30 Jan

More mortgage rules planned if housing market gets too hot

General

Posted by: Mike Hattim

Garry Marr

A new round of mortgage rules from Ottawa could include tough new measures for calculating how the self-employed qualify for loans and tighten regulations for condominium buyers, according to two separate sources.

Ottawa remains concerned about the possibility of an inflated housing market and wants to crack down on the practice where consumers self-disclose what they make when applying for a loan. In the case of the condominium buyer, the government continues to consider a proposal that would have 100% of condo fees count when assessing how much debt a consumer could afford.

“None of this is happening just yet. The housing market has slowed down and the government wants to see what will happen next,” said one source. “If the spring market picks up, then we will see more changes to the rules.”

Bank of Canada Governor Mark Carney said Sunday that some parts of the Canadian real estate market are “probably overvalued” and policymakers are monitoring to see if further steps are needed to cool it.

“We see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there. We’re watching it closely. We’re working with our partners, the federal government, the superintendent of financial institutions,” he said in an interview broadcast on Sunday on CTV.

” Measures have been taken. They’ve been effective. We’ll keep up that vigilance. If more needs to be done, I’m sure the appropriate authorities will take those measures.”

Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the selfemployed.

“These are individuals that are self-employed, have great credit and won’t be able to validate their ability to pay if they are not showing their income on their notice of assessment,” said one source.

He says those people with stated income could have to make an even higher down payment than the normal 20% that exempts consumers from buying expensive mortgage default insurance.

The source said some self-employed are qualifying for loans based on the assumption they have a lot of write offs, like car payments and housing costs associated with home office costs.

“They get to include that based on the assumption that self-employed people have an advantage from a tax perspective,” said the source. “The government is trying to figure how they would present this.”

A source with one of the banks said the government is trying “zoom in” on marginal borrowers so it doesn’t get into a U.S. type of situation where they were not verifying income.

“What banks are doing usually when it comes with self-employment is not dealing with declared income because nobody believes it. What they do is look at their behaviour and put more weight on it,” said the source, referring to how those consumers handle their debt. “With an employer, you can call and verify their income.”

The labour market is roughly about 13% self-employed so new rules could have a major impact but the source indicated it does not mean those people would be shut out of the loan market. “It will be just more difficult for them. You are going to have to prove income in a more precise way,” he said.

The suggestion the government might crack down on condo buyers is not new, having been scrapped last year in favour of tougher new rules on amortization lengths and refinancings. Most people in the real estate sector now believe amortizations will be reduced to 25 years after having been as long as 40 just three years ago.

Brad Lamb, a Toronto real estate broker and condo developer, has heard the government is again considering including 100% of condo fees in calculating debt levels but doesn’t think it will happen.

“The 25 year amortization is a no brainer, they should do it,” said Mr. Lamb. “It’s not smart to have loose lending rules. But the condo market is hot because of investors not speculators. These investors are coming [from around the globe]. This silly [condo fee] change will do nothing. These people are buying with cash.”

30 Jan

Canada facing subprime mortgage risk

General

Posted by: Mike Hattim

By Andrew Mayeda

Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the banking regulator.

Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.

“It just speaks to the general easing in lending standards, which has contributed to a booming housing market,” said David Madani, an economist in Toronto with Capital Economics, which estimates that Canadian housing prices may fall 25% over the next few years. “The problem is sort of baked in now, so I’m not sure there’s a way to prevent a weakening of the housing market.”

Canada’s housing market has surged since the 2009 recession as near-record low mortgage rates fueled prices and home purchases, unlike the U.S., where sales and values have fallen since 2007. Bank of Canada Governor Mark Carney has said record consumer debts are the greatest domestic threat to the country’s financial institutions, even as the central bank has held the benchmark rate at 1% since September 2010.

Most Vulnerable

While there are differences with U.S. mortgage practices, the Canadian housing market is displaying classic signs of a bubble, with a run-up in prices, high ownership rates and overbuilding, said Madani of Capital Economics.

“The biggest concern is taking extreme levels of debt for those who are most vulnerable,” Carney told reporters Jan. 18. The bank estimates the proportion of Canadian households “highly vulnerable” to an economic shock – those with a debt service ratio of 40% or more – remains above the average of the past decade. Canadians’ debt reached a record 153% of disposable income in the third quarter, according to Statistics Canada data.

Most mortgages in Canada are funded through deposits, followed by mortgage-backed securities and bonds guaranteed by Canada Mortgage and Housing Corp., a federal agency known as CMHC.

CMHC had an outstanding balance as of Sept. 30 of $132 billion in mortgage-backed securities and $202 billion in Canada Mortgage Bonds. The agency’s financing arm issued $41.3 billion in debt last year, up from $6.5 billion in 2001.

Covered Bond Sales

Banks are also cutting their funding costs by selling covered bonds, a form of corporate bond backed by assets such as home loans. Bank of Montreal and Bank of Nova Scotia raised $4.5 billion of the securities this month, according to data compiled by Bloomberg, after a record $25 billion of sales in 2011.

Relative yields for Canadian covered bonds average 91 basis points, or 0.91 percentage point, more than government benchmarks compared with 102 at the end of last year, according to Bank of America Merrill Lynch index data. That compares with a premium of 306 basis points for covered bonds issued by euro-region lenders.

Canada’s banking system has been rated the soundest in the world for four straight years by the World Economic Forum, and none of the country’s lenders needed a bailout, unlike U.S. banks, which suffered losses on securities backed by sub-prime mortgages.

No Documentation

U.S. nonprime mortgages – which include both subprime and “alt-A mortgages” – accounted for slightly more than a third of originations at the peak of the market in 2006, according to Inside Mortgage Finance, a Bethesda, Maryland-based company that tracks residential mortgages. Loans that required little or no documentation of income accounted for 46% of all U.S. subprime mortgages that year, according to a Credit Suisse Group AG report at the time.

While there is no common definition of subprime mortgages in Canada, the proportion of such loans has probably fallen from about 5% of the market since the financial crisis, said Benjamin Tal, deputy chief economist at CIBC World Markets in Toronto.

“If you look at the overall story and marginal borrowers, it’s a very small segment of the market,” said Tal.

Mortgage terms are also typically shorter in Canada than the U.S., and lenders can pursue defaulting borrowers for full reimbursement even after foreclosure. As well, mortgage interest isn’t tax deductible in Canada, unlike the U.S.

Stress Testing

OSFI head Julie Dickson said in a Sept. 26 speech the agency is “very focused” on mortgages and home-equity lines of credit, which allow individuals to borrow against the equity in their homes.

In a Nov. 2 letter to Canadian financial institutions, the agency encouraged them to follow mortgage underwriting principles recommended by the Financial Stability Board, including limits on the ratio of loans to property values and regular stress testing of mortgage portfolios. OSFI regulates Canada’s biggest banks, as well as smaller loan providers and credit unions.

Home buyers usually qualify for “non-income-qualified” mortgages because they make a large downpayment, according to the August 2011 analysis by OSFI. Lenders typically waive the requirement that buyers prove their income, OSFI says, which identified such loans on a list of issues to be considered by its “emerging-risk committee.”

Slackening Standards

Home-equity credit lines without income verification have become “an increasingly popular option,” OSFI says in the analysis, adding that they “pose greater risk” than mortgages because the credit lines are offered at floating interest rates.

Slackening lending standards were one of the early warning signs of the subprime crisis in the U.S., said Joshua Rosner, managing director at research firm Graham Fisher & Co. in New York. “U.S. history should be a guide to the irrationality of that practice,” he said by phone, referring to granting mortgages to borrowers without verifying their income.

By definition, such mortgages should be considered “nonprime,” added Rosner, who warned of the risks of a U.S. housing crash as early as 2001.

“As part of OSFI’s regular supervisory process, OSFI identifies areas that may require an increased level of monitoring,” OSFI spokesman Brock Kruger said in an e-mail, adding that regulators in many other countries have stepped up monitoring and oversight of residential mortgages and home- equity lines of credit.

Credit Standards

OSFI hasn’t imposed new requirements on banks in this area, Kruger added. “When OSFI identifies areas for heightened supervision, we work to ensure that we understand the issues and pressures driving that area before making decisions.”

OSFI officials assessed Canadian banks’ potential losses from defaults on home-equity lines of credit last year, the documents show. The results were blacked out under legal provisions that allow the government to withhold commercially sensitive information.

Bank of Montreal, the country’s fourth-biggest lender, has “prudent credit criteria, and we regularly review our credit qualifications,” spokesman Paul Gammal said in an e-mail. Other banks declined to comment on their mortgage lending standards, referring questions to the Canadian Bankers Association, an industry group.

Managing Risks

Canadian banks “carefully manage risk in their mortgage portfolios,” said Rachel Swiednicki, a spokeswoman for the Canadian Bankers Association. Mortgages in arrears were 0.39% of the total outstanding home loans in September, she said, calling the figure “extremely low.” In the U.S., the rate was 3.5% in the third quarter, down from 5.02% in the first quarter of 2010, according to the Mortgage Bankers Association. In the first quarter of 2007, the U.S. arrears rate stood at 0.98%.

Bank of Montreal recently cut its interest rate on five- year fixed-rate mortgages to a record low of 2.99%, prompting other banks to reduce their rates.

Falling borrowing costs are driving home sales, which increased 9.5% to $166 billion ($166 billion) last year, the Canadian Real Estate Association said this month. Home prices rose 7.2%. Toronto-Dominion Bank estimated in a Dec. 22 report the average Canadian home is overvalued by about 10%, and the heads of Bank of Montreal and Royal Bank of Canada warned that condominium markets in Toronto and Vancouver are at risk of correction. By contrast, the median price of previously owned homes in the U.S. plunged about 30% from a 2006 peak.

Arrears Rates

Non-income-qualified mortgages aren’t necessarily riskier than conventional loans, said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals, which represents mortgage brokers, lenders and insurers.

“There’s no data out there that I’m aware of that says these sorts of mortgage products have a higher arrears rate or a higher default rate,” Murphy said by telephone.

Finance Minister Jim Flaherty has tightened mortgage lending rules three times since October 2008, most recently last January, when he limited the period over which mortgages can be amortized to 30 years, capped the amount people can borrow by refinancing their mortgages, and eliminated government insurance on home-equity lines of credit that are not amortized. Flaherty said Jan. 17 he’s prepared to intervene again if necessary, though the government has no plans to take immediate action.

Mortgage Insurance

Mortgage insurance plays a role in protecting Canadian banks from losses. Federal regulated lenders must insure mortgages to borrowers who make a downpayment of less than 20% of the loan, a requirement that doesn’t exist in the U.S. Most mortgage insurance in Canada is underwritten by the CMHC. The OSFI documents refer to both insured and uninsured mortgages.

While CMHC validates the income of all borrowers whose mortgages it insures, the agency “may accept non-traditional means of income validation” from newly self-employed borrowers with an “acceptable” credit history, spokesman Charles Sauriol said by e-mail

CMHC’s policies “help ensure that newcomers and others without a Canadian credit history have access to CMHC mortgage loan insurance products through the utilization of alternatives to validate a borrower’s credit history,” he added.

26 Jan

Canadian home prices slide for first time in a year

General

Posted by: Mike Hattim

Financial Post Staff

OTTAWA — Canadian house prices dropped in November for the first time in nearly a year, according to the monthly Teranet-National Bank house price index released Wednesday.

The 0.2% drop followed two months of flat prices, and was the first decline in the index since a “brief correction during the three months ending November 2010,” said National Bank senior economist Marc Pinsonneault.

The national composite index, which tracks registered prices of homes sold at least twice, shows prices fell in eight of the 11 metropolitan markets tracked — one more than in October.

“Calgary and Victoria stood out with declines of 1.6% and 0.9% respectively,” said Mr. Pinsonneault, noting the declines were much smaller in the other six markets, though declines in Toronto, Hamilton and Winnipeg “are noteworthy in that these three markets are considered tight.”

December data released by the Canadian Real Estate Association suggested most real estate markets in the country are balanced, with the exception of those three cities, and Victoria, which is considered to be a buyer’s market.

November’s prices were higher than October’s in Edmonton (0.1%), Montreal (0.4%) and Halifax (0.5%).

Year over year, the composite index has gained 7.1%, up slightly from 7.0% the previous month because of a bigger drop in prices between October and November in 2010.

“Since prices began rising again in December 2010, the recent acceleration trend in 12-month changes could come to an end with next month’s report on December 2011 prices,” Mr. Pinsonneault said.

TABLE

November housing prices (% change m/m % change y/y):
Calgary -1.6 0.5
Edmonton 0.1 1.0
Halifax 0.5 2.8
Hamilton -0.3 4.4
Montreal 0.4 7.2
Ottawa -0.2 4.2
Quebec -0.2 6.0
Toronto -0.2 10.8
Vancouver -0.2 9.1
Victoria -0.9 -0.3
Winnipeg -0.1 7.5
National Composite -0.2 7.1
Source:Teranet-National Bank

25 Jan

Connect the housing bubble dots: There could be trouble on CMHC’s horizon

General

Posted by: Mike Hattim

TED RECHTSHAFFEN

Globe and Mail Update

A few months ago I heard leading Canadian investor Eric Sprott speak, and he said a very basic thing that struck a chord. He said that you should not be afraid to connect the dots. The dots are usually in front of you, but people don’t often look beyond the single dot.

Today I am going to show six dots that we can all see. When we connect them, the conclusion is that the Canadian Mortgage and Housing Corp. (CMHC) has a realistic chance of putting the Canadian taxpayer at risk – unless meaningful changes are made.

The key piece of background is that right now, a young couple can put down $20,000 to buy a $400,000 house, or five per cent of the purchase price. Their mortgage will be insured by CMHC (the Canadian government, also known as you and I) in exchange for a fee paid by the young couple.

If that $400,000 house drops in value by 20 per cent, for example, which has happened before in Canada, it will be worth $320,000. But the couple will owe $380,000. Then the odds of them walking away from their house or defaulting on their mortgage become meaningful. Given that this young couple might be in the same position as 50,000 other young couples (about 3 per cent of the Canadian population) at roughly the same time, the odds of a surge in mortgage defaults is very real in Canada.

Here are the dots or facts that we can all see:

Dot #1: “The greatest risk to the domestic economy is household debt,” Bank of Canada Governor Mark Carney said in an interview with the CBC last week, again sounding the alarm bell on excess borrowing.

Dot #2: The ratio of credit market debt to personal disposable income rose to a record high of 150.8 per cent in the third quarter of 2011, Statistics Canada said last week, the third-straight quarter the figure has gone up.

Dot #3: Last week, Bank of Montreal offered a five-year mortgage rate of 2.99 per cent. The lowest rate offered in history. Yes, this rate is available to those interested in putting down 5 per cent.

Dot #4: Fannie Mae and Freddie Mac, two U.S. organizations started in 1968 as a government sponsored enterprise (although they became privately owned and operated by shareholders) – have a mandate to help Americans to become homeowners by increasing liquidity for housing lending, and where appropriate, taking on risk. These two organizations were bailed out by the U.S. government in 2008 after the housing market deflated and it is estimated that their bailout will eventually cost taxpayers as much as $124-billion (U.S.) through 2014. When the housing bubble burst in the U.S., the value of many houses fell by 50 per cent.

Dot #5: In November, the Economist magazine said that Canada is among nine countries in the world where house prices are overvalued by 25 per cent or more. It went on to say that Canada is one of only three countries where “housing looks more overvalued than it was in America at the peak of its bubble.”

Dot #6: CMHC is Canada’s national housing agency. Established as a government-owned corporation in 1946 to address Canada’s post-war housing shortage, the agency has grown into a major national institution. CMHC backed loans of $541-billion (Canadian) as of Sept. 30, 2011. At that time, the total equity of CMHC was $11.5-billion. This is 2.1 per cent in equity against its overall loan exposure. To put the $541-billion in perspective: If we go back to those imaginary 50,000 couples that bought a $400,000 house and put down $20,000, that represents $19-billion of mortgages.

Back in 2007, Fannie Mae backed up $2.7-trillion (U.S.) of mortgage-backed securities with $40-billion of capital, or 1.5-per-cent equity against its overall exposure. At that time Fannie Mae stock was trading at $50 a share. Today it is 19 cents.

Just because these dots or facts are out there doesn’t mean that housing prices in Canada will fall 25 per cent or that CMHC will face any major financial problems in the years ahead. However, by connecting the dots, we can see a very plausible scenario that already unfolded with Fannie Mae and Freddie Mac that cost U.S. taxpayers an estimated $124-billion. If we had a similar scenario – and CMHC is now roughly one-tenth the size of the combined Fannie Mae and Freddie Mac – it is plausible that in a major real estate downturn, Canadian taxpayers would be on the hook for several billion dollars.

The biggest risk is likely with mortgage holders who only put 5 per cent to 10 per cent of equity down when buying a property. The reason I say this is that if house prices drop by over 10 per cent, everyone in this group will have negative equity in their homes. According to CMHC, 9 per cent of their loan book (or $49-billion) is connected to mortgages with under 10-per-cent equity based on current home prices. Remember all of CMHCs equity value is $11.5-billion (Canadian). Another 18 per cent of their loans are connected to mortgages with between 10-per-cent and 20-per-cent equity based on current home prices. This is another $108-billion of loans.

What happens if Canadian houses hit their ‘proper’ value, according to the Economist magazine, and decline by 25 per cent of their value? Every one of the $157-billion of mortgages noted above will be guaranteed by the Canadian taxpayer, and every one of those mortgages will be on homes with negative equity value.

When we connect the dots and look at the real risk, the time has come for the federal government to do the prudent thing and raise the minimum equity payment from 5 per cent to 10 per cent, and at least minimize the hit from the riskiest segment of mortgages insured by CMHC.

We can’t say we didn’t know, when the dots were right in front of us.

24 Jan

More mortgage rules planned if housing market gets too hot

General

Posted by: Mike Hattim

Garry Marr
Financial Post

A new round of mortgage rules from Ottawa could include tough new measures for calculating how the self-employed qualify for loans and tighten regulations for condominium buyers, according to two separate sources.

Ottawa remains concerned about the possibility of an inflated housing market and wants to crack down on the practice where consumers self-disclose what they make when applying for a loan. In the case of the condominium buyer, the government continues to consider a proposal that would have 100% of condo fees count when assessing how much debt a consumer could afford.

“None of this is happening just yet. The housing market has slowed down and the government wants to see what will happen next,” said one source. “If the spring market picks up, then we will see more changes to the rules.”

Bank of Canada Governor Mark Carney said Sunday that some parts of the Canadian real estate market are “probably overvalued” and policymakers are monitoring to see if further steps are needed to cool it.

“We see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there. We’re watching it closely. We’re working with our partners, the federal government, the superintendent of financial institutions,” he said in an interview broadcast on Sunday on CTV.

” Measures have been taken. They’ve been effective. We’ll keep up that vigilance. If more needs to be done, I’m sure the appropriate authorities will take those measures.”

Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the selfemployed.

“These are individuals that are self-employed, have great credit and won’t be able to validate their ability to pay if they are not showing their income on their notice of assessment,” said one source.

He says those people with stated income could have to make an even higher down payment than the normal 20% that exempts consumers from buying expensive mortgage default insurance.

The source said some self-employed are qualifying for loans based on the assumption they have a lot of write offs, like car payments and housing costs associated with home office costs.

“They get to include that based on the assumption that self-employed people have an advantage from a tax perspective,” said the source. “The government is trying to figure how they would present this.”

A source with one of the banks said the government is trying “zoom in” on marginal borrowers so it doesn’t get into a U.S. type of situation where they were not verifying income.

“What banks are doing usually when it comes with self-employment is not dealing with declared income because nobody believes it. What they do is look at their behaviour and put more weight on it,” said the source, referring to how those consumers handle their debt. “With an employer, you can call and verify their income.”

The labour market is roughly about 13% self-employed so new rules could have a major impact but the source indicated it does not mean those people would be shut out of the loan market. “It will be just more difficult for them. You are going to have to prove income in a more precise way,” he said.

The suggestion the government might crack down on condo buyers is not new, having been scrapped last year in favour of tougher new rules on amortization lengths and refinancings. Most people in the real estate sector now believe amortizations will be reduced to 25 years after having been as long as 40 just three years ago.

Brad Lamb, a Toronto real estate broker and condo developer, has heard the government is again considering including 100% of condo fees in calculating debt levels but doesn’t think it will happen.

“The 25 year amortization is a no brainer, they should do it,” said Mr. Lamb. “It’s not smart to have loose lending rules. But the condo market is hot because of investors not speculators. These investors are coming [from around the globe]. This silly [condo fee] change will do nothing. These people are buying with cash.”

 

18 Jan

Carney holds rates steady even as his concerns increase

General

Posted by: Mike Hattim

Globe and Mail

Bank of Canada Governor Mark Carney is getting more worried about record levels of household debt, but until the global recovery is on more solid footing, he’ll be relying on others to deal with the issue.

It’s Mr. Carney’s dilemma. Low interest rates have underpinned a worrisome surge of debt, but the economy is too weak to justify higher rates any time soon.

The central bank leader left his key interest rate at 1 per cent Tuesday for an 11th consecutive meeting, marking policy makers’ longest pause since the mid-1990s, as he and his team watch nervously to see how risks linked to the European debt crisis unfold.

Mr. Carney has repeatedly warned that low borrowing costs are enticing too many Canadians to take on debt that won’t be affordable once interest rates rise. On Tuesday he upped the ante.

Mr. Carney took the unprecedented step of noting in an interest rate decision that he expects the debt-to-income ratio will keep rising. Moreover, he attributed this to “very favourable financing conditions” – i.e. the Bank of Canada’s low policy rate, and its influence on the cost of mortgages.

“When they add something that wasn’t there before,” said Michael Gregory, a senior economist with BMO Nesbitt Burns, “it’s a signal that something has moved on their radar screen.”

Mr. Carney appears increasingly uncomfortable with a byproduct of his low-rate policy, even as debt-fuelled spending holds up the housing market and the economy at a time when soft global demand is crimping exports.

The debt-to-income ratio rose to a record 153 per cent in the third quarter, according to Statistics Canada, and exceeds the current level in the U.S. and the U.K. Canada is inching closer to the 160-plus threshold that got the U.S. and the U.K. into so much trouble four years ago.

Risks tied to the slack global economy are already affecting business decisions in Canada and arguably contributing to the slowdown in the labour market. For that reason, economists say it’s unlikely Mr. Carney will raise interest rates until next year.

Mr. Carney has stressed that there may be cases where interest rate changes can buttress moves by regulators to tame asset bubbles or dangerous buildups of debt that could threaten the entire economy. But higher rates now would hurt manufacturers in Central Canada and deter business investment, and tightening while the U.S. Federal Reserve is debating whether it needs to ease more would boost the currency, adding to exporters’ woes.

“The challenge of monetary policy is that it’s a blunt instrument,” said Derek Burleton, deputy chief economist with Toronto-Dominion Bank. “Regulation tends to have the benefits of surgical precision.”

Mr. Carney is no doubt keenly aware of the U.S. Federal Reserve’s failure to grasp the seriousness of trouble that was brewing in the U.S. housing market in the past decade, and criticism that Alan Greenspan fuelled that debacle by keeping interest rates low for longer than he should have.

But Mr. Greenspan was not presiding over an export-dependent economy that, according to new projections Mr. Carney released Tuesday, will grow just 2 per cent this year and 2.8 per cent in 2013, and that’s assuming the European situation is stabilized.

“Standing pat seems appropriate,” Mr. Gregory said. “But if things nudge either way – Europe clarifies itself a bit sooner, or housing takes off – the case for rate hikes will come a lot closer.”

In the meantime, is appears homeowners can’t resist the allure of rock-bottom mortgage rates.

“In my marketplace I see the consumer confidence to be very high, and it’s high because interest rates have been kept low,” said Peter Majthenyi, a Toronto-based mortgage broker. “Since the holidays, my phone hasn’t stopped ringing.”

18 Jan

Flaherty keeping wary eye on housing market

General

Posted by: Mike Hattim

Globe and Mail

Finance Minister Jim Flaherty says he stands ready to intervene in the housing market again, just as a mortgage price war breaks out among Canada’s major banks.

Mr. Flaherty said Tuesday that he’s watching the market closely, although he has no plans to tighten the market again at this point.

His comments came on the same day that the Bank of Canada projected that the debt burden on households will continue to rise, a troubling sign that means stretched consumers are vulnerable to shocks in this climate of heightened economic uncertainty.

Mr. Flaherty said he is in close contact with the big banks, most of whom are now offering 2.99-per-cent fixed-rate mortgages, the lowest ever.

Both the Finance Minister and Bank of Canada Governor Mark Carney have been urging consumers to get a handle on their debts, the bulk of them in mortgages, and not allow low interest rates to entice them into taking on more credit than they can handle.

Mr. Flaherty announced his most recent round of tightening a year ago, when he made a number of changes, including reducing the maximum length of insured mortgages to 30 years from 35 and restricting the amount Canadians could borrow when refinancing.

While low interest rates in Canada, the U.S. and Europe are intended to help fuel economic growth, they are also causing issues for Canadian policy makers, who worry homeowners will take out bigger mortgages than they’ll be able to afford once rates rise.

Some bank executives have recently indicated that they would support Mr. Flaherty taking further steps to tighten the mortgage market, for example by trimming the maximum length of federally insured mortgages to 25 years from 30.

Toronto-Dominion Bank chief executive officer Ed Clark told The Globe and Mail last month that he would not be opposed to the government tightening the mortgage rules further. “If you thought the Canadian economy was strong enough to take another adjustment, then we would say take the 30 [year amortization limit] down to 25 and get this back to where it originally was,” Mr. Clark said.

Bankers also argued that the 2.99 per cent fixed-rate mortgages they have begun to offer, after Bank of Montreal spurred a price war, are not a big problem for consumer debt levels, in part because many Canadians still have variable-rate mortgages that are even lower than that.

“We have been cautioning Canadians for some time that they need to be prepared to have higher interest rates in the future and be aware of the affordability issue that that may create for some Canadians, not to assume that mortgage interest rates will remain low for a long period of time,” Mr. Flaherty said Tuesday. “So we all have to be cautious in our financial planning.”

The ratio of Canadian household debt to personal disposable income hit 152.98 in the third quarter, compared to 150.57 per cent in the prior quarter and 146 per cent in 2010.

Mr. Flaherty added that there are some signs that Canada’s housing market is softening, and he hopes it will continue to moderate.

Mortgage credit, which accounts for 69 per cent of total household credit, “shows no signs of slowing in the near term,” said National Bank Financial analyst Peter Routledge.

“A substantial array of leading and coincident indicators suggests to us that Canadian households will continue to augment their leverage,” he wrote in a note to clients Monday. That, in his opinion, is not a good thing.

“It would be great if everyone just settled down and we saw housing come off 5 or 10 per cent and we kept having an economy that was growing but household credit levelled off, and that would be what I call a soft deleveraging,” he said in an interview. “But we’re not going to have it. And so, I think folks should prepare for – not this year, but somewhere down the line – a more disruptive resolution.”

17 Jan

Bank of Canada says borrowing cost to remain low, increasing household debt

General

Posted by: Mike Hattim

By Julian Beltrame
The Canadian Press

OTTAWA – The Bank of Canada is keeping its trendsetting policy interest rate at a super-low one per cent until at least March, which it admits will foster a continued rise in household debt from already historic highs.

The central bank’s decision on interest rates Tuesday was widely expected, but it did unveil a few new twists in its release, including a slightly altered profile for economic growth and an admission its policies will likely keep Canada’s housing market strong and spur consumer spending.

“Very favourable financing conditions are expected to buttress consumer spending and housing activity,” the bank’s policy council, headed by governor Mark Carney, said in its announcement.

“Household expenditures are expected to remain high relative to GDP (gross domestic product) and the ratio of household debt to income is projected to rise further.”

Carney has warned repeatedly that Canadians are taking on too much debt, lured by the super-low interest rate policy, but the concession that he expects debt to increase suggests he has become resigned to the fact for the time being. According to Statistics Canada, household debt to disposable annual income is already at an all-time high of 153 per cent.

Last week, the Bank of Montreal led a race to the bottom on interest rates by dropping its fixed five-year mortgage to 2.99 per cent, the lowest in modern Canadian history.

As analysts have noted, Carney is in a bind on interest rates, in that he wants to discourage irresponsible borrowing that might lead to difficulties later on but is restrained by an economy that is too weak and too risk-filled to withstand a policy clampdown on borrowing by consumers and businesses.

In the statement, the bank made clear it believes the global economy is even weaker and riskier now than it was when it issued a rather gloomy assessment in October.

“The sovereign debt crisis has intensified, conditions in international financial markets have tightened and risk aversion has risen,” the policy council wrote. “The recession in Europe is now expected to be deeper and longer than the bank had anticipated.”

The bank said it assumes European authorities will do what is necessary to contain the crisis, but admits “this assumption is clearly subject to downside risks.”

For Canada so far, European troubles, including weaker growth in China, has not materially altered the outlook.

It said the second half of 2011 was better than it had previously thought with growth of 2.4 per cent, three notches higher than its October projection. That was in part because the U.S. economy was also stronger.

For this year, however, growth will average one notch higher at 2.0 per cent and in 2013, one notch lower than the previous forecast at 2.8 per cent — in essence, little changed.

The bank has repeatedly stressed, however, that its mild forecast for Canada is contingent on the European debt contagion not spreading and that risk appears to have grown, in the bank’s assessment.

The higher starting point on growth because of the stronger 2011 will mean the output gap — the measure of when the economy is running on all cylinders — will close three months earlier, in the fall of 2013, the bank said.

And the bank believes inflation this year will be slightly higher because of the continued firmness in oil prices. In October, the bank had projected inflation would drop below one per cent by summer.

But the bank is clearly not worried about consumer prices, forecasting inflation will hit its target of two per cent in the third quarter of 2013.

“Inflation expectations remain well-anchored,” it said.

16 Jan

BMO’s No-Frills 2.99% mortgage offer is not ground breaking…Just another trap by the Big Banks..

General

Posted by: Mike Hattim

CanadaMortgageNews.ca
Jan 15, 2012 – SG 

EXTRA, EXTRA, READ ALL ABOUT IT…. 5 years fixed No-Frills mortgage for 2.99% by BMO….wow, can you believe it?    Well, don’t get too excited…  At CanadaMortgageNews.ca we  give you the straight talk…  and guess what, No-Frills mortgages aren’t anything new…

I’m giving a BIG THUMBS DOWNS to this product… and you should too…

I’ve had access to these products in the past and we still have access to them….  but I have NEVER recommended it to any of my clients….  the limitations can be too costly and any potential savings can easily be eaten away with prepayment penalties, fees and the inability to even exit the mortgage…. That’s right, you can’t exit the mortgage in many cases…  read on, I’ll explain more..

Make sure you understand how the rates are calculated

Before you start thanking BMO and putting your arm around the banker’s back, you should understand that rates have been inflated for several months… they should actually be much lower…..

Fixed mortgage rates are closely priced to the Govt of Cda bond yields.   5 year Bond yields have been below 1.50% since Nov 1….and have been hovering at around 1.30% since Dec 1.   Historically, the best discounted rates are between 1.25% and 1.50% above the bond yields….  That means fixed rates should be at around 2.80%…. Okay, let’s add in a premium for some market uncertainty….  That doesn’t explain why 5 yr Fixed mortgage rates have not been below 3.29%?

Well, I think Canadians are smart enough to know why the savings hasn’t been passed down to them….  yup, Banks are just maximizing their profits…  And now, this past week, we saw an announcement that BMO was announcing a special low rate… 5 years fixed for 2.99% …  WOW, that does sound great…doesn’t it?    Well, maybe not… let’s take a closer look before giving this product the ‘thumbs up’.

A closer look at BMO’s NO-Frills 2.99% special

There are too many limitations to this product…

-maximum amortization is 25 years.   your prepayment privileges is reduced to and annual lump sum payment of 10% of the original principal balance and you can only increase your payment by 10%.

-90 day rate hold instead of the usual 120 day rate hold.

-you cannot payout this mortgage prior to maturity unless through a bona fide sale…

-you can only refinance the mortgage with BMO and not with any other lender before maturity…. this will all but eliminate your ability to negotiate the rate… a huge loss for borrowers….  ( you can take your mortgage with you if you move to another house but if you need more money, you will have to negotiate the rate… do you really think BMO will give you the best rate at that time???).

-BMO’s penalty calculation… the BIG SIX banks have the worst penalty calculation formula in Canada.   This is one of the biggest kept secrets in the industry… If you had to pay your mortgage early, for any reason.. or if you had to refinance, you would be hit with a penalty calculation that could break your savings account…  That’s because the BIG SIX banks use a formula that makes you pay for your mortgage discount, for the entire term of the mortgage… read this article on how they do it…. don’t get caught having to pay a 10, 12, 14 month interest penalty….  (just worked out a mortgage penalty for a client.. if they stayed with RBC, they would have to pay a penalty of $7,000, if they went with one of our wholesale lenders, they would only pay $2,000.  this penalty calculating formula is similar to BMO).

By the way, the competition has responded and bettered BMO’s offer

There is some good news to BMO coming out with this product…  just as we are writing this, we see that a big lender has come out with a 4 year fixed rate of 2.99% with NO restrictions or limitations…  For us, that eliminates BMO’s Low rate special as a serious competitor in the mortgage market.  But thank you, BMO, for pushing the Lenders…

My advice, stay away from these No Frills mortgage…   speak with your mortgage broker and get full disclosure on this and other products before making any decisions that could end up costing you dearly…

12 Jan

Reverse mortgages hit record high

General

Posted by: Mike Hattim

Globe and Mail Update

Canadians looking for sources of cash in their retirement are tapping into reverse home mortgages in record numbers, according to data released this week.

The parent company of HomEquity Bank, the country’s sole provider of reverse mortgages, said that in the fourth quarter of 2011 it closed a record number of reverse mortgages worth $67.2-million. That is up 42 per cent from the fourth quarter of 2010.

On an annual basis, the value of reverse mortgages reached $239-million last year, a 16 per cent rise over the previous record set in 2010.

“Since its inception 25 years ago, HOMEQ Corporation has analyzed the demographic wave of Canadian seniors and how our business can address these trends,” Steven Ranson, the company’s president and CEO, said in a release.

“Now, the wave is here and we are meeting seniors’ needs for improved cash flow in retirement. This tremendous market demand is fuelling our strong growth in originations, while our disciplined approach to operating the business is resulting in healthy net income growth.”

Reverse mortgages are becoming increasingly popular among older Canadians who may not have saved enough to fund a comfortable retirement. For cash-strapped seniors who own their home, a reverse mortgage is a relatively easy way to tap into some money.

With a reverse mortgage, home owners can borrow up to 50 per cent of the appraised value of their home. They repay the principal – and interest that has been accumulating – when they sell it.

But some people in the financial community are critical of reverse mortgages. Chartered accountant David Trahair, who recently wrote a book on crushing debt loads, says they should be seen as a last resort. “They may make some sense for house-rich, cash-poor seniors who are having trouble buying groceries but for everyone else, simply applying for a home equity line of credit before retiring is a much cheaper way of securing access to emergency funds.”