Canadian Mortgage News & Canada's Mortgage Trends

Canada's Subprime Under the RADAR?

We like to drop in on Garth Turner every now and then to see if the world is any closer to ending.  We enjoy his stuff, if for no other reason than he makes you think.

He had an interesting guest post Monday that reiterates Turner's claim that Canada has a subprime mortgage problem brewing. 

The post's author argues Canada's subprime market is much bigger than 5% of all mortgages, as industry stats suggest.

The writer feels there are at least three other classes of borrower that should be classified as "subprime:"

1. Anyone who has GDS/TDS ratios over the standard 32%/40%, a 40-year amortization, and significant living expenses to which lenders are oblivious (high electric or heating bills, high car insurance and gasoline expenses, high condo fees, etc.)
2. Young families with multiple dependents, large child care expenses and food bills, and a mother on extended maternity leave
3. Self-employed borrowers who significantly overstate their incomes (of which there are many)

The theory is, if the economy and housing values go south, these folks above could increase defaults and accelerate the fall.

U.S. Mortgage Terms Tighten Up For Canadians

We're hearing from contacts south of the border that the biggest U.S. lender for foreign nationals is tightening up its loan criteria.  Among other things, maximum loan-to-value for most Canadians buying in the U.S. is expected to drop to 65% from 75%.

In addition, it is becoming extremely difficult, if not impossible, for foreign nationals to refinance or get mortgages on investment properties (at anywhere close to decent rates).

All of this has been brought on by declining U.S. property values and foreclosure activity.  It's becoming tougher and tougher to securitize mortgages held by foreign nationals, despite much lower than normal delinquency rates versus U.S. citizens.

Variable Rates to Rise?

We're hearing more talk from lenders that variable mortgage rates may be on the rise (soon).  Prime - banker's acceptance spreads have narrowed and are squeezing lender margins.  As a result, variable rate mortgage lenders are considering reducing their discounts from prime rate to compensate.

If you need an approval for a variable-rate mortgage, it might not be a bad idea to submit your application to a mortgage planner today.

40-Year Mortgage Risk

Scotiabank released a report today saying 40-year amortizations are "changing the longer-term risk dynamics" of Canada's mortgage market. (Financial Post story)

Three out of four insured applications are now for 30 to 40-year amortizations, says Scotia. 

40-year amortizations comprise 1/2 of that total. (Don't be surprised if this 1/2 grows to 3/4+ over time.)  Prior to 2006, 25-year "ams." were the standard for decades.

According to the Financial Post, Scotia's Derek Holt (the report's author) cites some potential risks of this trend:

1. If homeowners someday start paying off their 40-year mortgages sooner, and en masse, it could heighten [prepayment] risk to buyers of mortgage-backed securities containing these mortgages. That could in turn cause problems for mortgage originators.
2. If people become highly leveraged using 40-year amortizations, and the economy goes in the dumper, the repercussions to our housing market could be material.

We have no stats to back this up but most people seem to be getting 40-year ams. because they need them (to get the home they want).  If wages sink and unemployment spikes, you have to wonder how many 40-year mortgagors might be living too close to the edge to keep up their house payments.

On the other hand, given the quality underwriting standards we see day in and day out, it's difficult to foresee anything akin to a U.S.-style collapse heading Canada's way.  Long-term though, Holt says nobody knows what the effect of 40-year ams. will be.

We'll try to get our hands on Scotia's full report and follow up on this story shortly.

Bond Yields March Higher

5-year bond yields have been on a one-month ascent.  They've now risen over 1/2% from their multi-decade lows in March.

The upswing comes thanks to positive economic data out of the U.S.  Bond traders are seeing hope beyond North America's current economic doldrums.  They're also becoming increasingly wary of inflationary threats. 

That's got many thinking we're approaching the end of Canada's current rate cutting cycle.  Some economists are now predicting just one more 1/4% cut before the Bank of Canada sits back and evaluates the fruits of its efforts.

Thing are far from clear cut, however.  All of this talk contrasts sharply with the Bank of Canada's warnings about a big economic slowdown.  On Thursday, Mark Carney stated again that "some further monetary stimulus will likely be required" to keep Canada's economy on track.

How much and when?  Nobody knows for certain.

Regardless, Canada's rising bond yields are of real interest to borrowers and brokers.

Borrowers waiting for fixed rates to drop lower, before locking in, may be keeping a close eye on rates over the next month or two.  Fixed rates are closely linked to bond yields.

As for mortgage planners, bonds yields are often used as a leading indicator for fixed rate increases.  Brokers therefore watch the bonds to help advise clients and try to determine when to lock in rates they may be "floating."

("Floating" is when a broker lets a fixed rate commitment stay variable until the client's closing date.  Brokers do this to get better rates from a lender, but it can be risky.)

Keep in mind, both of the above scenarios entail market timing.  Market timing is when people try to outguess the interest rate markets.  This is an absolute no-no in the minds of academics.  It really is a huge gamble.  Yet people seem determined to do it every day.

Remembering Dave Nichol

As many in our business know, Dave Nichol passed away last Sunday April 20.  Dave was co-founder of Invis Financial Group and Morty Systems (now part of Filogix), as well as a key driver in the development of MorWEB. 

CanEquity's CEO Anthony De Almeida summarized the person Dave was with a statement released Monday.  We'd like to share it here.

Dave was always ready to share his experiences, invite you to share a meal or just be a sounding board when you needed it. He rarely let you see him down and could make anyone feel like they were the most important person in the room. For those of us that knew him well, he enriched our lives. Those that didn't missed out on being in the presence of a man who would give you the shirt off his back if you needed it, while making you realize that tomorrow will be a better day. He will be fondly remembered and missed for his laugh, generosity, pioneering spirit and his zest for life.

Variable Rates, Banks & Brokers

Lately, non-bank lenders have had a shortage of low-priced funds to lend out on variable-rate mortgages.  As a result, we're seeing the best variable rates at places like RBC. 

For example, if you're in the market for a regular closed variable-rate mortgage, we've found RBC reps quoting prime-.85%.  As best we can tell, that's an extra 1/10% off what you could find elsewhere, or $11 a month on a $200,000 25-year amortization. 

(Although RBC's prepayment privileges and conversion rates are not the best--if that's important to you.)

If you're interested in any of the following variable rate products, however, you can still often find the best deals with mortgage planners:

• Open variable-rate mortgages
  (good if you hate penalties for breaking a mortgage)
• Variable rate mortgages with front-loaded discounts
  (good if you plan to lock into a fixed rate later this year)
• Variable readvanceable mortgages
  (good if you need cheap credit for future investing or personal reasons)

Interestingly, the fact that commercial banks have an edge in closed variables is a phenomenon driven by Canada's current liquidly shortage.  Later this year this trend could very well reverse itself, with the banks playing second fiddle to brokers again.  Only time will tell.

Of course, to most people, rate isn't everything.  If you find yourself needing quality advice, you'll serve your best interests by talking to an independent mortgage professional.

Mortgage planners can help you:

• Determine the optimal mortgage for your long-term financial goals
• Summarize the latest and best mortgage products
• Develop strategies to save you interest
• Decide on a fixed or variable rate
• Arrange your current debt to qualify for a mortgage
• One-stop shop for mortgage rates and terms
• Best structure your mortgage application to improve your chances of approval
• Handle all the tedious paperwork

Apart from mortgage planners, there aren't a lot of other places to get this kind of help.  Bank reps are particularly limited in the advice they can give because they don't have daily exposure to products from all lenders, nor do they recommend the competition.

At the end of the day, good and honest advice usually saves people money.
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Quote du jour...

In giving advice seek to help, not to please. 

~Solon

Mortgage Bytes

• The big banks took their time to lower prime rates yesterday.  Some think they were sending a message to the Bank of Canada to slow the pace of rate cuts.  Many lenders' costs of funds have been increasing and the Bank of Canada's rate cut has put further pressure on profits.
• With the best variable rates near 4%, a $200,000 mortgage with a 40-year amortization is now just $832 a month.  If that whets your mortgage appetite don't bite off more than you can chew.  Make sure you have enough cash to weather a 2%+ rate hike in the next few years.  We're not saying it will happen, but anything's possible so plan ahead.  A rate increase like this could raise your variable payments 31% ($259) a month based on the above example.  You could always lock into a fixed rate, but your timing must be right, and your fixed rate might still be notably higher than today's low variable rates.
• 62% of first-time buyers are choosing 30-40 year amortizations according to Re/Max.  Last year, overall, 37% of buyers choose 30-40 year amortizations.
• 38% of first time buyers choose mortgages with no, or little, down payment.
• Canada's mortgage industry is a $77 billion a year business.  Canada.com
• "Not many are using [online mortgage applications]," says Joan Dal Bianco, vice-president of real estate secured lending at TD Canada Trust.  That statement likely refers only to branch banking customers at TD because we're seeing the exact opposite.
• Total Canadian mortgage debt was $821.4 billion in 2007, another record.
• Canada's economic growth is at it's slowest pace in 16 years, according to Bloomberg.
• Financial advisor Adrian Mastracci calls 40-year mortgages the "Freedom 95" plan. He says, "The banks will love you because you're going to be paying for life.  With a 40-year mortgage, you're not buying, you're just leasing long-term, and will spend the first 30 years making mostly interest payments."

Bank of Canada Cuts 1/2%. Prime Moving SLOWLY.

The Bank of Canada acted aggressively and cut rates 1/2% this morning.  It was a move that was anticipated by many.

What wasn't anticipated is how long it would take big banks to lower prime rate.  As of 5:00pm EST not one commercial bank had lowered their prime rate.

This is rather unusual.  With a few exceptions, most of the time the big banks announce their changes to prime rate the morning of the Bank of Canada's announcements.  See this chart below for recent release times.

Until TD lowered its prime rate today at 5:06pm, it had some people wondering if TD's speculation a few months ago (that prime rates might not move) would come true.  Indeed, prime-bankers acceptance spreads have compressed to the point that many lenders' cost of funds have increased with today's rate cut.  It's being caused by the same old story: investors wanting risk premiums in today's uncertain credit markets.

That said, most expect the rest of the big banks will lower their prime rates tonight.  Caisse Desjardins (not a big bank but still a big player) has already lowered their prime rate 1/2% to 4.75%.

Here is the full Bank of Canada release from this morning.  In general, economists are looking for another 1/4% cut by years end.  As for the BoC's position, they stated earlier today that "further monetary stimulus will likely be required to achieve the inflation target over the medium term." 

The next rate meeting is June 10.
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Thanks to Merix for the heads up on the spread issue.

Thanks to the Bank of Canada for the above rate announcement chart.

Interest Adjustment Date (IAD) Explained

Interest adjustments are one of the most overlooked closing expenses.  It's probably because many homeowners don't expect to make any mortgage payments for up to a month after their closing date. 

If a borrower doesn't close at the beginning of the month, however, they'll often owe their lender an interest adjustment.

As it turns out, more people have been emailing us about interest adjustments lately.  Therefore, we thought it might be helpful to post this quick and dirty interest adjustment date overview.