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CategoryMortgage Trends

Posted Mortgage News

$600billion, $250billion, 2.99%, $1.5trillion… numbers to watch in 2012

$600billion….Recently, we heard that there was another crisis looming in the mortgage industry.  Last week, we saw CIBC make headlines when their wholesale lending division, Firstline Mortgages, made drastic changes to the lending policies, which included pulling out of the self-employment and new-immigrant lending programs. They also reduced their maximum mortgage limits.

So what happened?  Why did Firstline Mortgages make these changes?  Firstline told us this was in reaction to a report stating Canada’s self-employed and new-immigrant mortgages shared similarities with the U.S. Subprime mortgages.    But maybe there was another reason…  Shortly after this report, we got news that CMHC was approaching their mortgage limit.   The report said CMHC ‘s total insured portfolio was $541billion as of the end of Sept 2011.  The last increase was in 2008 when the govt raised the limit from $450billion to $600billion.    But now it remains uncertain if or when the govt will raise that limit… So now we have lenders and bankers wondering how this will affect the supply of mortgage insurance.. so, what do they do?  They cut out some of the less popular mortgage programs…  Nice, huh?

$250billion….But we are forgetting the private mortgage insurers.  Genworth Financial has stated they have plenty of capacity before they reach their govt approved $250billion limit (this limit is expected to increase to $300billion in a few months).  The only challenge for private insurers like Genworth, is that the govt only guarantees up 90% of it’s insurance to the lenders…. but 100% for CMHC .   This could case lenders to seek higher returns on their mortgages, meaning potentially higher interest rates…

 

2.99%….Remember that 2.99% No Frills rate special last month?  I can’t help but wonder what the executive boardroom was like when they saw their mortgage department come out with this rate…  at a time when the govt was clearly trying to cool the housing market and slow consumer borrowing…  It’s early in the year, but this has to go down as one of the most ill-timed moves of 2012…  Congrats BMO mortgage dept!  You did bring No Frills products to the forefront.  And this gave us a real opportunity to point out the shortcomings of this product..

$1.5trillion…Last years, we heard that personal debts levels had hit record highs.  Numerous articles and reports are telling us that we are borrowing too much.  Yes, it’s true, outstanding mortgage balances topped $1trillion for the first time in Canada.  That means $500billion of non-mortgage personal debt it out there.   And that number bothers me more than the mortgage balance.   Mortgage rates are at historical lows… home ownership and property investments should be encouraged.   But borrowing for new TVs, cars, computers and other items, should be discouraged.   We have to make a distinction.   GOOD DEBT VS BAD DEBT.  There is a difference.  Let’s not group all this debt in one category…

 

Posted 5 Comments on Major lender cuts out self-employed and new immigrant lending programs Case study

Major lender cuts out self-employed and new immigrant lending programs

THE SKY IS FALLING AT CIBC?

On Tuesday, CIBC’s wholesale lending arm, Firstline Mortgages, announced drastic changes to their lending policies.   They will no longer participate in self-employment and new-immigrant lending programs.  These programs made it possible for Canada’s growing self-employed and new-immigrants to get a mortgage at discounted interest rates.

click here for The Star’s report featuring some of own personal comments.

HERE’S WHAT REALLY HAPPENED

The move by Firstline seems to have come immediately after 2 recent reports…  First, CMHC said they are reaching their $600billion cap limit on the amount of mortgages CMHC can insure.   Currently sitting at $541billion, as of the end of 2001.  (I think this is the real reason for Firstline’s lending changes.. a more thorough explanation is below).   But next, a Bloomberg news report was released, earlier this week quoting a 152 page OSFI report (by the way, I searched OSFI and couldn’t find that report).   The article drew comparisons between the US sub-prime mortgage lending and Canada’s self-employed and new immigrant lending programs.

Let’s get something straight… Canadian lending policies are NOT like the US sub-prime policies.  Not even close!  The US sub-prime mortgages were granted to people with poor credit history, they lent up to 125% of the value of the home, amortizations went up to 50 years, they offered interest only payments, appraisals were not always required, they offered low interest teaser rates for 1 to 2 years, they offered Variable rate mortgages with no payment adjustment even if rates went up….  We don’t have theses features or options in Canada…. To suggest that our lending practices are similar is not accurate and has to be corrected…or proven… (there was time when similar mortgages were made available to Canadians this only lasted a few years from 2006-08 and this only accounted for less 5% of all mortgages during these years)

In Canada, we have much stricter lending policies that is in keeping with our conservative reputation….. And let’s not forget, the Fed govt has made 3 major changes in the past 3 yrs… making it tougher to qualify for a mortgage.

-maximum amortization reduced to 30 years maximum.  -refinances were cut to 85%  loan to value.  -business for self without traditional income confirmation will need to put 10% down payment, instead of 5%.

We really don’t need any more tightening.  The record low interest rates are helping to drive the real estate market.  Once rates go up, the values will level off and maybe even drop.

And by the way, if you think this is a small segment of the population, guess again.   The Canadians Association of Accredited Mortgage Professionals (CAAMP), estimates that 13% of the country is self-employed.    (to further clarify, a self-employed person is anyone that is paid in full and then must deduct and pay their own income taxes.)   Being able to reduce your taxable income is part of the benefit of being self-employed…Remember, these people don’t have pension plans and usually don’t qualify for Unemployment insurance…  

New immigrants are a big part of what has made our country the best place in the world, to live in.   In 2010, there were over 250,000 new immigrants that came to Canada.   These are people, anxious to work, wanting a better life…..wanting to spend and borrow…helping our economy grow.   And as a former Senior Lending Manager with a major bank, I can attest to the fact that granting new immigrants a mortgage has always been considered a low risk loan.   Most new immigrants would give up their right arm, before not paying their mortgage.

BANKS HAVE TAPPED INTO CMCH PORTFOLIO INSURANCE FOR YEARS

You bought a house, you put down 20% or 25% and you didn’t have to pay CMHC or Genworth hi-ratio mortgage insurance.  Congrats…!  But did you know that your mortgage might still be CMHC or Genworth insured?   That’s right.  Banks and other financial institutions have been buying and paying for CMHC insurance through portfolio insurance.  This makes the mortgage a secure investment for the Banks.  If you default, the loan is guaranteed by CMHC, a Crown corporation.  Soveriegn debt.  You can’t get any more secure than than.   It also takes the mortgage off the Bank’s books and frees up more capital for other investments.

Here’s a thought… CMHC is a Crown corp that is there to help Canadians own a home… well, maybe they should take a look at the % of mortgages that are 85% loan to value or higher…this number isn’t as high as you might think.

Remember these stats from January 2011?

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

And we also know that last year, the total outstanding mortgage balance in Canada topped $1trillion for the first time in history….. You could say that CMHC has a very well secured book of business….

Come on CMHC, let’s make insurance available for those Canadians that need it…  it seems the Banks have found a way to eliminate all their risk when it comes to lending money…but we know they keep all the rewards and profits (how else do you explain $billion profits through the 2008-09 recession and beyond)   Maybe it’s time to increase that $600billion limit… There doesn’t appear to be any arrears problem with mortgages either… last I heard, we were at around 0.43% for mortgages in arrears more than 90 days.

Posted 1 Comment on BMO 2.99% No Frills mortgage needs another look. Interest rates

BMO 2.99% No Frills mortgage needs another look.

It’s January 25, 2012… that’s the original deadline date issued by BMO for their NO FRILLs 2.99% 5 year fixed rate mortgage.   Since announcing that 2.99% rate, BMO has reportedly been flooded with calls and applications.  And rightfully so.  That’s the lowest advertised 5 yr fixed rate in history.  (we need to say thank you to BMO… they woke up the competition and the competition answered.. we have seen competitive offers from the non-bank lenders… no restrictions or limitations…   This is great news for the consumer.)

This product has also drawn some criticism…There was an interesting articles asking if this product was too good to be true….  click here to see what The Toronto Star thinks.

Let’s look at the restrictions and limitations more closely…    If you are 100% certain about the next 5 years in your life, your job, your health, your family’s health, then this may be a great product for you…. But if you look at the stats, we, as Canadians, on average refinance or change mortgages every 3 years…  With that in mind, the product can be very costly for the unsuspecting borrower….read on and I’ll explain…

I’m not too concerned with the limited prepayment privileges.   The biggest potential risk to borrowers is the inability to refinance outside BMO should they experience some financial problems in the next 5 years.   If a borrower runs into financial problems and needs to take the mortgage elsewhere, because they won’t qualify for a BMO refinance,  they can’t do it.  The mortgage can only be paid out if the house is sold…

An an even bigger problem is the BIG SIX penalty calculation…. let’s say you can somehow refinance in 2 or 3 years with BMO, or you do sell the house and are not porting the mortgage… well, now you must deal with a penalty calculation that makes you pay for the original discount you received at the time of the original mortgage….   And LOOK OUT…This is where we have seen penalties of 6, 9, 12, 14 and even 16 months worth of interest being charged by the Banks to get out of a mortgage..(click here to see how banks calculate their penalties).  (hey, Federal Government, didn’t you promise to standardize mortgage penalty calculation 2 years ago??… when is that going to happen?))

And if you need more money added to your mortgage, what assurance will you have that BMO or any other BIG SIX bank, will give you a good rate or a discount on those new monies?   None… they certainly won’t have to, given your penalty to exit would be higher than other non-bank lenders…    This subject is not talked about very much by the media or by the banks… We will be commenting on this further in future posts….  (hey, how about CIBC and that class action lawsuit over mortgage penalty charges??… I’ll be making some comments on this soon).

Here’s some advice… seek out Lenders that have better penalty calculations... they are out there… they just aren’t as obvious as the Big Six Banks… talk to a mortgage broker and get some comparisons…  you might be surprised to know that competitive rates exist without having to give up your future options…

Posted Interest rates

Canadians saved $2.7billion on their mortgage by refinancing or renewing this year.

Variable rate mortgages have been extremely popular.   A study by the Canadian Association of Accredited Mortgage Professionals (CAAMP) showed that 37% of Canadians took a Variable rate last year, compared 31% from the year prior.

And Canadians saved almost $2.7billion by renewing or refinancing their mortgages this year.   Wow, that’s a lot of money… maybe too much?   The banks have put a lot of pressure on borrowers NOT to take Variable… they’ve made it harder to qualify by getting the govt involved and having them qualify all new Variable rate clients with posted 5 year fixed rates…. And most recently, the Banks have jacked up their Variable rate pricing from Prime less 0.75%, 0.80% and even 0.90%, to Prime less 0.00% and even Prime PLUS 0.10%.

Watch for the Banks to hike fixed rates as they aren’t earning enough… or so they tell us…

Posted Interest rates

Fixed vs Variable in 2011

FIXED RATES MAKE MORE SENSE TODAY.

If you were  in a Variable rate mortgage over the last 2, 3, 5, 10 years or longer….then you paid less interest than someone in a Fixed rate product.   You probably saved $$thousands each and every year.    Variable rate has been lower than the 5 year fixed rate in over 88% of the time.

But how about today….?  Well, the Banks have changed the mortgage landscape.   They have decided there isn’t enough profit in Variable rate mortgages.    Up until 6 months ago, anyone needing a new mortgage could get a Variable rate at Bank Prime (3.00%) less 0.75% and maybe even a little better..!    If you took a Variable rate 4 years ago, you might still be enjoying Prime less 0.90%!!   Today, a quick search on the net for Variable rate pricing and you’ll find Bank Prime less 0%…. some are actually charging Bank Prime + 0.15%.

But it’s not all bad news.   With the bond market hitting all time lows, we are also experiencing historical low 5 year fixed rates.   Today, the best 5 year fixed rate seems to be 3.39%  (WORD OF WARNING… there are some NO FRILLS rates of 3.19% or lower being advertised out there… these NO FRILLS products carry limited or no prepayment privileges and you cannot exit these product without selling your home.   We are not quoting those rates).

Any upward movement in the Bank Prime rate and you could actually be paying more for that Variable rate vs today’s 5 year Fixed rate.   Yes, today we must consider Fixed rate as a good option…. Just make sure you are choosing the appropriate term.   Anything shorter than 3 years does not seem to give enough of a rate guarantee for most of us.  Anything longer than 5 years is too costly.   5 years seems to be a good option in most cases.  But not for all… we are all different and have different needs… speak to a Mortgage Broker to review all available products and decide which one fits you best.

My guess is that Variable rate pricing will continue to be priced at Bank Prime for the next 6 months to 12 months or at least until Bank Prime moves up or until one of the Banks is losing too much market share and wants to attract more business.

We will be watching and reporting.