Mortgage Bytes

April 20, 2008

Mortgage Bytes

Commentary

Home sales plunged 13% in the first quarter of 2008 versus last year. That prompted BMO's Doug Porter to proclaim, "Canada's six-year housing market boom is officially over." The Globe has a good discussion going on this.
CAAMP isn't too happy with the Financial Post for it's recent articles about mortgage brokers--and rightly so. Some parts of the stories were completely non-representative of the Canadian broker industry. CAAMP issued this letter to the editor in response to the stories. (Our take)
"The idea used to be that you paid your mortgage down as quickly as you could. You didn’t want anyone to have control over you; you wanted to own your house outright. Now people are totally unafraid of debt." -- Howard Cappell, bankruptcy trustee. Toronto Life
Jim Tourloukis of Advent Mortgage Services says we're in the most competitive mortgage market he's seen in 14 years. "The banks are ultra-aggressive right now," Tourloukis says. "So if you're a keen negotiator, you can do a heck of a lot better with the banks today than you could have six months ago." Globeadvisor.com
Four Pillars asks if it's worthwhile being a mortgage slave.
The Smith Manoeuvre is becoming much higher profile these days. Now we've even got people calling it a strategy "for the rich." Northern News ran an editorial effectively calling it a "tax dodge." The piece called on parliament to amend the tax code so working class people can also "deduct interest on their home mortgages." The writer disregards and misinterprets far too many facts to give this post much credibility, but suffice it to say, every Canadian that borrows to produce an income has the same rights to deduct interest per CRA guidelines.

Mortgage Strategies

Pre-paying your mortgage is one of the best after-tax uses for your hard-earned cash. A lot of people talk a big game about their plans to pre-pay their mortgage but then never do. Move Smartly suggests, at a minimum, increasing your mortgage payment as your salary goes up. It it goes up 2%, then increase your mortgage payments 2%. It could cut years off your mortgage with little pain.
Pre-paying $1,000 off a 6% mortgage saves $60 of interest that would otherwise have to be paid every year for the rest of the mortgage term (with after-tax dollars). If you're in a 40% tax bracket, pre-paying your mortgage is therefore like having a risk-free long-term bond return 10% annually.
Smith Manoeuvre advocates will eagerly watch the Supreme Court's April 23 hearing on the Lipson case. The case entails very different circumstances than the typical Smith Manoeuvre. However, there is always a chance the court could rule in a way that effects this increasingly popular strategy. (More from MDJ) Financial Post

Rate Trends

Bank of Canada governor Mark Carney believes the tight credit that's slowing our economy "is not over." As a result, he says we can expect lower rates "in the near term."
March's CPI showed inflation at its lowest level in months. Economists therefore predict the Bank of Canada will cut rates 1/4% to 1/2% on Tuesday. However, some observers wonder whether they should cut at all. The fear is that further rate drops will fan the flames of inflation. That could set up Canada for rate hikes a year or so down the road.
Mortgage costs rose 8.3% in March despite the Bank of Canada's recent rate reductions. According to the Globe, that's largely due to higher rates being offered on renewals versus five years ago. With rates staying stubbornly high, Merrill Lynch's David Wolf thinks "the BoC will ultimately have to cut further than markets expect" to loosen up the credit markets.
CIBC says, "There’s no reason for the Bank of Canada to be shy about cutting interest rates in the week ahead." They say, "Look for a half-point cut, with a statement that doesn’t rule out further moves ahead."
"While the Bank of Canada may not match the Federal Reserve Board basis point for basis point, it will, nevertheless, be following the Fed in direction." -- CIBC's Jeff Rubin

Housing Market Trends

CREA says more people are selling houses now than at any time on record. They also note that Canada's market is "more balanced compared to any other quarter over the past nine years." Many are now interpreting CREA's "balanced" statement as meaning "toppy." TD's Craig Alexander says this would have happened a year earlier if it weren't for long-amortization mortgages propping up the market.
Some find Calgary's deteriorating sales to listings ratio (35% today vs. 64% in the same period 2007) is particularly concerning.
U.S. mortgage rate resets will peak in May or June according to the Globe. That's admittedly news to us. Last we heard they were supposed to have crested in December. In truth, we're not sure if anyone really knows when resets will peak (see graph below). Whenever it happens, however, the worst of the U.S. housing bust will supposedly be over predicts RealtyTrac. Knock on wood.
Credit Suisse Rate Reset Graph, via the Consumerist
Canadian Business says Canada has enough demand to absorb about 180,000 newly-built homes a year.
The IMF says Canada and Austria were the only two countries out of 17 with undervalued home prices in 2007. The Province
Canada's average house was worth $329,383 in March, up 5.5% over March 2007. That increase was the smallest in 7 years says CBC.
Roughly 19% of Toronto condos are held by investors. This compares to ~32% in 1996. Source: CMHC

Industry News

BMO is running well-designed commercials promoting its ReadiLine readvanceable mortgage. The commercials tap into borrower psychology by suggesting homeowners will never need to refinance or worry about getting a lenders' approval again. That's music to a lot of people's ears.
A contact we spoke with at ICICI Bank says they are now shooting for the 3rd quarter as their rollout date for a mortgage broker channel.
CMHC says it now considers "market rents" when insuring a vacant income property. Previously, CMHC generally required that a lease be in place (or leases for multi-unit properties). Fair market rents can be determined with an appraisal or qualified opinion letter.
Product tip: CMHC's Self-employed simplified program requires no NOA and only stipulates the applicant be in the same industry for two years, not necessarily the same job.
Accredited Home Lenders Canada has changed their contact information and homepage.
Xceed successfully retired $200 million in notes that matured on April 17.
Abode Mortgage lost $1.2 million last quarter while funding $10.7 million in mortgages. Nonetheless, CEO Mike Linehan expects improved "origination volumes during the latter half of 2008 and into 2009" as Abode's "A" business and Ontario expansion yields benefits. The company also renewed its $80 million credit facility with Deutsche Bank.
CAAMP's Canadian Mortgage Industry Course and Errors and Omissions insurance is now approved by FSCO.
CAAMP is launching a new consumer website "in a few short weeks" at www.mortgageconsumer.ca.
Quebec's new Bill 73, a real estate act covering mortgage brokers among other things, will likely receive second reading in the National Assembly in May. CAAMP
AIG is testing a new HELOC product. According to an AIG presentation last week, it will launch "in coming months" (2008 "for sure").
Product Tip: Genworth allows the use of stated incomes when applying for a mortgage on a 2nd home.
Mortgage planners with AMP designations have to meet continuing education requirements. Genworth makes it easy with online AMP courses you can take in your pajamas.

Miscellaneous

71% of Canadians have a credit score of 680+. 8% have a score of 620 or less. Source: AIG United Guarantee
At the 2006 U.S. real estate peak, private mortgage securitizations accounted for 47% of new mortgages in the States, compared with 7% in Canada. Investors often had no idea of the "junk" mortgages that made up these U.S. mortgage securities. Canadian Business
Read this if you plan to buy a new house in Ontario, not live in it, and then flip it. You may have to register the house with Tarion Warranty Corp. or risk fines and/or jail.
Despite record numbers of 40-year amortized mortgages, two thirds of Albertans say they plan to ask for a lower amortization when they renew their mortgage next. Calgary Herald
84% of Alberta homeowners shop around for the best mortgage, versus a national average of 77%. Calgary Herald
Free down payment programs are getting few takers.
43% of mortgage refinances are done for renovations. That makes renovations the most popular reason for refinancing. Source: AIG United Guarantee
Self-employed mortgages are big business. 1 in 7 borrowers has commission-based income. 26.5% of households have a self-employed worker. Genworth
When applying for a "business for self" mortgage, the stated income declared is the #1 factor in getting approved. The insurers know the average salaries for each industry and compare applicants' stated income with these averages. If you want to see the average salary for your profession, check out Salary Wizard. (Note: It doesn't list all jobs. For example, we looked for "hot dog vendor" [a very lucrative profession in parts of Toronto], but no luck.)

Comments

Commentary

Home sales plunged 13% in the first quarter of 2008 versus last year. That prompted BMO's Doug Porter to proclaim, "Canada's six-year housing market boom is officially over." The Globe has a good discussion going on this.
CAAMP isn't too happy with the Financial Post for it's recent articles about mortgage brokers--and rightly so. Some parts of the stories were completely non-representative of the Canadian broker industry. CAAMP issued this letter to the editor in response to the stories. (Our take)
"The idea used to be that you paid your mortgage down as quickly as you could. You didn’t want anyone to have control over you; you wanted to own your house outright. Now people are totally unafraid of debt." -- Howard Cappell, bankruptcy trustee. Toronto Life
Jim Tourloukis of Advent Mortgage Services says we're in the most competitive mortgage market he's seen in 14 years. "The banks are ultra-aggressive right now," Tourloukis says. "So if you're a keen negotiator, you can do a heck of a lot better with the banks today than you could have six months ago." Globeadvisor.com
Four Pillars asks if it's worthwhile being a mortgage slave.
The Smith Manoeuvre is becoming much higher profile these days. Now we've even got people calling it a strategy "for the rich." Northern News ran an editorial effectively calling it a "tax dodge." The piece called on parliament to amend the tax code so working class people can also "deduct interest on their home mortgages." The writer disregards and misinterprets far too many facts to give this post much credibility, but suffice it to say, every Canadian that borrows to produce an income has the same rights to deduct interest per CRA guidelines.

Mortgage Strategies

Pre-paying your mortgage is one of the best after-tax uses for your hard-earned cash. A lot of people talk a big game about their plans to pre-pay their mortgage but then never do. Move Smartly suggests, at a minimum, increasing your mortgage payment as your salary goes up. It it goes up 2%, then increase your mortgage payments 2%. It could cut years off your mortgage with little pain.
Pre-paying $1,000 off a 6% mortgage saves $60 of interest that would otherwise have to be paid every year for the rest of the mortgage term (with after-tax dollars). If you're in a 40% tax bracket, pre-paying your mortgage is therefore like having a risk-free long-term bond return 10% annually.
Smith Manoeuvre advocates will eagerly watch the Supreme Court's April 23 hearing on the Lipson case. The case entails very different circumstances than the typical Smith Manoeuvre. However, there is always a chance the court could rule in a way that effects this increasingly popular strategy. (More from MDJ) Financial Post

Rate Trends

Bank of Canada governor Mark Carney believes the tight credit that's slowing our economy "is not over." As a result, he says we can expect lower rates "in the near term."
March's CPI showed inflation at its lowest level in months. Economists therefore predict the Bank of Canada will cut rates 1/4% to 1/2% on Tuesday. However, some observers wonder whether they should cut at all. The fear is that further rate drops will fan the flames of inflation. That could set up Canada for rate hikes a year or so down the road.
Mortgage costs rose 8.3% in March despite the Bank of Canada's recent rate reductions. According to the Globe, that's largely due to higher rates being offered on renewals versus five years ago. With rates staying stubbornly high, Merrill Lynch's David Wolf thinks "the BoC will ultimately have to cut further than markets expect" to loosen up the credit markets.
CIBC says, "There’s no reason for the Bank of Canada to be shy about cutting interest rates in the week ahead." They say, "Look for a half-point cut, with a statement that doesn’t rule out further moves ahead."
"While the Bank of Canada may not match the Federal Reserve Board basis point for basis point, it will, nevertheless, be following the Fed in direction." -- CIBC's Jeff Rubin

Housing Market Trends

CREA says more people are selling houses now than at any time on record. They also note that Canada's market is "more balanced compared to any other quarter over the past nine years." Many are now interpreting CREA's "balanced" statement as meaning "toppy." TD's Craig Alexander says this would have happened a year earlier if it weren't for long-amortization mortgages propping up the market.
Some find Calgary's deteriorating sales to listings ratio (35% today vs. 64% in the same period 2007) is particularly concerning.
U.S. mortgage rate resets will peak in May or June according to the Globe. That's admittedly news to us. Last we heard they were supposed to have crested in December. In truth, we're not sure if anyone really knows when resets will peak (see graph below). Whenever it happens, however, the worst of the U.S. housing bust will supposedly be over predicts RealtyTrac. Knock on wood.
Credit Suisse Rate Reset Graph, via the Consumerist
Canadian Business says Canada has enough demand to absorb about 180,000 newly-built homes a year.
The IMF says Canada and Austria were the only two countries out of 17 with undervalued home prices in 2007. The Province
Canada's average house was worth $329,383 in March, up 5.5% over March 2007. That increase was the smallest in 7 years says CBC.
Roughly 19% of Toronto condos are held by investors. This compares to ~32% in 1996. Source: CMHC

Industry News

BMO is running well-designed commercials promoting its ReadiLine readvanceable mortgage. The commercials tap into borrower psychology by suggesting homeowners will never need to refinance or worry about getting a lenders' approval again. That's music to a lot of people's ears.
A contact we spoke with at ICICI Bank says they are now shooting for the 3rd quarter as their rollout date for a mortgage broker channel.
CMHC says it now considers "market rents" when insuring a vacant income property. Previously, CMHC generally required that a lease be in place (or leases for multi-unit properties). Fair market rents can be determined with an appraisal or qualified opinion letter.
Product tip: CMHC's Self-employed simplified program requires no NOA and only stipulates the applicant be in the same industry for two years, not necessarily the same job.
Accredited Home Lenders Canada has changed their contact information and homepage.
Xceed successfully retired $200 million in notes that matured on April 17.
Abode Mortgage lost $1.2 million last quarter while funding $10.7 million in mortgages. Nonetheless, CEO Mike Linehan expects improved "origination volumes during the latter half of 2008 and into 2009" as Abode's "A" business and Ontario expansion yields benefits. The company also renewed its $80 million credit facility with Deutsche Bank.
CAAMP's Canadian Mortgage Industry Course and Errors and Omissions insurance is now approved by FSCO.
CAAMP is launching a new consumer website "in a few short weeks" at www.mortgageconsumer.ca.
Quebec's new Bill 73, a real estate act covering mortgage brokers among other things, will likely receive second reading in the National Assembly in May. CAAMP
AIG is testing a new HELOC product. According to an AIG presentation last week, it will launch "in coming months" (2008 "for sure").
Product Tip: Genworth allows the use of stated incomes when applying for a mortgage on a 2nd home.
Mortgage planners with AMP designations have to meet continuing education requirements. Genworth makes it easy with online AMP courses you can take in your pajamas.

Miscellaneous

71% of Canadians have a credit score of 680+. 8% have a score of 620 or less. Source: AIG United Guarantee
At the 2006 U.S. real estate peak, private mortgage securitizations accounted for 47% of new mortgages in the States, compared with 7% in Canada. Investors often had no idea of the "junk" mortgages that made up these U.S. mortgage securities. Canadian Business
Read this if you plan to buy a new house in Ontario, not live in it, and then flip it. You may have to register the house with Tarion Warranty Corp. or risk fines and/or jail.
Despite record numbers of 40-year amortized mortgages, two thirds of Albertans say they plan to ask for a lower amortization when they renew their mortgage next. Calgary Herald
84% of Alberta homeowners shop around for the best mortgage, versus a national average of 77%. Calgary Herald
Free down payment programs are getting few takers.
43% of mortgage refinances are done for renovations. That makes renovations the most popular reason for refinancing. Source: AIG United Guarantee
Self-employed mortgages are big business. 1 in 7 borrowers has commission-based income. 26.5% of households have a self-employed worker. Genworth
When applying for a "business for self" mortgage, the stated income declared is the #1 factor in getting approved. The insurers know the average salaries for each industry and compare applicants' stated income with these averages. If you want to see the average salary for your profession, check out Salary Wizard. (Note: It doesn't list all jobs. For example, we looked for "hot dog vendor" [a very lucrative profession in parts of Toronto], but no luck.)