that will mean that, other things equal, we’re gonna have more work to do on interest rates.”

In other words, more pain to come. Another 50bps is baked into the cake come October 26th. Both variable and fixed rate mortgages in Canada could soon start with a 6 handle come November.

Borrowers renewing 5-yr fixed rate mortgages today are about to see a big jump in monthly mortgage payments. On average, payments will rise ~$100 for every $100k originally borrowed.

Source: Ben Rabidoux

In other news, a blockbuster undercover investigation by CBC Marketplacehas exposed networks of real estate agents, mortgage brokers and bank employees facilitating mortgage fraud for a fee. In typical fashion, frauds are always exposed at the end of a bull market, once the dust settles.

Marketplace‘s undercover buyers told each agent that they had enough money for a 20 per cent down payment, but were unsure about their eligibility for a mortgage since one of them had an undeclared cash income. This factor alone would disqualify them for a mortgage at Canada’s big banks.

The agents all recognized the couple would not qualify for the mortgage needed to purchase the home, but six out of 10 went on to offer to facilitate mortgage fraud by connecting the couple with counterfeit documents and brokers who would submit the application on their behalf.

Full Documentary here, definitely worth a watch.

According to Equifax, 67% of mortgage applications flagged for potential fraud relate to income misrepresentation. These cases total about 192,000 a year, or 9.6% of the 2 million mortgages originated in 2021.

Lastly, CPI data for the month of September will be released by Stats Canada on October 19th- it’s sure to be a doozy. Be safe out there.

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