Canadian Mortgage News & Canada's Mortgage Trends

Xceed's Downsizing

As most in our industry now know, Xceed announced the termination of 74 employees last week, as well as the resignation of its president and CFO. 

The former-subprime-turned-prime lender now has 38 employees left.  The company is also shedding office space and reducing its warehouse credit facility, as it struggles to be profitable.

CEO Ivan Wahl commented:  "...it has become clear that there is no way of knowing when we will be able to return to [Xceed's non-traditional mortgage] business model, if ever." 

For now, Xceed's PR says it will focus on "continuing to originate approximately $40-45 million per month in new and renewing insured mortgage business that is saleable to the Canada Mortgage Bond Program."

Wahl did offer hope by saying, "we expect that our business can return to profitability in the third quarter of fiscal 2008." 

We hope he's right.  Xceed is the underdog lender of the year and if they can pull it out, it'll be a great story.

Xceed's stock is down 83% from its 52-week high. It closed today at $1.32 a share. 

Now the Globe is citing sources who say Xceed is a takeover target.

An Xceed spokesman said they weren't surpised.

RBC Blog Aimed at Young "Hip" Clients

We read over at Thicken My Wallet that RBC has now entered the blogging world.

Here's a sample mortgage-related post from RBC's new blog, which it calls "RBC p2p."  Link

Like most big company blogs, RBC p2p has a commercial vibe to it.  It's probably due to the legal disclaimers that appear when outside links are clicked, the RBC colors and branding, the RBC-focused content, and the frequent RBC references. 

Those aren't just RBC traits however.  It seems a lot of players in the mortgage business get into blogging to "cheer on" the home team.  Heck, even we started this blog partly because we thought it would be good for business. 

Yet, we've never forgotten the other reason we launched CMT:  to provide, to the best of our ability, open-minded, quality information.

The public needs sites it can rely on for impartial mortgage advice.  Mortgages are such a complex topic to most people.  Bloggers in our business therefore owe it to readers to paint the whole picture and not just talk about their own products and services.  That's something most commercial blogs don't seem to understand.

RBC probably won't be the last bank to jump on the blogging bandwagon.  Blogs offer staid old banks additional marketing exposure, a chance to be hip, and added search engine equity.

Unfortunately, most bank blogs will likely exist as impotent "advertorial" sites--at least until they discover the secret sauce of neutrality.  In our case, CMT happily tells readers about non-broker products because neutral reporting is what repeat readers demand.  Yet, when was the last time a bank wrote about a competitor that had better rates or products?

In the end, simple impartiality is sometimes the biggest thing separating good blogs from glorified advertisements.

Low Rates Sometimes Have Strings

If you take a 10 minute stroll on the net you'll find more than a few websites advertising surprisingly low rates.  For example, after a few minutes we found a variable advertised at "2.74%" and a fixed at "5.35%."

It's always smart to fine print, but in many of the sites we reviewed, there was no fine print. 

But there should be.

The sites we found advertising 2.74% for their variable rate are using MCAP's VIP Select mortgage.  It's based on a 3-month front-loaded discount.  After three months the rate rises to 4.85%, based on today's prime.  (Still good, but not 2.74%)

Many sites advertising a 5.35% fixed rate are using Merix's quick close offer.  That means you'll need to close in 45 days.  If your closing is longer, you'll need to have another deal.  Most non-bank lender's regular fixed rates are closer to 5.60% to 5.70%.

The point is that great rates aren't necessarily as they appear.  Always ask your mortgage planner if there are any strings attached.

In reality, websites should probably not be allowed to advertise these kinds of rates without disclaimers, at the very least.  It wouldn't be surprising if regulators eventually start cracking down on it.

Discharge Fees - The Basics

It seems someone's always charging a fee for something.  Most Canadians are quite "anti-fee" as a result.  Even the word fee itself conjures up resentment.

It is therefore no surprise that first-time mortgagors are often disbelieving when they learn they're being stuck with a few hundred dollars in discharge fees.

Discharge fees are what some in our industry call the "goodbye  kiss."  They're charged whenever you "discharge" a mortgage and leave your lender.  Virtually all lenders have them.  The Toronto Star list below shows Ontario discharge fees at the major banks for example.

Note that there are actually real costs (governmental, legal, etc.) involved with discharging a mortgage from title.  So this fee is not simply a lender cash grab.  Although it's "interesting" that some lenders can be $100 apart for this service.

Quick Tip: A few lenders will actually pay your old lender's discharge fee when you switch.  (Although, the lenders that do sometimes don't have the best rates.)  Ask your mortgage planner for details.

Lender	Discharge Fee
BMO	$200
CIBC	$225
Laurentian Bank	$150
National Bank	$250
RBC	$260
Scotiabank	$270
TD Canada Trust	$200

This data provided by Fiscal Agents Financial Information Services, via thestar.com. Please confirm with your lender before relying on the above.

Eco-Mortgage Savings II

Further to our story yesterday, it's worthy to note that Genworth has an Energy-Efficient Housing Program (EEHP) as well.

The program is very similar to CMHC's.  Qualified homeowners get a 10% discount on their Genworth insurance premium, as well as a 40-year amortization with no additional insurance charge. 

Qualifying is also largely the same:  a 77 EnerGuide rating or a R-2000 rating, etc.  Here's Genworth's full requirements.  EEHP customers also get access to Genworth's Homebuyer Privileges program.

We'll also point out that AIG United Guarantee is developing an efficient energy program as well.  According to the company representative we spoke with, it's expected soon.

In addition to mortgage insurance savings, there are naturally other benefits to having an energy efficient house.  Estimates are that people can save up to 30% on their annual utility costs by having a house that meets EnerGuide 77 standards.  Typical new homes are rated about 68.

You might also be eligible for up to $5000 from the government if you environmentally retrofit your existing house.  (More info)

In coming years, most new houses will probably have to meet efficiency standards regardless.  Certain provinces have, or are considering, legislation that requires all new homes to meet EnerGuide 77 or 80 ratings by 2010-2012.  If that happens, it's possible insurers would increase their efficient-housing standards so homeowners don't get the insurance discounts by default.

Eco-Mortgage Savings

Being environmentally friendly can pay--even for mortgage shoppers. 

CMHC's Energy Efficiency program is one example.

If you don't have 20% to put down, you'll typically need mortgage insurance. If you go through CMHC for that insurance, and buy an energy efficient home, CMHC will rebate you 10% of your mortgage insurance premiums.

An energy efficient home, according to CMHC, is one that:

1. Is an energy-efficient R-2000 model;
2. Has an EnerGuide energy efficiency rating of 77 or above (on or after July 27^th, 2005¹);
3. Was, or will be, built under a CMHC-eligible energy-efficient building program; or
4. Is a condominium building that is 25% more energy efficient than if constructed to meet the requirements of the Model National Energy Code for Buildings (MNECB),

For energy efficient homeowners who need lower payments, CMHC will waive their premium surcharge on 40-year amortizations.  (Usually 40-year ams. entail insurance premiums that cost 0.60% of the mortgage value.)

These two savings can add up to real dough.  With a $250,000 mortgage, a homeowner getting 100% financing and a 40-year amortization could save:

    $775 in premiums + $1500 in 40-year amortization surcharge

This amounts to $2275, plus the interest saved by not rolling that amount into your mortgage (another $3677 over 40 years). 

That's a nice chunk of green.

Xceed Earnings Down 77.6%

Like many Canadian lenders, Xceed mortgage has been in a credit whirlpool the past six months.  The former subprime-turned-prime lender earned just $1.5 million last quarter, down from $6.8 million a year prior.

More surprisingly, Xceed's funded mortgages plummeted from $340.0 million to $65.7 million in that same timeframe.

From what we can see, Xceed is weathering the subprime storm as best they can and we wish them well.  However, the Toronto Star writes that a quick turnaround isn't likely.

Here are some key notes from Xceed's latest earnings report:

• According to CEO Ivan Wahl, "The capital markets turmoil that began last summer has proven more severe and protracted than most anticipated. It was hoped that a greater level of stability and normalcy would have returned to the markets by now or at least clearly be on the horizon. This, however, is not the case and the financial condition of Xceed's business, as well as our financial results and operations have been, and continue to be, materially and adversely affected by ongoing market disruption."
• Xceed has cut back on its lending and "may decide to curtail originations further in order to preserve capital resources."
• Xceed "has made concerted efforts to shift its origination efforts away from non-conforming mortgages."  More specifically, Xceed's "management has decided to accept only business that meets the underwriting guidelines of mortgage insurers," says Mr. Wahl.  As of this earnings report, the vast majority of mortgages in Xceed's pipeline were insured deals.
• Unlike some of its non-insured/subprime mortgage business from last year, Xceed's current insured business entails no lender/application fees and has much lower margins.
• Xceed's default ratio (mortgages 90+ days in arrears) was 3.33% in the first quarter, versus 2.49% a year prior.  The company says this is "due to the aging of the portfolio, since defaults are less likely to occur in the early stages of a mortgage term."
• Xceed's average loan-to-value is ~84% (based on mortgages it has already securitized).

Mortgage Bytes

Commentary

• Canadians were bitter when they heard that big banks might not follow the Bank of Canada and lower their prime rate.  But what about fixed rates?  Author and mortgage expert Peter Kinch wonders why we aren't more angry about these rates.  He says "banks have been raking it in for months and not passing the savings on to you." Kinch suggests fixed rates could be at least 3/4% lower than they are now based on costs of funds.  In other words, he feels the banks are keeping fixed rates artificially high.  Well, the big banks must be listening. They cut their 5-year posted rates by 0.10% last week.  Tres generous!  Kinch's story
• John Lunam on the subprime fears plaguing our credit market:

  Picture a sausage factory: The makers fill their sausages with the best pork that they can find, but a piece that sat behind the machine for 3 weeks was tossed in and has made one sausage rancid. Most of the sausages are of good quality, but nobody is buying for fear of the bad one.

Mortgage Miscellaneous

• "As a general rule of thumb, borrowers should investigate paying a penalty and breaking their contract when a 2% reduction in rate applies to the remaining balance of their term," -- Regan-Pollock of Invis.  Vancouver Province
• Don't forget the closing costs says The Province.
• John Santos-Ocampo compares a reverse mortgage to a HELOC.
• 63% of baby boomers still have a mortgage. 22% think their home will be their primary income source upon retirement.
• Canadian banks have 56% market share in Canadian mortgages says the Vancouver Sun. Mortgage brokers now command 33%, and counting.

Interest Rate Trends

• CIBC's Benjamin Tal says the Bank of Canada "is likely to cut by another 50 basis points in its next move."  He adds, "the likelihood is that by 2009, inflation will be notably higher as the economy recovers and oil and food prices remain elevated.  If the story of 2008 is
  of a recession/slowdown, subprime losses and lower interest rates, the story of 2009 will be of accelerating inflation and higher interest rates."
• Point:  The Bank of Canada will likely cut rates more than normal to counteract commercial banks' reluctance to lend. Globe & Mail story
• Counterpoint:  "There is no compelling domestic reason for a dramatic reduction in rates in Canada." Vancouver Sun
• RBC says 5-year fixed mortgage rates will "drop by about three-quarters of a percentage point by year end."
• "At some point, rates will revive and go up, but lower interest rates are likely to prevail throughout this year and into next year," says Helmut Pastrick, chief economist for Credit Union Central of B.C.  Vancouver Province

Housing Market Trends

• The average Canadian house rose 15% in value in the year ending January 31, says the Financial Post. The average U.S. house dropped 9% in the same period.  (Note:  CREA shows a Canadian gain of 9.57% in that timeframe)
• Indeed, Canada's high-end housing market is booming--especially in BC.  But MP Garth Turner is warning Canadians to sell their "McMansions" while they still can.
• So far, Canadian home prices show no sign of weakness and mortgage defaults have been miniscule.  Analysts are keeping an eye on both metrics as 83% of the average Canadian's net worth is tied to real estate.  680 News
• It takes 30% of pre-tax income to buy the average condo in Canada.  It takes 48% to buy a typical 2-story house.  CP
• Alberta home prices did something unique last quarter; they fell.
• In BC, the housing market "sits at its most stressed point on record in terms of affordability," says RBC.
• 6.1% of BC renters say they have plans to buy a house, compared to 9.4% last year, according to consulting firm Altus Clayton.  Vancouver Sun
• MoveSmartly's John Pasalis says Toronto's record 2007 real estate sales were largely due to "the introduction of 40-year mortgages."  He says, 40-year amortizations helped "a lot of people who had been priced out of the market...suddenly afford to buy."
• What a turn of events in St. John's, NF. Home prices there might jump 12% this year thanks to massive new resource projects. Apparently bidding wars are the norm these days. 100% financing has bolstered the income property market as well.  Investors snap up duplexes and two-apartment homes 24 hours after they hit the market.  CBC
• Saskatchewan is "the new Alberta," says RBC. House prices keep soaring and it might be the only province in 2008 to have an increase in housing starts over 2007.

Mortgage Industry News

• AIG now allows 80% rental offset on a borrower's entire income property portfolio (instead of just on the subject property).
• CitiFinancial is no longer approving applicants with prior bankruptcies "until further notice."
• MortgageBrokers.com and RE/MAX launched a new website to get RE/MAX agents to refer mortgage business to MortgageBrokers.com. According to the site: "For each residential mortgage origination you refer to, and close with, MortgageBrokers.com, RE/MAX and MortgageBrokers.com will contribute up to 25 basis points (0.25%) to your [the RE/MAX agent's] Retirement Savings Plan.
• The Independent Mortgage Brokers Association of Ontario will hold its Annual Conference on May 8, 2008 at the Toronto Congress Centre.  It includes a trade show with 70+ exhibitors as well as several practical sales & marketing seminars.  (Hopefully CAAMP will offer these types of hands-on seminars at its annual conference.)
• PMI Canada, the 4th largest Canadian mortgage insurer, says Quebec "may not grant PMI Canada's request for (a) provincial license until the financial condition of The PMI Group and our U.S. mortgage insurance operations stabilizes." PMI is licensed in all other provinces but has written only "a limited amount of insurance so far."  PMI says "Competition in the Canadian mortgage insurance market is intense."  PMI also acknowledges threats from "unregulated lenders" who self-insure (For example, First National).
• Home Capital, parent of Home Trust, announced Thursday that its CFO was departing.
• Last week we saw the biggest issuance of Canadian Mortgage Bonds ever:  $10.9 billion.  It was also the world's biggest international debt issue this year according to Dealogic. Demand was so high that they were priced one-day ahead of schedule, at 0.58% above 5-year bond yields. It's interesting to note that this spread has increased notably since last March's 0.12%--especially since CMB's are triple-A rated securities fully backed by the Canadian government.

The Economy

• The Globe says the U.S. and Canadian economies are on different tracks.
• The U.S. housing downturn is unprecedented says CIBC.
• Are Canadian resources shielding Canada from recession?
• "We're not seeing increases in unemployment, we aren't seeing a busting housing market, and I don't think [Canada] will see a busting housing market," says Merrill Lynch economist David Wolf.

Other Stuff

• Ontario's new power of attorney rules take effect April 7.  They're designed to help curb real estate fraud perpetrated with invalid powers of attorney.
• The Vancouver Sun did a story that listed various homebuyer stats:
• 1/4 of Canadians aged 18 to 34 are homeowners
• Of homeowners aged 25 to 39:
• 22% bought their home by themselves
• 76% bought with a spouse or common-law partner
• 2% bought a house with other family members or friends
• 83% of renters don't wait to get married or engaged before buying.
• The average age of first-time buyers was 32.5 (in 2006)
• Rob Carrick notes a good source of bond data.
• Canada's non-bank asset-backed commercial paper will likely fetch 60-80 cents on the dollar once it starts trading, says the Vancouver Sun.  That's gut-wrenching news for Canadian investors caught up in the mess.  Though it's better than having worthless paper.  Now the group restructuring this ABCP debt has put it under bankruptcy protection--after missing last Friday's settlement deadline.

Mortgage Broker Usage Up

33% of Canadian home buyers used mortgage brokers in 2007, according to CMHC's newly-released Mortgage Consumer Survey.  That's up from 27% in 2006.

Just as importantly, mortgage brokers gained market share in all mortgage segments (1st-time buyers, repeat purchasers, renewers, and refinancers).

Its growth that will likely continue.  More people seem to understand that it makes little sense to limit oneself to working with only one lender.  People are now putting a greater value on fast objective advice, and would rather offload the mortgage research and paperwork to someone else.

CMHC's study included other broker-related findings as well:

• 95% would recommend their broker to a friend
• 85% were satisfied with the mortgage process
• Of those who used mortgage brokers, 92% felt their broker gave them the best deal.  Of those who worked with lenders directly (going to a branch for example), the figure was lower at 82%.

Here's a few other mortgage statistics from the survey:

• 75% of recent home buyers plan to pay off their mortgage "as quickly as possible."
• 88% are confident they can handle their mortgage debt load.  (Makes you curious about the other 12%.)
• 41% "strongly agree" with using their home equity to finance other investments.  30% strongly disagree.
• Over 1/2 of all mortgagors make weekly or bi-weekly mortgage payments.  84% of those people accelerate their payments (i.e.  make an extra payment each year)

CMHC's survey was based on 1404 active mortgage holders.

Smith Manoeuvre Debated

Real Estate Magazine's March issue has a scary sounding piece on the Smith Manoeuvre.

Tax specialist Dan White warns those considering the Smith Manoeuvre to "think again and think carefully."  He suggests there is a danger of being audited--and losing.

Toronto Star writer Bob Aaron adds his own opinion.  He calls the Smith Manoeuvre "far too risky for the average homeowner." 

Aaron writes: "Under CRA rules, interest paid on money used from a mortgage to produce capital gains is not tax deductible."

From our layman's view, the main issues here appear to be with:

a)  The earning of "capital gains" instead of "income;" and,

b)  Using "money...from a mortgage."

It's worthy to note that people borrow to earn income all the time, and using home-secured lines of credit for that purpose is nothing new. 

Ed Rempel, a financial advisor who specializes in the Smith Manoeuvre, says:

"While it is technically correct that the Tax Act does say that there needs to be an expectation of profit excluding capital gains...CRA has never contested any interest expense in a simple borrowing to invest."

Rempel continues:

"I can tell you that the Smith Manoeuvre done properly (eg. if you don’t take distributions out of the fund) easily meets all CRA rules."

Brian Poncelet, another Smith Manoeuvre expert, quotes CRA's bulletin IT533 on interest deductibility.  It says that CRA's comments on interest deductibility are:

“generally applicable to investments in mutual fund trusts and mutual fund corporations.”

But don't take our word for it.  Do as Aaron suggests.  He says,

"Always obtain tax advice from a qualified person, such as an accountant or tax lawyer, who is not selling or promoting anything, and to whom the client's interests come first...If the tax adviser stands to make a commission selling participation in a scheme like the Smith Manoeuvre, he or she is in an obvious conflict of interest."

That's excellent advice.  It applies to our industry as well.  In other words, if you use a mortgage planner to set up a mortgage for the Smith Manoeuvre, do not rely on their advice on the tax or investing aspects of this strategy.

There are many opinions on Aaron's article--both dissenting and supportive.  Canadian Capitalist has a great thread about it.  Have a read and call your accountant.