(Newswire.net — May 3, 2017) — According to recently released data, only one sector has outperformed Berkshire Hathaway in the previous two decades, the sector of Canadian banks. Smart investors have known what the rest of the country is just now finding out: Canadian banks offer investors an excellent opportunity to grow their capital.
Why are Canadian banks such a good investment? Due to mergers and acquisitions, there are only five top financial banking institutions that now control as much as 80% of the lending market. To further make them a safe investment bet, the government has all but stacked the cards so that it is nearly impossible for anyone to start up a new banking firm or institution.
The banks are taking their assets and profits and are reinvesting the money into other markets. Most of their acquisitions are being made in the U.S., but some of the banks are going to other, more unique markets like Latin America.
Another reason Canadian banks are literally cornering the market is that it is expensive to build new branches and you need millions just to market a new institution, much less to build a reputation and have the type of technology necessary to be a viable option for banking in Canada.
Many of the smaller institutions can only compete locally, because they have to forego things like marketing and advertising budgets just to stay afloat. The biggest reasons that the bank loans Canada are a sure bet, at least for now, is because of mortgage default insurance.
Mortgage default insurance is a premium that a borrower is required to purchase to protect the lender in the event that they default on their loan. If the borrower can’t make payments on the loans that they take out, then the banks are forced to foreclose. In many cases that leaves the lender with very little recourse to recover what is lost. Mortgage default insurance saves the day by providing the way that banks can cover their “would-be” costs.
It’s not a huge price to pay, currently most mortgage default insurance is less than one percent of the loan. The foreclosure fallout in the U.S. wasn’t experienced to the same degree in neighboring Canada, but it still created an atmosphere for banks to charge for insurance. Even though the likelihood of default is very low, the Canada Mortgage and Housing Corporation approved the practice, all but ensuring that the banks can’t lose and that they can continue to reap the benefits.
The best part for the banks is that they get to not only receive the mortgage default insurance payments, but they also get to finance it as well. It’s a win-win for them, but for consumers it barely seems fair. As long as the banks have such a hold on the market, there is no reason to believe that the mortgage default insurance requirement will be removed any time soon.
Not so fast, though, as the Canadian government is finally realizing that it is taking on a huge risk by insuring all the mortgages. As of June of last year, there was almost $525 billion in mortgages insured by the government. If the housing bubble bursts like it is predicted to, then the entire system, including the government, could go belly-up.
There are many who believe that the market is inflated, especially in Calgary and Vancouver, which could tank mortgages across the nation in response and take the economy down with it.
To minimize risk, the government is working to increase the minimum requirements necessary to secure a loan through banks. To qualify for mortgage default insurance, the government has made it much more difficult to provide documentation that you can actually repay your loan.
There is also a rumor that the government, realizing that it could all fall to pieces, has talked with some of Canada’s biggest banking institutions to find out if they would be willing to share some of the risks of the insurance, so that the government isn’t taking on so much risk.
Mortgage default insurance was a great idea for the Canadian banking institutions. The problem is that it wasn’t really that necessary, and now the Canadian government, who is backing all the insurance policies, is the only one who is really in trouble if the bubble bursts.