Canadian Mortgage News & Canada's Mortgage Trends

Resmor in High Gear

Mortgage lender ResMor Trust has seen its mortgage volume jump almost 60% in the first two months of 2008 versus 2007...and last year was a record year for the company.

The reasons for ResMor's success are largely twofold, according to sources.  For one, the company offers solid broker incentive programs (i.e.  more compensation).  Moreover, ResMor's mortgage offerings are quite broad and entail flexible underwriting guidelines.

On Monday, ResMor will also launch a new strategy by offering insured conventional mortgages (and paying the insurance premiums for the client).  These mortgages are designed for people with good credit and a 25% downpayment.  According to the company, this means:  No more manual appraisals, lower required credit scores, faster approvals, expanded lending areas, and better rates.

On a more somber note, ResMor has suspended lending on its conventional subprime "C75" and "C65" mortgages.  These products were geared to clients with credit issues who couldn't get approvals with traditional lenders.  The company said the decision was due to "challenges in the asset-backed commercial paper market."  That is, unfortunately, an all-to-familiar reason to most readers of CMT.

ResMor's other subprime products will supposedly remain intact however.

ResMor Trust is a subsidiary of GMAC.

Mortgage Bytes II

• Mark Carney, Governor of the Bank of Canada, says: "further monetary stimulus is likely to be required in the near term." That appears to mean a 1/4% to 1/2% cut in interest rates is coming this Tuesday.
• Canadian home prices have almost doubled since 1997. That's a 7.1% annualized gain.
• According to Genworth, more Canadians are worried about high monthly payments than high interest rates.
• Canadian debt delinquencies have dropped 21% since 2005.
• Vancity, Canada's largest credit union, saw a 9% jump in membership last year to 388,000. Unfortunately their profits fell 37%. Vancity says ABCP losses and low margins in its mortgage/loan business are to blame.
• It's better to sell your house for $279,135 than $279,000--say Cornel Researchers. Story from The Star
• Office vacancies in Canada's major cities are at a 22-year low of 4.7%.
• Equitable Trust's mortgage business grew 26% in 2007. The company will expend beyond Ontario and Alberta this year.
• Ontario's new mortgage broker/agent license fee is $482.  That covers two years.  It will rise to $550 in 2010.
• BC has increased the exemption on its property transfer tax from $375,000 to $425,000. This applies to first-time homebuyers only. (The average home in BC is $470,000.)  BC also got rid of a rule requiring first-time homebuyers to have at least a 70% loan-to-value mortgage to qualify for the exemption.
• "By 2010, Canadians will have $1-trillion in outstanding mortgage credit." - Jim Murphy, CAAMP CEO
• 362,934 homes were sold in Canada in 2007. That's up 8% from 2007. But things may be slowing.
• JP Morgan economist, Ted Carmichael, puts the odds of recession in Canada at 45%.
• Virgin Bank is coming to Canada.

Mortgage Bytes

• The average interest rate prediction from the big 5 banks is for a further reduction of 0.85% this year, possibly by mid-summer.  Partial source:  BCMortgage
• The Canadian Real Estate Association is disappointed about Tuesday's budget.  They expected some capital gains relief.  CREA feels Canada's capital gains policy "locks in" investment properties from resale because people don't want to pay the capital gains tax when they sell.
• Ontario's Realtor population grew an astounding 20% since 2005.  Metro Toronto now has one real estate agent for every 150 people.  Real Estate Intel.
• Thinking of holding your mortgage in your RRSP? The Financial Posts notes that you'll have to buy mortgage default insurance, even if you're putting 20% down.  Plus you have to pay for a 3rd-party trustee.  More from Garth
• 20% of Canadians were born abroad. Lenders are now catering to them more and more, with up to 100% financing in some cases.  Winnipeg Sun Story
• Merix cut their rate discount today on their popular HELOC variable-rate mortgage.  It's now prime - .25%  (versus prime - .50% yesterday).  That basically prices them out of the market if you want a variable readvanceable mortgage--which is sad because they have a solid product.

TFSA - Tax-Free Savings Accounts

Today's federal budget was somewhat anti-climactic.  Many expected the Tories to start letting investors defer tax on capital gains. That didn't happen.

What did happen was a nice little perk for savers and home buyers: the new Tax-Free Savings Account (TFSA). 

When the TFSA takes effect in 2009 it will offer a brand new way to save (including saving for a down payment). It works like this.  You fund the TFSA with after-tax money.  Thereafter your money grows, and can be withdrawn, tax-free.  In addition, if you take money out of the TFSA you can add it back later without penalty.

From a home buying perspective, this new program raises one question right off the bat:  How does it compare to the existing RRSP Home Buyers Plan (HBP)? 

Here's a basic overview of each.

	RRSP Home Buyers Plan	Tax-free Savings Account
Availability	First-time buyers	Everyone
Money Taxed	Upon withdrawal from RRSP*	Before depositing into TFSA
Withdrawals	Must be paid back	No Need to Repay
Tax Deductible Deposits	Yes	No
Maximum Annual Deposit (for 2008)	$20,000 (max. 19% of your income)	$5,000
Maximum Withdrawal	$20,000	Unlimited

*  Money withdrawn under the Home Buyers Plan is tax free if repaid in 15 equal yearly installments. Money withdrawn from an RRSP for most other purposes is taxable at that time.

If you're a first-time homebuyer saving for a down payment, you might be better off contributing to your RRSP first.  The upfront tax deduction is usually far more beneficial.

Of course you can also use the TFSA.  In four years, by using both vehicles, you could theoretically save up to $40,000+ for a down payment, and avoid some taxes to boot. 

(The TFSA is a brand new program and we're still getting information on it.  If anyone has addition thoughts or viewpoints please let us know in the comments.  Also make sure to speak to a licensed financial/tax advisor to confirm all of the above.)

Big Investor Break in Budget?

If this Globe & Mail article is correct, it may be thumbs up Tuesday for real estate investors. 

Many are speculating that tomorrow's federal budget will include provisions that let investors shield capital gains--possibly by using a registered savings plan.  (Although some are skeptical)

One of the Conservatives' goals in 2006 was to exempt capital gains from taxation as long as those gains are reinvested.  We'll see if that promise is finally realized tomorrow.

40-Year Ams...Pros/Cons

Million Dollar Journey says "if you can't afford a 25-year mortgage on the home that you want, then the home is too expensive." 

For some clients, and in some markets, there's truth to that.  Moreover, it's also important to note that, versus 25-year amortizations, 40-year Ams. cost you:

• Considerably more interest
• 0.6% more in insurance premiums if loan-to-value > 80%
• Interest on those premiums (usually)
• Potentially higher pre-payment penalties

In some cases, however, 40-year Ams. are warranted.

In high demand areas for example (e.g.  Vancouver, Calgary, Toronto), inflated prices leave many buyers little choice but to up their amortization.  (This assumes they don't want to rent, which can also be a good economic choice.)  We continually see clients who would never get approved without a 40-year Am.--because it lowers their payments--and debt ratios)

40-year Ams. are also good for folks with uncertain incomes.  In this case, a longer amortization allows for lower payments--which helps people weather dips in income.  When times are good they can make prepayments to bring their Ams. down to 25 years or less.

It's also important to note that 40-year Ams. are sometimes great for investment/income property buyers.  Rental clients use them frequently because:

a)  The extra interest is tax deductible
b)  It's easier to generate a positive cash flow
c)  It allows them to reinvest in the property, or in other assets

Mortgage Broker Fees

A client called us this week upset that his broker charged him a $5000 broker fee.  So we asked where the broker got him approved.  Much to our amazement, it was at a major "A"-lender.  More surprisingly, the client's credit was excellent.

To us, this is almost criminal.  There was no reason in the world this client should have paid this broker that kind of fee.  The lender was already paying the broker a finder's fee.  He didn't need to gouge the client for more.

This type of thing drives us batty.  Our industry works hard to educate people about the benefits and integrity of professional mortgage planners.  Every profession--doctors, police officers, even priests--have bad apples, but this behaviour hits close to home.

You might wonder why we're bringing this up in front of thousands of readers.  The goal here is to warn consumers (and other planners) about what we consider rogue brokers.  This is far from typical practice in our industry and people need to know that.

When is a broker fee warranted?  Here are sample cases where such fees may apply (this list is not exhaustive):

• Commercial Mortgages:  Unlike residential lenders, commercial lenders often don't pay finder's fees.  So there is no other way to compensate planners for the value they add in arranging hard-to-place commercial financing. Moreover, commercial deals take a huge amount of time and often never close for various reasons.  In many cases, a planner can do 10 residential mortgages (and be compensated for them) in the time it takes to do one commercial deal.
• Private Mortgages:  When normal lenders won't approve a client, private ("hard money") lenders are often the last hope.  Like commercial lenders, private lenders don't usually pay finders fees.  In these cases, broker fees compensate the planner for his/her time and for use of their private lending network. (Building a good network of private lenders is very difficult. We'll do a story on that sometime.)
• Small Loans:  A small deal (e.g. a $30,000 second mortgage) takes up just as much time--and often more--than a large deal.  Really small mortgages also divert the planner's attention from other clients who deserve equal service.  Because the finder's fee on these deals is tiny, planners sometimes charge a small and reasonable broker fee.

Remember, in Ontario a broker is not allowed to ask for any fees up front on residential mortgages under $200,000.  For mortgages over $200,000, borrowers should get it in writing that any advance fees will be refunded if suitable financing is not provided.

In BC, it's illegal for a broker to ask for fees up front on a residential mortgage.

Generally speaking, advance broker fees on most residential mortgages should be a big red flag.  (Click here for a related story).  We know of no reputable mortgage planners that charge them, except in the aforementioned circumstances.

Even if it's a subprime (bad credit) client, lenders pay brokers well enough that extra fees shouldn't come up--apart from the cases above.

Mortgage Bytes

• 8 of 12 securities dealers surveyed by Reuters predict the Bank of Canada will cut rates 1/2% on March 4.  The other four expect a 1/4% cut.  A majority expect the BoC to lower rates again in April and June, by 1/4% each time.
• Desjardins says Canada's housing affordability index is at its lowest point in 17 years.  The company says average disposable income is just 1.1% higher than that needed to finance the typical home.  Higher mortgage rates and rising housing costs are the main causes. 
• In Vancouver, average disposable income is only 2/3 of what's needed to qualify for the average mortgage.
• CBC says, "Canadians are able to negotiate with (U.S.) banks to get some good bargains - sometimes paying 50 or 60 cents on the dollar for [U.S.] homes."
• Manulife's mortgage assets grew 8% in 2007.
• Mortgage Alliance has a new radio campaign and $100K sweepstakes.

First Time Home Buyer Survey

Genworth released their First-Time Homebuyer's Monitor today.  It had plenty of little info-nuggets.  For example, according to the survey:

The most common concern among first-time buyers is "high payments."

The most common down payment for first-time buyers is 5.0%-9.9%.

68% of Canadians agree a home is the most important investment of their lives.

Most Canadian first-time home buyers plan to spend between $100,000-$199,000.  In Alberta and the Greater Toronto Area, the number is $200,000-$299,000.  In British Columbia: $300,000-$399,000.

About 60% of first-time buyers plan to use the Internet to get mortgage information, including the use of online mortgage calculators to see what monthly payment they can afford.

68% of first-timers prefer new homes to resale units.

52% of respondents prefer 5-year terms.  23% want terms of 7 or more years.

63% of first-time buyers prefer living in the suburbs instead of the city.

The most popular mortgage-related reason for using the Internet is to "check interest rates."  That's probably why rate questions are many broker's #1 type of email.

Interest Rates Seen Lower

Inflation is down and rate cut hopes are up.

In fact, inflation is at a 5-month low--thanks in large part to the 1% GST cut.  Meanwhile, the Bank of Canada's new governor, Mark Carney, is acknowledging further U.S. threats to Canada's economy.

This has RBC expecting a 1/2% rate cut March 4 and another 1/2% cut by mid-2008.  TD, among others, is also predicting a 1/2% reduction March 4.

"The core (inflation rate) is nicely below the Bank of Canada's worry level," says Scotia Capital's Steve Butler. "It points to a path of rate cuts coming up..."

Despite the above, Carney expresses worry that foreign demand may soon heat up our commodity-heavy economy.  This view coincides with that of others (like CIBC's Benjamin Tal) who feel Canada's economy may surprise people late this year.