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Four years ago when the federal government initiated the housing bubble by allowing 0% down payments and 40-year mortgages, it also opened the door to Genworth. Today those insane mortgage provisions are gone, despite the damage having been done. Genworth, however, remains – the leading private provider of mortgage insurance in Canada.

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Of course, CHMC is the 800-pound gorilla (actually, a 600-billion-dollar monkey) of the mortgage insurance business, underwriting the lion’s share of high-ratio, high-risk mortgages on houses bought by people who have no money. Because CMHC stands behind lenders like BMO or CIBC, it takes away their risk in the case of default. That means banks have no reason not to give money to people they’d otherwise laugh out of the branch.

Behind CMHC, which is an agency reporting directly to the federal government, stands you. If CMHC, which last year had its lending authority extended to six hundred billion, a number roughly equivalent to the national debt, were ever to stumble, Ottawa would bail it out with tax dollars. At least, that’s the theory.

Of course, that was the logic in the US, as well, when its quasi-governmental mortgage insuring giant, Fannie Mae collapsed in the housing bust. Well, $164 billion later, it is still an orphan of the state, bleeding from a million sores as the foreclosure crisis continues and defaults mount.

Now, like Canada, the US also has some private insurers of high-ratio mortgages. Surprise, surprise, one of the majors is Genworth Financial, based in Virginia. So here’s the news: this week the company said it just lost another $100 million thanks to “worsening trends” in the mortgage business. Genworth has about 40,000 mortgages which have been non-performing for at least a year. Yes, that means the families who took the money and bought houses with it are no longer making payments.

Things are so dire Genworth has to take $375 million from other activities (it sells life insurance, for example) to shore up the mortgage-guarantee business. Says the company, prospects are getting bleaker along with the residential housing market. In response, its shares were hammered to a two-year low Friday on the stock market.

In this country, Genworth Financial (a division of GE) is still making money, headed by the sunny Peter Vukanovich. In fact, if it weren’t for profits from subs in Canada and Australia, the whole enterprise would be on even shakier ground. Genworth in Canada provides insurance for mortgages handed out to self-employed people who can’t (or won’t) verify their income, recent immigrants, buyers without any savings and people who want to purchase a house with 0% down.

Several of those practices are now either illegal or unknown in the United States.

My point is simple. We are far down the financial path that led to the housing bust in the States. Our government supports an agency which supports high-risk lending. We allow private insurers to promulgate even more risk. And by insuring loans to people who have no resources or no financial discipline, we court an inevitable outcome.

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avatarGarth Turner - The Greater Fool posted Friday, July 22nd, 2011.

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