Canadian Mortgage News & Canada's Mortgage Trends

Mortgage Bytes

Mortgage News

• Just 45 days remain before 100% financing and 40-year amortizations come to an end.  (For the most part anyway...They'll still be available on non-government backed mortgages.)  As a reminder, when the insurers cap their loan-to-value ratios at 95% in October, high-ratio borrowers will still be able to tack on insurance premiums to their mortgages.
• 57% of Canadians claim they'd use extra money to pay down their mortgage whenever possible.  The number is 65% in Quebec.  National Post

Interest Rates

• The Bank of Canada meets Wednesday.  Most expect them to keep rates as is.

Chart above courtesy of TD.

• "I don't know too many traders who really believe that we are going to see a cut in interest rates before the end of this year." - National Bank fixed income trader, David Duggan  CEP
• Scotia Capital is looking for a 1/4% rate cut in the wake of Friday's weak GDP data. FXStreet
• "It confirmed that the economy all but stalled in the first half of the year, and has little momentum heading into the second half. It opens the door, a crack, for a possible rate cut, not [Wednesday], but possibly in the fall." - BMO economist, Sal Guatieri
• "The bond market is hoping for a rate cut or two from the Bank of Canada before year-end...We continue to expect the next move will be a hike in 2009, the start of a 100-bp tightening round." - CIBC
• "We expect the BoC to stand pat and leave the overnight interest rate unchanged at 3.00% at its upcoming meeting on Tuesday Sept. 3rd." - TD

Lender News

• BMO said "new originations outpaced the impact of exiting from the broker mortgage channels."  On the other hand, BMO said its mortgage market share tumbled 1.48% compared to last year as "broker mortgages continue to run off."   Its earning assets also decreased, partly because of BMO's exit from the broker channel.
• Scotiabank's interest margin (spread) declined last quarter versus 2007 due in part to a consumer shift to variable-rate mortgages, as well as higher "wholesale funding" costs.
• RBC said it's mortgage market share rose 0.19% over the last year.  The average loan-to-value of an RBC mortgage was 69% as of last quarter.
• Merix now has $5 billion of mortgages under administration.  Not bad for a company less than three years old.
• Abode Mortgage's "Ride for the Cure" raised $36,000 for the Canadian Cancer Society.  Well done guys!
• Canadian Tire had $67 million of mortgages on its books as of last quarter.

The Real Estate Market

• Over 80,000 Canadians listed their homes for sale in July--a new record for any month.  REI
• Canada's average home price was $302,298 in July.  One year ago it was $309,885 according to CREA.
• "For those who live in Canada's major urban centres and have dreams of home ownership grander than a 435-square-foot shoebox on the second floor facing an alley, a few bad years for real estate would be helpful." -- Vancouver Sun
• The Globe suggests real estate around Vancouver's new Skytrain line might be worth looking at.

Miscellaneous

• The Globe says bring cash if you're buying in the U.S. because financing's getting tougher there for Canadians. That's somewhat true, but sources we talk with say it depends on where you're buying. One lender, for example, was recently offering Canadians 70% financing with no credit checks, no pre-payment penalties, and a 4.25% variable interest rate.
• Here's a story on income property financing by CEP.
• FSCO is hosting webinars to prepare Ontario agents for new mortgage regulations that take effect January 1, 2009.  On October 16 FSCO will run a webinar on disclosure of potential conflicts of interest. On October 23 they'll offer one on disclosure of suitability and risks.
• Here's a link to monthly mortgage backed securities reports by CMHC.

Mortgage Jobs & Events

CMT's mortgage jobs and events pages are updated every week.  If you're job hunting or want to attend an industry function, check out the links below. 

• Latest mortgage jobs
• Mortgage industry events

Happy long weekend!

Commercial Financing/Investment Still Tight

Canadian commercial real estate investment will tumble up to 40% in 2008 if CB Richard Ellis is right. (See story in TheStar.)

Vancouver is Canada's only major market that's shown a rise in commercial investment this year. ($1.6 billion versus $1.5 billion last year)

As most in the commercial side of our business know, financing is tight--to put it mildly.  Commercial lenders have no shortage of want-to-be borrowers so they're being very picky about the deals they look at. 

The smaller, looser, lenders are still in the game, but they're not charging anywhere near bank rates.  Instead, borrowers are paying well into the 10%+ range on most non-'A' deals (e.g. deals where borrower equity is low, debt coverage ratios are only so-so, etc.).

"While large pools of capital continue to be available in Canada to qualified buyers of commercial real estate investments ... lenders today are much more stringent in their lending requirements than they were in the past," says CB's Stefan Ciotlos"

That means, for example, that folks looking for 90% debt financing on a construction project, with little development experience, only 10% pre-sales, and minimal net worth, probably shouldn't get their hopes up too high.

Bond Yields Lowest Since April

Bank of Canada Governor David Longworth thinks Canada's economy will be weaker than expected. He also thinks inflation will be tamer than expected.  What a nice combination for interest rates. 

It looks like economists' see-sawing interest rate speculations are now tilting towards rate cuts.  (Keep in mind this can change in a heartbeat.) 

5-year bond yields fell to 3.03% yesterday, their lowest close in over 19 weeks.  That, of course, is good news for fixed-rate mortgage shoppers.  Now we await Friday's GDP report, which could spike yields higher or take them below the key 3% support level.

In the meantime, here's what Bay Street has to say:

• Bloomberg's survey of major economists has 13 of 13 predicting the Bank of Canada will leave rates unchanged when they meet next on September 3.
• Scotia Capital's Derek Holt:  Predicts a 1/2% rate cut by year-end
• Laurentian's Carlos Leitao: "I think in Canada, if we're not in recession, we're mighty close to it."
• Merrill Lynch's David Wolf:  Expects a 1/4% rate cut in both December and January

Lender Funding Ratios

Don't you hate it when someone rings your doorbell and runs away?

That's the way lenders feel when brokers cancel far more deals than they close.  Lately, lenders have been doing something about it:  cutting brokers off. 

Xceed Mortgage announced the latest such policy today.  Starting September 1, Xceed will reportedly limit its relationships to brokers in its "Prestige" program, and/or those with total funding ratios over 15%.

Polices like this are basically a matter of limited resources.  It takes a lot of manpower to support and underwrite a client's application.  With margins today as tight as they are, multiple dead deals can really eat into a lender's profitability. 

Folks might not be very sympathetic to their plight, but lenders are in business to make money.  Moreover, brokers who cancel deals regularly eat into the time a lender can spend on servicing brokers who close deals regularly.

Look for more lenders to follow suit as time goes on.  If this catches on in the next few years, it will force brokers to spend a lot more time qualifying their clients and underwriting their own deals.  Heck, maybe someday lenders will even start charging brokers for canceling deals.

Lender Retention Programs

If you're a mortgage planner, have you ever heard someone say, "Why would you send the client to that lender? You'll never get them back."

It's a question mortgage brokers are sometimes asked when they recommend lenders who have strong retention programs.  For those who don't know, retention programs are systems lenders have in place to encourage clients to renew with them upon maturity.

Brokers who have been around a while know who these lenders are.  (We won't name them.)  A minority of brokers avoid these lenders because they worry about losing the client once the client's term is up. 

Most mortgage planners don't fret about it, however.  The thinking is:

• If the client is placed in the best possible mortgage today, then the broker has done his or her job.  It doesn't (or shouldn't) enter our minds that we might not get paid again in five years.  (Brokers get referral fees when they renew clients' mortgages with new lenders.) 
• Educated clients are smart enough to see through their lender's song and dance at renewal time and focus on the bottom line.  They know that mortgage planners provide invaluable assistance when presenting renewal options.
• If a client trusts that you will always do the best thing for them, they will remember you at renewal time and reward you with repeat business. 

Today more than ever, if you're a broker, you have to adopt this philosophy and practice it.  Focusing solely on the client's interests is good for our industry, and it's good for your business.

Mortgage Bytes

Commentary

• Canada's mortgage credit slump started just over a year ago, when the bottom fell out of the ABCP market.  Since that time, the AMBA says 18 lenders have pulled out of the Canadian mortgage industry.  Dozens of others have cut products and notably tightened lending standards.  Based on the estimates we heard from lender executives last fall, the credit markets have taken longer than expected to revert to normal.  Some in our industry now think it could be next spring or longer before credit loosens up for subprime borrowers.
• "The official Alberta Mortgage Brokers Association's position [regarding the federal government's new mortgage restrictions] is that the market should be allowed to function on its own with very limited government involvement," says AMBA's Frank Hickey. AMBA suggests the new rules will hurt housing demand and may lead to a "crisis of confidence in the real estate and mortgage markets."
• A comment from a Real Estate Talks visitor on the Smith Manoeuvre:  "...how does that work if your property drops in value, say 10%, and your investment makes 5%, and you are paying 6.5% on the loan, which goes up to 8%? There's better ways to die broke." We thought we'd post this opinion because it encapsulates the short-term risk of the strategy and emphasizes the importance of a long-term time horizon.

Interest Rates

• Does anyone really know where rates are going?  Not if you listen to the big economists.  The contrasting opinions that follow illustrate this.  Invis's Gary Siegle says, "If trained economists can't agree on where interest rates are going, how could the average consumer do so?"
• CIBC is looking for a 1% hike in prime rate by September 2009.
• Counterpoint: "We think the downside risks to Canadian growth are mounting and the pressures on inflation are ebbing gradually and that should give the Bank of Canada room to cut by half a point." -- Scotiabank, via CEP
• Counter-counterpoint:  "A weaker CAD removes an important factor that had helped keep Canadian inflationary pressures under control...With monetary policy already stimulative, the [Bank of Canada] is unlikely to corroborate market expectations of at least one rate cut by year end." -- RBC strategist David Watt, via CEP
• "The bond market isn’t fully braced for what lies beyond that in 2009—a fairly aggressive rate hike cycle that will be needed to ward off the spillover from food/energy prices into core inflation." -- CIBC World Markets
• "Today, prime has flattened and is poised to go up -- It's simply a matter of not if, but when and how much.  So now might be a good time to look at locking in." -- The Mortgage Centre's Peter Kinch
• "Assuming commodity prices stabilize around where they are, or at somewhat lower levels, the peak headline inflation numbers should begin to look a little bit better next year." -- Scotiabank economist Adrienne Warren, via Financial Post
• The Bank of Canada will ponder 2nd quarter GDP on Thursday.  It's the last big piece of economic data before the BoC's interest rate meeting September 3.
• 5-year bonds, which drive fixed mortgage rates, crept higher last week. They're currently yielding 3.17%.
  • The average yield in the last year has been 3.57%
  • The high has been 4.43% (on October 9, 2007)
  • The low was 2.74% (on March 17, 2008)

Housing Market

• Desjardins says housing affordability has increased 10% in the last two quarters thanks to falling home prices and mortgage rates.  "Affordability" is the ratio of disposable income to the income needed to qualify for the average Canadian mortgage.  The all-time low in affordability was in 1990.
• Edmonton's Real Estate Board says don't panic!

Miscellaneous

• A chart of inflation since 1990 -- Courtesy of RBC (The core inflation figure is displayed)
• Off-the-Wall Mortgage Product of the Day:  BMO offers an 18-year open mortgage at 8.95%.  Hmmm.  Would anyone ever hold an open mortgage at that rate and term, given all the alternatives below prime?
• Reverse mortgages are based largely on your age.  The older you are, the more money you'll get.  Here's a table from Seniors money that illustrates this.
• Ed McMahon has avoided foreclosure!
• Canadians' debt-to-income ratio (i.e.  household debt-to-income), has leaped from 122% to 130% in the last year.
• Crucially Unimportant Fact of the Day...  Did you know that if you sell a mortgaged property in the Monopoly board game, the player buying it has two choices: A) He/she can repay the principal and 10% interest and lift the mortgage immediately; or, B) He/she can leave the mortgage intact, but must pay 10% of the mortgage value immediately as a "transfer tax". He/she must also pay the normal 10% interest when the property is later un-mortgaged.

Mortgage Broker News

• There aren't many mainstream lenders left with 40-year amortizations and 100% financing. The ones that remain have been pretty busy.  Merix, for example, has been on a small hiring spree lately to help handle its increased volume. As we approach the October 15 deadline (when 40-year and $0-down insured mortgages disappear) the remaining lenders offering them will likely get even busier.
• Many think negatively of the subprime market, but it's sure been profitable for Home Trust.  The "alternative" lender's mortgage volume rose 42.5% in the last year.  Profits jumped 21%.  Home Trust has a deposit-taking model that's fared better than most lenders who rely on securitization.  That said, Home's securitization activities have reportedly offered a lower cost of funds than its deposits lately. Separately, CEO Gerald Soloway sees a lot of "low risk growth opportunities" this year, thanks to many of its competitors leaving the Canadian market.  GE Money's departure is case in point.
• "We're seeing that mortgage lenders are putting a brighter face on things than they were two months ago." -- Bruce Cran, president of the Consumers' Association of Canada, via The Canadian Press.
• We hear Merix may be adding a 10-year term in the next few months to their popular HELOC product.
• MortgageBrokers.com posted revenue growth of 72% last quarter. Total sales were $4.03 million.  As of June, MortgageBrokers.com had 403 agents (up 47%) and 36 offices.  Its stock price is currently $0.15 a share.  SEC
• CMP reports that over 1/3 of Ontario mortgage agents weren't compliant with FSCO's July 1 licensing deadline.
• CHIP reverse mortgage originations rose 17% to a record $39 million last quarter.  CHIP's average loan-to-value is 36%.  The company also recently inked a distribution agreement with Multi-Prets, Quebec's biggest mortgage broker.
• CAAMP has a new website for this year's Expo in Vancouver, BC.  The event is Canada's biggest mortgage trade show. Attendance at this year's show should top 1,800.  Stats from last year:  52% of attendees were mortgage brokers. 30% were lenders.
• CAAMP is launching an e-directory in January 2009 that will allow members to update their own contact information.  Hopefully that includes members' website addresses as well.
• Seneca College has been given "sole" rights to provide FSCO-required education for mortgage brokers. The new course starts this December. (Note: This information applies to ON brokers only, not agents)

"Great" Rates

If you're a mortgage planner you see this all the time.  Lenders send email updates advertising their "great" mortgage rates.  Yet in many cases, these "great" rates are over 1/4% worse than the competition.  The question then becomes, what makes them so "great?" 

It's almost like some lenders don't know their competition.  Or maybe they don't care to know.  Or maybe they know there are competitors with much lower rates, but need to ignore them because of their own rate limitations.

So, if you're a lender sending out a rate sheet promoting "excellent" rates, make sure they're actually excellent.  Or, make sure to differentiate how your product is better, despite your competitors' lower rates. 

Our old Xceed rep, for example, was always outstanding at this.  He would give actual scenarios where Xceed's products fit a gap that other lenders weren't filling.  This helped easily justify their rates to the client.

Mortgage Job of the Week

This week's featured mortgage career...

Company:  Xceed Mortgage Corporation
Position:  Business Development Manager
City:  Vancouver, BC

Click on the position title above for more information.

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