TagFederal Government

Posted May 14, 2012 Case study

A complete overhaul of Mortgage Lending in Canada?

FED GOVT KEEPS TALKING ABOUT TIGHTENING MORTGAGE LENDING POLICIES

But why? Why does the govt believe there is a need for all this change? That’s the question most industry insiders are asking. Here are some facts with my thoughts mixed in…. tell me if you see some contradiction between the different branches of the govt or a lack of consistency:

Surprise…we don’t have a mortgage default problem… Mortgage arrears in Canada are 0.38% as of January 2012. In Ontario, the housing hot spot, arrears are only 0.28%. These figures are very low by anyone’s standards.
The average resale price dropped 0.5% nationally. But resale prices in Toronto, are up around 7.3% in a year-over-year comparison. But that trend is cooling according to The Canadian Real Estate Association.
Inflation isn’t a problem… it’s hovering at 1.9%, well within acceptable levels.
Housing affordability hasn’t really changed in 10 yrs according to the RBC housing affordability index and it actually improved in Q4 of 2011 (it’s probably even better this year as interest rates are even lower).
Personal household debt is around 153% of income. That’s a record high number, it’s true, but what are Canadians borrowing for? Studies tell us it’s not for big screen TVs or trips to Bahamas… We’re actually investing… in stocks, mutual funds, real estate here and in the U.S. In fact, we are the biggest foreign buyers in Florida and we are also buying in Phoenix, Arizona in record numbers…. Is buying a second home a bad investment?
Did you know that 1/3rd of Personal Debt is non-mortgage debt including high interest credit cards, loans and unsecured lines of credit…. yet, there is little to no regulation for these products…
Speaking of credit cards… the arrears rate is just over 1.00%... that’s around triple what mortgage arrears are! Why isn’t the govt clamping down on these credit products?
Record-low interest rates were brought in to stimulate the economy. Haven’t Canadians played their role to kick-start the economy? Why does the govt want to punish homeowners now with tougher qualifying rules? OSFI has even proposed you re-qualify for your mortgage at renewal time!! How absurd is that?
The Bank of Canada wants to raise rates to slow our personal debt growth… but can’t for fear of slowing the economy…
The Federal Minister of Finance, Flaherty, wants to tighten mortgage lending to slow the housing market and reduce the amount of mortgage debt we take on.
The housing market accounts for up to 40% of this country’s GDP… all these changes will affect our economy.
Business for Self mortgage programs have been eliminated by some banks and other Lenders… making borrowing more expensive for this segment of our population…. by the way, they are paying their mortgages just fine.. there is no evidence suggesting Business for Self borrowers have repayment problems…
CMHC opted out of rental property mortgages last year in an attempt to slow real estate investment… so you must come up with 20% down or use equity from other sources for the down payment..

FED GOVT’S LATEST MOVE IS TO PUSH CMHC UNDER OSFI CONTROL

OSFI will assume control over CMHC, the country’s national housing agency…. You will have an audit dept overseeing a social program… hmm, I wonder what will happen to CMHC?? The possibilities frighten me and should frighten most Canadians… (more on this later).
Minister Flaherty made a comment that maybe the govt should consider selling CMHC… say goodbye to a business that nets over $1billion a year.. $16billion since 2002. Here’s an idea…why not split CMHC into 2 business… bulk insurance business and the traditional low down payment business… wouldn’t that keep the Canadian dream of home ownership alive and also satisfy the auditors, like OSFI??
OSFI wants to limit Secured Lines of Credit to 65% loan to value from today’s 80% loan to value… This one makes no sense and has received harsh criticism from Financial Experts…. scares me to think that it’s even gone from thought to paper to print… what other changes were they considering that didn’t make it to print??

MY SUMMARY OF IT ALL…

In short, the govt wants to keep the economy stable but they are going to make it harder for you and I to qualify for a mortgage…. Yet, there are no changes coming for the most expensive of debts… Credit cards, loans and unsecured lines of credit rules either don’t exist or will not change… For some reason, the govt thinks it’s okay to borrow at 7% , 8% for unsecured lines of credit and pay 18% to 20% on credit cards, but please don’t borrow for a home, at 3% and 4%??

If we continue to make it harder for Canadians to get a mortgage, then we will have fewer home sales.. Fewer home sales will affect ALL HOME VALUES and slow the economy. It’s really that simple… this affects the biggest asset that most of us will own… our home!

Let’s hope the govt thinks like a carpenter… measure twice and cut once… !

If you’re a homeowner and aren’t sure how these and other changes might affect you, feel free to contact me anytime. I’d be happy to help.

Posted March 5, 20122 Comments Mortgage News

Mortgage penalty rules change… finally.. well, sort of…

The Federal govt announced some changes to protect Canadian Consumers… including rule changes to credit cards and mortgage prepayment information. Here’s a link to the entire news release.

For our purposes, we are focusing more on the mortgage prepayment announcement. Here’s a link to that portion of the news release.

There are 5 Elements to the Code of Conduct for Federally regulated institutions. The changes must be implemented within 6 to 12 months. In short, the new Code of Conduct rules will require these lenders to provide clear disclosure on how penalties are calculated, along with online calculators and access to knowledgeable staff that can be contacted through a toll-free phone. Continue reading “Mortgage penalty rules change… finally.. well, sort of…”

Posted January 28, 20112 Comments Consumer Debt

Personal debt level up…uhh, wait.. maybe we made a mistake?!

As you know, I have been very critical about the data that was being put out over the past few months regarding Canada’s personal debt levels.. We were being bombarded with reports and comments about our spending habits… I found it hard to believe that we could go from conservative nation to a casino nation in just a few years…

Sure, there is more debt…. Outstanding mortgage balances topped $1trillion for the first time… but we seemed to be growing at a moderate pace, year over year.. We didn’t have the 20% to 30% increases in real estate prices that we saw in 1987-89, or like our neighbors in the U.S. over the past decade. Meaning there was less chance of a housing bubble or crash.

And what about our assets….? It was hard to find any report about our net worth or assets… There was one report from Ben Tal, Senior Economist CIBC, that didn’t get much notice but we reported it here on December 3rd… here are some of those stats…

-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.

click here for the full story..

And now for the real stats

Personal debt to disposable income ratio has been reported at 148%… This figure has been recycled more than that gift bag from the wine store you received at Christmas…. and just like that gift bag that gets passed around from friend to friend, it comes with a different bottle… or in this case, different figures and opinions.

Let see how you like this vintage…. Some new reports just came out that should ease our concern about our personal debt levels and average net worth. “Average household net worth has risen to an impressive six times the size of disposable income, up from an average of five times in the 1990s.” That’s a quote from BMO’s Senior Economist, Sal Guatieri… read more here.

What’s this? You mean Canadians are actually investing their money and not spending it frivolously like the Federal Govt has been telling us for the past several months?

It gets better…

Here’s a little more info from CIBC Bank.. Those figures had to do with the personal tax refunds we were getting last year because of the stimulus packages…. “Household debt in the third quarter grew at the slowest pace in nine years, while in the last month for which there is data — October 2010 — it was the softest in 15 years.” read more here.

That’s right, WE ARE SPENDING LESS AND OUR ASSETS ARE GROWING FASTER THAN IN THE 1990’s. … But how can this be? The Federal Govt has been telling us that our personal debt levels are at dangerous levels… and they had to change mortgage rules to slow our spending habits….. Any of this make sense to you?

Here’s an article from Ellen Roseman from The Star that says Canada’s Stock Market has outperformed the U.S. markets for the past 7 years… and we are poised to outperform them for the next 10 years….

Feel good about yourself Canada….. Keep investing… keep borrowing and spending wisely….

Posted January 25, 20112 Comments Consumer Debt

January credit card offers, new mortgage rules and Canadians buying U.S. real estate…

There’s been lots of reaction to the latest round of Mortgage rule changes… it’s been just over a week since the changes were announced and I’ve had some time to digest these changes but something just isn’t making sense.

At the same time, my December credit card bills have started to come in…..and because it’s January, I’m also getting those preapproved credit card offers…. I can even skip a payment with some of my credit cards… Isn’t that convenient?

This made me wonder….I decided to ask some simple questions like, “who will be affected?”… and “who will benefit?”. Here’s what I have come up with…

First, here’s what a few Experts think…

Jim Murhpy, President of Canadian Association of Accredited Mortgage Professionals, says ‘Debt Fears are overblown’…. and here are the stats to back it up. One stat that really stood out for me was that 79% of Canadians are in a 5 year fixed rate mortgage… that means 79% of Canadians are not at risk of interest rate hikes…

(as an aside, I still like Variable rate mortgages with their low interest rates and the historical data that clearly shows Variable outperforming Fixed rate….but if the govt wants us to be ‘safe and secure’ in our mortgage, then this stat should make the govt feel more comfortable)….

On January 10th, 2011, Bank of Canada’s own Deputy Governor, Agatha Cote, said that debt growth in Canada was slowing… So hold on here….On the one hand, we are spending like kids in a candy shop.. but on the other hand, our spending has slowed…. Mixed message? … So what’s really going on?

I’m going to change the subject for a minute…. but read on as you will see this is all related….

Canadians are buying U.S. real estate like never before

There was another great article last week that showed Canadians are the largest foreign buyers of real estate in the U.S. accounting for 23% of all purchases? WOW! And in border towns like Ellicottville, New York, a local real estate broker said Canadians accounted for 50% of sales…. read more here.

These stats and buying patterns are showing me something… Our mortgage arrears are below 1.00%… this is an unbelievably low number.. Click here to see what our U.S. neighbors are saying….. Hmmm, maybe we are borrowing wisely? Maybe we are borrowing to invest? Isn’t this a good way to spend our money?

If the govt wants to slow personal debt levels, then why not impose qualifying rules on borrowing unsecured lines of credits, credit cards and loans? After all, mortgage balances are around $1trillion… but Credit card purchases totaled $260billion...! Remember this number.

Who is really affected by the new Mortgage Rules?

Simply put, there are 3 new Mortgage rule changes:

1- Amortization maximum is 30 years, down from 35 years and down from 40 years in 2008. 2- Refinances will be reduced to 85% loan to value, down from 90% and down from 95% just 2 years ago. 3- Secured lines of Credit will no longer be insured, meaning the maximum is 80% loan to value.

1- 30 year Amortization.… First time home buyers, Self-employed, contract employees are just some of the people that will be affected.. More Canadians are becoming self-employed or are on contract employment… This group of individuals doesn’t get a steady pay cheque… I would always recommend that this group take the longest amortization possible….Not to have a mortgage forever, but to ensure they have options and flexibility during times of uncertain income… I would also recommend they set their payments based on a 25 year amortization or shorter… The longer amortization just means you could always reduce your payment to the lowest possible amount if and when needed.

This change will also make it a little harder for some Canadians to qualify for a mortgage… If you think this is good you need to remember last year, the government changed the rules that made it mandatory for all mortgages with less than 20% down to qualify at the Bank POSTED 5 year fixed rate (if you were considering a shorter term or a Variable Rate mortgage). Many Banks are using this policy even if you have more than 20% down payment. In effect, many of us are being forced into a 5 year fixed rate mortgage…. and which product do banks make the most profit on? You guessed it… 5 year fixed rate mortgages…. read here for a little more insight.

Rental property Investors will also be affected. Let’s face it, company pension plans are a thing of the past for most of us… (sometimes I wish I had a government job)… So what’s someone without a company pension supposed to do? RRSP you say? Well, if your RRSP is anything like mine, then you are better off going to the racetrack or Las Vegas …. At least you’ll have a good time spending it. Real estate has been a proven winner over the last 10, 20, 40, 100, 300 years and probably longer…. The rents are usually indexed with cost of living and over time, the mortgage is eliminated giving you income and an appreciating asset. Last year, the govt got out of lending on rental properties with less than 20% down… It’s now a little harder to buy that investment property…

2- Refinances to 85% loan to value… Just one year ago, we were able to refinance our homes up to 95%… This options was not used by many… Then it was reduced to 90%… now it’s 85%… This won’t affect many of us but it will affect some.. Most people refinancing up to 85% or 90% were doing so to consolidate higher interest debt or to cover some emergency expense. How is this helping to lower our personal debt levels? This move will just force us to carry and borrow with those higher interest rate products… (are seeing a pattern here?)

3- Secured lines of Credit or Home Equity Lines of Credit (Heloc) are no longer available over 80%… This change really doesn’t affect many of us as most lenders stopped offering this product long ago and even when it was being offered, the costs were prohibitive. This is a non-event.

Who will benefit from these new Mortgage rules?

So who really benefits from making it harder to qualify for a mortgage? The answer is simple… Canadians will be forced to carry more debt on their credit cards, unsecured lines of credit and other high interest rate products… There are NO rule changes or policies in place for these products… Don’t forget, credit card purchases totaled around $260billion last year…. In case you’re wondering, the total outstanding mortgage balances in Canada is around $1trillion.

The new rules won’t slow the credit seeker from getting another credit card and buying that new surround sound stero or hot tub or new car, etc..

So why did the government choose to make even further changes to mortgage rules? The answers are obvious to me but I will let you decide.

Posted January 17, 20113 Comments Consumer Debt

New Mortgage rules… let’s make it an annual event!

The Minister of Finance, Jim Flaherty, announced some changes to Canada’s mortgage rules that come into effect March 18, 2011…… these rules apply to hi-ratio insured mortgages… those with less than 20% down payment….

-The maximum amortization is reduced to 30 years from 35 years.

-The maximum loan to value available for refinancing your home is 85%, down from 90%.

-Secured lines of credit (or HELOC’s Home Equity Lines of Credit) will not longer be insured meaning the maximum loan to value will now be 80%.

Click here for the official government announcement.

Not the first time for mortgage rule changes.

This is becoming an annual event with the Government:

–In 2008, the Govt reduced 40 year amortizations to 35 years, eliminated the 100% loan to value mortgages and the interest only mortgages.

–In 2010, the Govt brought in some of their biggest changes yet…borrowers would have to qualify for variable rate mortgages or short term mortgages at Bank posted rates…Self employed individuals would now have to qualify with traditional income verification if they were in business for more than 3 years…. Refinancing would be capped at 90% loan to value, down from 95% loan to value… and investment properties or rentals would require a 20% down payment…

(By the way, the govt also announced they would be standardizing mortgage prepayment penalties… we STILL haven’t seen any announcement… Mr. Flaherty, you want to help Canadians? Change the mortgage penalty calculations!)

Has the govt gone too far?

Apparently, rising personal debt levels are the driving force behind these changes… The govt wants to make sure we don’t borrow more than we can afford…. But with mortgage defaults well under 1.00% (that’s extremely good), why would the govt pick on mortgages? After all, wouldn’t any Financial Advisor recommend that you consolidate your high interest credit cards, lines of credit, car loans, student loans and other personal debts into a LOWER RATE product?

Why isn’t the government making changes to loans, unsecured lines of credit, credit cards….? All these products have higher rates of interest and higher rates of default. Think about this for a minute… we are making it harder for Canadians to take lower interest rate products (mortgages)… Where will they go? Yes, that’s right… directly to the higher interest rate products…. Credit cards, loans, etc…. (I think I might buy some Bank stock today… or any other financial institution that offer credit cards or loans.)

So let’s see if I’m getting this straight…. we want to stimulate the economy and spending so we’ll keep interest rates low… but we are concerned about rising personal debt levels so we’ll make it tougher to get a mortgage (even though mortgage defaults are extremely low)… but we’ll keep those high interest rate loans, credit credits, etc as is….. Is this making sense to anyone?

We’ll be sharing more on this latest announcement in the coming weeks…