Mortgage Bytes

August 24, 2008

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.

Posted in Reverse Mortgages

Comments

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.