BIG BANKS need your help for higher profits!!

The more I think about it, the more fired up I get!   OSFI (Office of the Superintendent of Financial Institutions) has come out and said Bank profit margins are shrinking and the BIG Banks may start to loosen their credit lending policies in order to write more business and therefore earn more profit.

This statement just doesn’t make any sense…. let’s think about this for a minute… Take a look at Financial Post’s Biggest Companies ranked by profit in 2010.…let’s see where the Banks rank:

– #2 is RBC $5.2 billion

-#3 is TD Bank $4.6 billion

– #4 Bank of Nova Scotia $4.2 billion

– #9 Bank of Montreal  $2.9 billion

– #12 CIBC $2.4 billion

Five of the top twelve most profitable companies are Banks!!!  This doesn’t look like the Banks are hurting that badly, does it?  We should also not forget that the govt has made several changes to mortgage lending rules…It’s already harder to qualify for a mortgage and line of credit…  So what gives, OSFI??

Look, OSFI has spoken and we must not ignore this….I don’t like what they are saying and the logic they are trying to give us doesn’t make sense….But we can’t bury our head in the sand either… The Banks have too much power… We should prepare ourselves for changes… Make plans and adjust accordingly… Don’t wait for the Banks to act.

It’s clear to me that we could see some changes in lending policies…My guess is this will translate to some increased rates on your secured lines of credit, a possible review of your account, even a reduction in your limit… That’ right, the banks can even call your line of credit and ask you to repay it in full…!! They might ask you to lock into a fixed rate mortgage or get into an amortized repayment schedule instead of just paying interest only.

But it doesn’t end there… commercial accounts will also be under the magnifying glass, in my opinion.  Commercial loans and mortgages get reviewed annually by the Banks…This is why it’s very important to choose your commercial lender carefully… Not all Banks are alike… there are some institutions that offer commercial loans that are not callable…

Bottom line is to be aware, stay informed and act accordingly…. If you are not sure where you fit in with these possible changes, give me a call.. I’m happy to help.

Setting us up for fewer rate drops and higher bank profit margins..

It’s becoming clear that the Banks and govt want us to boost Bank profit margins…. Yes, it’s true!   They want you and I to pay a higher interest rate so that the Banks can earn a higher profit

Let’s look at some facts…

-The Banks recently got together and increased their Variable rate pricing from Prime less 0.75% to Prime less 0% (the Bank websites are showing their variable rates at Prime less 0% but there are still places you can get Prime less 0.40%).   So why is that?  They tell us ‘profitability concerns’ is the reason…

-The best 5 year fixed rate on the web from any of the Big Six Banks is 3.99%… Yet, the 5 year govt of Canada bond yields are at 1.43% today…that’s a spread of 2.56%... historically, that spread is between 1.10% to 1.50%… (by the way, you can still get a 5 year fixed rate at 3.39% from reputable lending institutions).   The Banks are making a fortune these days on Fixed Rate mortgages.

– OSFI (Office of the Superintendent of Financial Institutions) has now come out and said that they are concerned consumers will borrower more than they should because interest rates are so low… and because of this, they are urging Banks not to loosen their lending criteria, especially on Home Equity Lines of Credit…

Read the warning signs

If you read between the lines, we are being warned that tighter lending rules could be just around the corner for Secured lines of credit… I don’t think the govt needs to make any further changes to mortgage lending…both secured lines of credit and mortgages…  We have seen several rules changes over the past few years….  But  the message we are being fed is that Banks need to charge a higher rate of interest because consumers cannot be trusted to borrow wisely…

The reality is that interest rates should actually be lower than where they are today.   Cost of funds are down… so why can’t we just let consumers pay fair market interest rates?  It’s one thing to be told that interest rates are going up because of market conditions and cost of funds… but when I start hearing that Bank Profit concerns and consumer spending habits are issues, then I have to start questioning the motives.   This just sounds like another excuse to raise rates and charge the average consumer more…..Consumers beware…!

Some good news

There was some good news… and that is that US interest rates are forecast to remain low into 2013…. Canada usually follow the US very closely….Hey, let’s enjoy the low interest rates…. a $300,000 mortgage will carry from between $1200/mth and $1325/mth…what’s wrong with that?  Enjoy Canada… Enjoy.

Govt regulator says interest rates extremely attractive…

We can interpret a sentence to mean several different things…   Take for example the following comments made by the head of the Office of Superintendent of Financial Institutions (OSFI), Julie Dickson:

“current levels of interest rates have already made borrowing extremely attractive to all borrowers.”  (Wall Street Journal)

– “Extremely low rates will be with us for even longer than envisaged before the summer.” (Globe and Mail)

What does that mean to you?   To me, it simply means we are in a historic low interest rate environment.. with an economy that is better off than the rest of the world…  add it all up and it looks like a pretty good time to borrow, if you ask me… Borrowing for a house is NOT the same as borrowing for a car or a trip… A house is a tangible asset.. it appreciates tax-free.  It’s a good investment…

Borrowing to invest

Speaking of borrowing to invest…. rental properties have never looked more attractive…  Borrowing to invest is NOT a bad thing and it is NOT what the regulators and economists are concerned about… They are concerned about borrowers that have borrowed to their absolute maximum capacity and cannot afford to miss a day’s work without being in danger of defaulting on a payment…

Take a bow Canadians… we are doing great!

Last time I checked, Canadians were acting as conservative as ever…. paying down their mortgages faster and borrowing at a slower pace…  Look at these stats from The Montreal Gazette:

“In Canada, an average of 63 per cent of a household’s home value is equity, while in the U.S. this figure is just 39 per cent.” (Matthieu Arseneau, National Bank).

“In Canada, 40 per cent of homeowners have no mortgage debt; in the U.S. it’s 31 per cent.” (Matthieu Arseneau, National Bank).

“Debt amounts to just 24 per cent of a household’s average net worth in Canada, while it’s 29 per cent in the U.S.”  (Matthieu Arseneau, National Bank).

“Mortgage debt, which was climbing by 10 per cent or more through last year, has throttled back to a six-per-cent pace. Other consumer borrowing hasn’t grown at all over the past year.” (Benjamin Tal, CIBC World Markets).

–  “More than 70 per cent of all mortgage-holders are on an accelerated payment schedule, Tal says, adding: “That’s a smart use of low interest rates.” (Benjamin Tal, CIBC World Markets).

Hmmm… the economists tell us we are doing pretty good, judging from those comments….

Final thoughts.

If interest rates were 6%, 7% or 8%, what we would the media be saying?   ‘INTEREST RATES AT HIGHEST LEVEL IN 10 YEARS!’ … or something like that…  and I bet we would also see this headline…  ‘BANKS WARN THAT FURTHER RATE HIKES ARE ON THEIR WAY….BEST TO LOCK INTO A LONG TERM FIXED RATE NOW’…..

Use your own judgement… seek out professional, non-biased (non-bank) advice…. Hey, I don’t know about you, but I’d rather borrow at 2.60% for aVariable rate or 3.39% for a Fixed rate, than 6%, 7%, or 8%…..  We are experiencing historical low interest rates… they will be here a little longer but they won’t last forever.. enjoy them now… take advantage…

Condo fraud allegations grows to 9 properties

As reported last week, a property management company near Toronto has been linked to an alleged fraud on a massive scale.   Channel Property Management’s President, Manzoor Khan, has been charged with numerous counts of mortgage fraud and construction fraud that may total more than $20 million.

The Toronto Star has reported that the list of properties affected has grown from 4 to 9.    As more facts emerge, it seems like Mr. Khan’s lifestyle involved having 2 wives that are in Bangladesh.   It is also reported that Mr. Khan has fled the country and is also in Bangladesh.

The real victims are the individual condo owners.   We are talking about real people and families that have been crushed by this.  Their property values have dropped and their condo fees have skyrocketed.   The govt needs to step in now to help.

And what about other condo buildings… Could this be happening with other property management companies?   Right now, there should be a quick and fast audit being done by all condo corps.    This is probably an isolated incident but it would good to see the other Property Managers and condo corps make a public statement to calm the fears of current and prospective condo owners.

We will be following this story as it does not appear to be over yet… Channel Property Management said they managed around 40 properties, according to The Toronto Star.   And again, for the record, Mr. Khan and Channel Property have denied the allegations and have filed a statement of defence.

$20million condo fraud in Toronto shows need for more regulation.

Reports have surfaced about a Property Manager that allegedly obtained fraudulent mortgage funds on behalf of 1,000 unsuspecting condo owners.   The Toronto Star reports that Manzoor Moorshed Khan, president of Channel Property Management, borrowed millions against at least five condo buildings, without the owners knowing about it.

Equitable Trust, a Canadian financial institution, says they were taken for $14million worth of fraudulent mortgages.  The Star reports that Khan falsified a series of legal papers to obtain the loans fraudulently.

In another situation related to the same property management company, it is alleged that Khan siphoned off some money through construction fraud.   Apparently, he tendered a bid for some construction work on one of the buildings he was managing through Canali Engineering, a company he created.  He submitted the lowest bid at $1.2million.  Then he inflated the bill to $1.3million… but his company never did the work.. he hired a sub-contractor to do the work at half the cost.

It should be noted that a statement of defense has been filed by Khan denying the allegations.

CBC.ca reports that condo fees in one of the buildings managed by Khan’s company has gone up from $340/mth to $780/mth….and the values have gone from $152k to $70k.

They say fraudsters cannot be stopped, only discouraged through regulations and laws.   Clearly, some more regulations need to be put in place.  CBC.ca quotes Dean McCabe, president of the Association of Condominium Managers of Ontario (ACMO), saying “there is no licensing or regulation of condo property managers.   Khan could manage condos next week, next month or next year”.   ( Yikes!  That’s a scary thought.)  Mr. McCabe is calling on the government to enforce licensing or regulation.

Channel Property Management manages upwards of 40 buildings….. We’ll report more on this story as it happens…

Variable rate increases again..

Lenders have begun to raise their Variable rate mortgages again…. The second increase in less than a month.  A look at the Bank websites and you will Variable rate pricing is now at Bank Prime less 0%….  that’s 3.00%…   And although ‘3.00%’ sounds like a good rate, a Variable rate at Bank Prime less 0% is not good.

The Banks have gone from an advertised rate of Prime less 0.65% to Prime less 0% in about one month’s time.   Of course, the best wholesale rates through mortgage brokers now sit at Prime less 0.50% and will probably go to Prime less 0.40% after the dust settles.

So what’s causing the Banks to increase their Variable rate mortgages?   They tell us there are “profitability concerns”.   In simple talk, that means they simply want to increase their profit margins now that rates are expected to stay low for some time to come.   They also want to force us to take the much mortgage profitable 5 year fixed rate mortgage, now sitting at 3.99% (RBC website special rate)..    Keep in mind, there are better rates to be had in the wholesale market…. 3.49% seems to be the best 5 year fixed rate today.

But even 3.49% is too high.  The spread between the 5 year govt of Cda bond (1.45%) and 3.49% is still over 2.00%.   Historically, this spread has been between 1.10% and 1.40%..    It’s simply math…. the Banksters are saying ‘ka-ching, ka-ching”.

A look back at Oct 2008 and the Bank’s kool-aid..

October 2008 will be remembered for a few reasons….. First, it was Obama’s rise to the presidency… the first black American president…. next, it was also the end of Lehman Brothers investment bank and the beginning of one of the biggest global recessions in modern history…

That’s how most of us will remember October 2008….. but  there was also another very memorable event that took place.  You see, it was around this time that I heard some borrowers were getting calls from their Bank to lock-in their Variable rate mortgages…. or to take a long term fixed rate mortgage to ‘protect themselves from the uncertainly’ that surrounded the markets at the time…. I warned mortgage borrowers to expect a call  from their Bank offering a ‘safer mortgage option’ or some ‘special offer’ to lock into a fixed rate or a long-term rate…and NOT to take such offers or deals….

Can you imagine a Bank advising or recommending that you lock in your Variable rate or to take a long-term Fixed rate at that time?    At the time, Variable rates were are at around 3.35% and 5 year fixed rates were at around 5.75%.   Uh, no thank you… I’ll pass on the bank kool-aid.

The funny thing about uncertainty is that it usually brings us lower interest rates…..not always, but during this time we knew the World Banks would work together to lessen the economic impact of the Lehman Brothers collapse.   Unfortunately, there were far too many borrowers that listened to their banker and locked into the much higher Fixed rates…

The moral of the story is that Bankers and their ‘Mortgage Specialists’ work for one company, one Bank… they can only offer you one set of products and MUST do what’s in the BEST interests of their BANK…. They have to drink the Bank koolaid….   Mortgage Brokers can offer the products from dozens of lenders and can also compare the benefits and differences between Banks… Remember to ask questions and opinions from neutral, unbiased professionals.

Don’t drink the kool-aid…

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