Canadian Mortgage News & Canada's Mortgage Trends

Opportunity in Alt-A / B?

Many readers know that there are generally two options for people who can't put down 20% on a mortgage:

A)  Get a mortgage with default insurance (e.g. from CMHC, Genworth, AIG, or PMI); or,
B)  Choose a non-traditional (self-insuring) lender.

Come October 15, folks who choose option A will need to meet two new requirements (among other things):

• A 620 minimum credit score; and,
• A 45% maximum TDS ratio.

Unconventional borrowers who don't meet these requirements will be stuck with option B.  This is thanks to the federal governments new insurability rules.  These stricter requirements essentially mean that insurers are backing away from people who have less than stellar borrowing profiles.

Some observers feel this will actually create opportunities--opportunities for lenders that is.  With less competition from insured products, alternative lenders might theoretically spring at the chance to offer "Alt-A" and "B" mortgages at fat spreads (profit margins).

From a lender's perspective it sounds great on paper, except for one thing.  Investors willing to finance Alt-A and B mortgages have been few and far between since last summer's subprime blowup.  That's why so many Canadian lenders have had to exit subprime lending altogether.  Given this new opportunity, however, it will be interesting to see which lenders can find a way to raise capital for these "alternative" mortgages.

In recent weeks, we've been seeing a fair number of private lenders advertising their subprime products by email.  So maybe privates will be the first to take advantage of this gap in the market.  Then again, some people in the know think the banks will take the lead in promoting non-prime products, since their conduits are still operating.

One thing's for sure, subprime will be back in Canada--one way or another.  We don't know when, but when it returns, those lenders with the products and capital will make good dinero.

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If you have a prediction on the Canadian subprime market we'd love to hear your thoughts.

GE Money Pulling Out of Canada

GE Money is now the latest casualty of the lingering subprime crisis.  The lender will stop taking new applications effective Thursday.  (Globe story)

The company, just three years old, carved out a niche in "alternative" lending, with lending guidelines that were looser than most.  Now it wants to shift away from consumer financing.  It's CEO, Stephen Motta, said: "This was precipitated by the credit market turmoil, and the need to deploy capital more effectively." 

GE shuttered its U.S. mortgage operation in July 2007.

One of the things that made GE Money unique was that it kept mortgages on its books instead of selling them all off to investors (securitizing them).  This insulated them somewhat from the problems other Canadian lenders have been having in raising capital.

The only ones happy about this announcement will likely be the few remaining subprime lenders and Canada's private lenders.  Both will now be able to charge higher rates and be more selective in what business they take.

Borrowers with weak credit or untraditional financing needs will be less happy.  For them, another big option has just disappeared.  CAAMP's Jim Murphy said, "This is the one major, direct impact on the Canadian mortgage market from what's happened in the U.S."

GE will honour all applications in its pipeline and continue to hold all existing mortgages on its balance sheet until maturity.  Naturally, GE Money will no longer be renewing existing mortgages.

GE Money's Canadian operations are valued at about $980 million.  It's 50 Canadian workers will reportedly transfer to other GE units.  Other big lenders exiting the Canadian market in the last year include Accredited Home Lenders, HSBC Finance, and GMAC.

Thankfully, GE's commercial mortgage division (GE Capital) will continue operating in Canada.  However, times are challenging in the commercial lending market as well.  According to sources, GE Capital's commercial lending competition has dropped from about 20 lenders a year ago down to five or so today.

The 40-Year Rush

On October 15, 2008, barring any surprises, there will be no more lenders offering insured mortgages with 40-year amortizations or no money down.  (See previous story)

It's therefore not a stretch to expect a rush of mortgage applications leading up to this date.

The rush will likely be greatest in cities where 40-year borrowers congregate due to high prices (e.g.  Calgary, Vancouver, Toronto).

Invis's, Gary Siegle, says, "The word is out and as long as lenders are continuing to offer 40-year amortizations until October, you're going to see probably a rush into the marketplace."  He says 40-year ams are "definitely much more popular in the higher-priced markets because it's really the only way people can qualify."

The Mortgage Centre's, John Panagakos, agrees and says, "I am very sure there will be a rush of buyers and brokers and lenders rushing to get in before the deadline."

Siegle estimates half of Invis's Calgary clients in the last year chose 40-years, and zero-down mortgages were almost as popular.

Quotes via:  Globe & Mail, Calgary Herald

MGIC Withdraws Canadian Mortgage Insurer Application

Mortgage Guaranty Insurance Corporation (MGIC) was set to become Canada's fifth mortgage default insurer (after CMHC, Genworth, AIG, and PMI).  Earlier today, however, they announced that they were withdrawing their application.

CEO, Chuck Wilson, sent an email to industry members saying, "Given the ongoing challenges in the US housing market, MGIC did not feel this was the right time to extend into Canada and provide the level of support Regulators, Lenders and our staff deserved."

In a chat with Wilson earlier, his concern was foremost with his staff, who he says have been deeply committed to the company since it's Canadian office opened.

He feels there's always a chance MGIC will revisit entering the Canadian market in "coming years."  As for now, he says, "The timing was just not perfect."

MGIC's announcement follows that of Triad, another U.S. insurer that cancelled plans to enter Canada earlier this year. 

When US parents struggle, foreign subsidiaries often shutter their windows.  This was case in point.  It's disappointing for Canadian borrowers, who would have undoubtedly benefited from MGIC's entrance.

Brokers Rate The Banks

CMP's 2nd annual Brokers on Banks survey is in.  Here are the lenders that brokers apparently liked the most, broken down by category. 

Keep in mind, this survey rated just the big banks.  CMP does a separate survey for non-bank lenders.

Best Approval/Turnaround Times: 

1.  TD Canada Trust
2.  ING

This is such an important category. Low rates are meaningless if a lender can't close on time. Take last month's low-rate lender for example (we're not comfortable naming them but many brokers know who we're talking about).  They're still working on applications submitted over a month ago!

Without question, there are times when we'd give up some of our commission to know a deal will get approved in 4 hours.  With some lenders, like FirstLine, you don't have to give up anything.  They just consistently provide reliable turnarounds.  This should be the standard all lenders follow.  TD is solid in this department as well.

Best Support from Business Development Managers:

1.  Scotiabank
2.  TD Canada Trust

BDM's who reply to emails and phone calls within two business hours should be applauded.  We say focus less on site visits (we're biased being Internet based).  Instead, send concise product summaries by email and focus on answering calls and emails quicker.  As the Internet takes over mortgage brokering, time is growing as a factor.  Fast feedback from BDMs will continue to rise in importance.

Best Broker Support:

1.  Bridgewater Bank
2.  TD Canada Trust

We love the lenders who explain their niche in short periodic emails.  This helps brokers understand what that lender is good at versus the competition, and it's all the training most people need.  Kudos to lenders with broker call centres as well.  Call centres are a nice fallback when you can't reach, or don't need, a BDM or underwriter.

Best Broker Technology

1.  Bridgewater Bank
2.  TD Canada Trust

Immediate confirmation of faxed or emailed documents is on our permanent wish list.  A centralized electronic document submission feature for Filogix Expert (where you could upload docs to any lender) would be even groovier!

Best Interest Rates

1.  TD Canada Trust
2.  Scotiabank

Lenders who offer great rates and lousy turnaround times fool no one.  You might send them deals once, maybe twice.  But few sane brokers will let a lender burn them consistently.

As a side note, TD is good but Scotia has rates just as good, with excellent products to boot (their open STEP for example).

Best Range of Products

1.  ING
2.  Scotiabank

Our hats are off to banks like Scotia who are wise enough to offer their best products though the broker channel.

Top 10 Things Not to Do Before Closing

There's lots of mortgage no-no's but here are 10 off the top of our heads...

10. Make large undocumented bank deposits
9.  Fail to disclose you're on probation with your employer, maternity leave or disability
8.  Close credit accounts with zero balances
7.  Co-sign a mortgage or loan for someone else
6.  Change your job from full-time to part time
5.  Doctor your employment or financial documents
4.  Spend your down payment or closing cost money
3.  Apply for new loans or credit
2.  Stop paying your bills on time
1.  Quit your job!

Thanks to the folks at Denzins Financial for the inspiration behind this list.

AIG To Stop Insuring 40-year & $0-Down Mortgages

AIG has joined CMHC and Genworth in announcing the end of insured 40-year amortizations and 100% financing.  That subdues minor speculation that AIG would buck the federal government's June 9 announcement.

Andy Charles, president of AIG United Guaranty Canada, said today,  "We support this direction and will amend our product line-up to reflect the new policy set out by the Department of Finance, commencing October 15, 2008."

The industry is now focusing on Canada's #4 insurer, PMI.  PMI is apparently meeting with the Department of Finance at the end of the month to discuss the new restrictions and potential alternatives.

Mortgage Options Dwindle for Canadians Buying in the U.S.

We're hearing reports that Wachovia is closing it's wholesale mortgage division.  This division was the biggest lender to Canadians buying residential property in the U.S.

Sources say this will make it significantly more difficult for Canadians to get good financing terms on U.S. properties.  It will likely necessitate greater use of local lenders--which have notoriously tougher lending guidelines for foreign nationals.

Wachovia is the fourth largest lender in the U.S.

We'll update this story as we get more details.

Mortgage Jobs This Week

This week's featured mortgage job...

Company:  Genworth Financial
Position:  Account Manager
City:  Oshawa, ON

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Advertise your mortgage job opening now!

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Click to browse CMT's Mortgage Jobs Database.

Ball Gazing

We received a memo this week from a large brokerage.  We'll keep their name under the rug in case they don't want the publicity.  It talked about what to expect once the government's new loan-to-value and amortization limits take effect.  We thought we'd pass along it's more salient points.

In no particular order:

• A fair number of Canadians currently rely on 40-year amortizations and $0-down programs to qualify for a mortgage.  The source suggests the upcoming absence of these programs will reduce demand for housing temporarily (but not substantially).
• The federal government's move may stimulate price competition among insurers.  That's because #3 insurer, AIG, as well as lower tier insurers, may have to cut premiums to maintain market share (a lot of AIG's share is currently attributed to 100% financing and 40-year amortizations).
• "Opportunities will emerge" in the "Alt-A" and "B" lending markets as insurers pull out of this segment.  For example, a lender with investors (i.e.  a way to securitize its mortgages) may find it attractive to cater to folks with 580-619 credit scores.  People with these scores currently qualify for insured mortgages in many cases...but not for long.
• According to our source, "The Banks will be the first ones to start promoting non-prime and Alt-A as their conduits are still operating and it’s a market segment they would certainly like to ingest."

A few more thoughts from our end:

• The median Canadian family makes $66,343 a year according to the last census.  Other things being equal, that's enough to qualify that family for a roughly $328,300 house--if they choose a 40-year amortization. (assuming prime rate and $3,000 a year for property taxes and heat)
• If, however, the family can now access a 35-year mortgage at most, the maximum they can qualify for drops to $312,615.
• The moral is, if you need a 40-year amortization or $0-down loan, buy soon.  5-6 lenders have already pulled 40-years and $0-down mortgages from the shelves, and the other lenders could do so at any time as well (even before the October 15 transition). 
• Don't be surprised if a lot of people start thinking this way.  In fact, it could actually create a small rush to buy in the short-term. 
• In the medium-term, the changes could potentially have a slight negative effect on house prices for the reasons alluded to above.  (i.e.  people on the fringe can't qualify, or qualify for as much)
• Long-term, the changes could either help the market (by encouraging more conservative lending) or hurt it (by forcing marginal borrowers into pricier extended financing methods).
• All this said, experts predict the impact to borrowers will be reasonably small.  TD economist, Pascal Gauthier, for example, notes that the average Canadian's mortgage payment would increase just $55 a month with a 35-year amortization, versus a 40-year.  (via Ellen Roseman at the Star)