Mortgage Bytes

May 10, 2008

Mortgage Bytes

Commentary

A prominent lender sent this email out recently:

"We are seeing some borrowers take on the risk of Variable rates, when based on their profile they should be in a fixed rate mortgage. When the BOC starts increasing interest rates, your customer’s options for locking in may not be as attractive as they are today. And that could end up costing them more money over the term than it would if they choose to lock–in today.

Did you know the Canadian government guarantees 100% of CMHC-insured mortgages and 90% of privately insured mortgages (up to $200 billion)? That's according to the Star's Ellen Roseman. She thinks Ottawa should cut back its mortgage insurance guarantees because of growing risk. Star Article

40-Year Amortizations

The Bank of Canada's Mark Carney told Members of Parliament: "We have concerns with the increased prevalence of very long amortization and higher value mortgage products. They add to momentum in the housing market and if everyone has a 40-year amortization mortgage, then you just have higher housing prices." Nonetheless, Carney feels Canada is not following in America's footsteps. He said housing problems are "not possible in our system, to the U.S. magnitude."
Scotia's Derek Holt says 40-year amortization risks are "misunderstood." He says "these new products actually extend near-term credit quality and the housing cycle by offering flexibility in a shock environment and bringing in new buyers."
In Jonathan Chevreau's look at 40-year amortizations he says "If you can't afford a home, rent and save money for a down payment." He suggests couples save $10,000 a year using tax free savings account. Then, "with well-chosen investments, the tax-free growth should [result in] a 25% down payment on a home in a few years." Sounds good on paper. But three years of saving $10,000, and a 10% return, yields about $35,000. If that's used as a 25% downpayment it implies a house price of $139,000. With Canada's average house at $314,279 that isn't going to buy much.
Finance Minister Jim Flaherty said he's "watching" the recent "tendency...to longer amortizations and smaller down payments." He suggests it's not a problem now but "could become a concern over time."

Interest Rate Trends

Economists think the U.S. is finished cutting rates for a while. If so, and IF Canadian bond yields are also near a bottom, the only way fixed mortgage rates will fall much more is if spreads narrow.
“The story for 2009, and potentially 2010, is inflation. With inflation we will have higher interest rates." -- CIBC's Benjamin Tal. Globe & Mail
Mark Carney says the Bank of Canada has had to cut rates more than it normally would because big banks are hesitant to lower rates much more. TheStar.com
Expect the Bank of Canada to cut rates 1/4% on June 10 before pausing, says BMO Senior Economist Michael Gregory.
"Trading in federal funds futures suggests investors expect the (U.S.) Fed to start raising rates again as early as this fall to deal with inflation." Globe & Mail
According to the Star, TD expects a 1/2% rate cut in both June and July, with no hikes until next year. (That seems surprisingly aggressive.)

Housing Trends

TD economist Craig Alexander reminds us that home prices can change fast. "The U.S. went from double-digit gains to outright (price) contraction in a matter of six months. That is a bubble bursting."
"There's a sense in the market that the worst is over as far as the subprime-mortgage market is concerned in the U.S." - CIBC's Benjamin Tal The Province
CMHC forecasts a national rental vacancy rate of 2.8% for 2008.
In Alberta, new real estate listings leaped 36% in the first quarter versus last year. Nationally they rose 6%.
48% of Canadians would consider buying a condo. Last year the number was 39%.

Industry News

Lender stock prices might not fare well with a weak economy says Andrew Bell. BNN Story
CHIP reverse mortgage originations were up 10% in its latest quarter, versus the prior year. CHIP's average interest rate spread (rate charged - cost of funds) on reverse mortgages is 3.27%. The average loan-to-value of a CHIP reverse mortgage is 36%.

Miscellaneous

The Supreme Court of Canada reserved its decision on the Lipson (interest deduction) case in order to write its opinions. A transcript of the decision was announced Tuesday. We'll post a copy once received.
CAAMP has launched www.mortgageconsumer.ca, its new consumer education site.
Ottawa is Canada's #1 "Best place to live" according to Moneysense. Victoria, BC is #2 on their list.
From the "every-little-bit-helps" department: Scotiabank will round up debit purchases to the nearest dollar and then deposits the change in your savings account.
Canada need not fear stagflation.
40% of Canadians pay interest on their monthly credit card balances. The Telegram

Posted in Reverse Mortgages

Comments

Commentary

A prominent lender sent this email out recently:

"We are seeing some borrowers take on the risk of Variable rates, when based on their profile they should be in a fixed rate mortgage. When the BOC starts increasing interest rates, your customer’s options for locking in may not be as attractive as they are today. And that could end up costing them more money over the term than it would if they choose to lock–in today.

Did you know the Canadian government guarantees 100% of CMHC-insured mortgages and 90% of privately insured mortgages (up to $200 billion)? That's according to the Star's Ellen Roseman. She thinks Ottawa should cut back its mortgage insurance guarantees because of growing risk. Star Article

40-Year Amortizations

The Bank of Canada's Mark Carney told Members of Parliament: "We have concerns with the increased prevalence of very long amortization and higher value mortgage products. They add to momentum in the housing market and if everyone has a 40-year amortization mortgage, then you just have higher housing prices." Nonetheless, Carney feels Canada is not following in America's footsteps. He said housing problems are "not possible in our system, to the U.S. magnitude."
Scotia's Derek Holt says 40-year amortization risks are "misunderstood." He says "these new products actually extend near-term credit quality and the housing cycle by offering flexibility in a shock environment and bringing in new buyers."
In Jonathan Chevreau's look at 40-year amortizations he says "If you can't afford a home, rent and save money for a down payment." He suggests couples save $10,000 a year using tax free savings account. Then, "with well-chosen investments, the tax-free growth should [result in] a 25% down payment on a home in a few years." Sounds good on paper. But three years of saving $10,000, and a 10% return, yields about $35,000. If that's used as a 25% downpayment it implies a house price of $139,000. With Canada's average house at $314,279 that isn't going to buy much.
Finance Minister Jim Flaherty said he's "watching" the recent "tendency...to longer amortizations and smaller down payments." He suggests it's not a problem now but "could become a concern over time."

Interest Rate Trends

Economists think the U.S. is finished cutting rates for a while. If so, and IF Canadian bond yields are also near a bottom, the only way fixed mortgage rates will fall much more is if spreads narrow.
“The story for 2009, and potentially 2010, is inflation. With inflation we will have higher interest rates." -- CIBC's Benjamin Tal. Globe & Mail
Mark Carney says the Bank of Canada has had to cut rates more than it normally would because big banks are hesitant to lower rates much more. TheStar.com
Expect the Bank of Canada to cut rates 1/4% on June 10 before pausing, says BMO Senior Economist Michael Gregory.
"Trading in federal funds futures suggests investors expect the (U.S.) Fed to start raising rates again as early as this fall to deal with inflation." Globe & Mail
According to the Star, TD expects a 1/2% rate cut in both June and July, with no hikes until next year. (That seems surprisingly aggressive.)

Housing Trends

TD economist Craig Alexander reminds us that home prices can change fast. "The U.S. went from double-digit gains to outright (price) contraction in a matter of six months. That is a bubble bursting."
"There's a sense in the market that the worst is over as far as the subprime-mortgage market is concerned in the U.S." - CIBC's Benjamin Tal The Province
CMHC forecasts a national rental vacancy rate of 2.8% for 2008.
In Alberta, new real estate listings leaped 36% in the first quarter versus last year. Nationally they rose 6%.
48% of Canadians would consider buying a condo. Last year the number was 39%.

Industry News

Lender stock prices might not fare well with a weak economy says Andrew Bell. BNN Story
CHIP reverse mortgage originations were up 10% in its latest quarter, versus the prior year. CHIP's average interest rate spread (rate charged - cost of funds) on reverse mortgages is 3.27%. The average loan-to-value of a CHIP reverse mortgage is 36%.

Miscellaneous

The Supreme Court of Canada reserved its decision on the Lipson (interest deduction) case in order to write its opinions. A transcript of the decision was announced Tuesday. We'll post a copy once received.
CAAMP has launched www.mortgageconsumer.ca, its new consumer education site.
Ottawa is Canada's #1 "Best place to live" according to Moneysense. Victoria, BC is #2 on their list.
From the "every-little-bit-helps" department: Scotiabank will round up debit purchases to the nearest dollar and then deposits the change in your savings account.
Canada need not fear stagflation.
40% of Canadians pay interest on their monthly credit card balances. The Telegram