Mortgage Rates & Mortgage Broker News in Canada

Flaherty Somewhat Clarifies GST/HST On Financial Services

Mortgage planners can take a very slight sigh of relief. Finance Minister Jim Flaherty said the Finance Department has “no intention of changing tax policy” on financial services.

In response to whether GST/HST would be applied to services like mortgage brokering, Flaherty said:

• “We are not imposing new taxes.”
• “We will have the tools in the first Budget Implementation Act to make sure we get back to the status quo before the court cases, so people can rest assured that the tax treatment of defined financial services will not change.”

Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals (CAAMP), said: “It gives us some assurance.”

Nonetheless, it could be weeks before we know, for sure, how CRA’s financial services tax interpretation plays out. There are too many conflicting reports at the moment. For example, legal analysts from one of Canada’s top business law firms, Stikeman Elliot LLP, wrote on February 26:

“The CRA confirmed to [us] during a phone conversation that facilitatory services offered by an intermediary in the financial services industry, such as mortgage brokerage services, are likely to be taxable under the new regime.”

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More from:  The Globe

Background:  13% HST on Broker Commissions

IMBA, MBABC & AMBA Fight HST Interpretation

The Independent Mortgage Brokers Association of Ontario (IMBA) calls the potential 13% HST on broker commissions “the most pressing issue facing mortgage agents and brokers right now.”

It emailed an eye-catching information bulletin to brokers today, saying: “Your income may be about to be slashed by 13%.” IMBA states that “any financial service fees found not to be exempt would be subject to GST as of Dec 14, 2009.”

Prior to this year, financial services agents (like mortgage brokers, insurance agents, financial advisors, etc.) were GST exempt.  If you assume the average mortgage planner makes $50,000 a year, this tax could wipe out roughly $6,500 a year of those earnings, minus deductions.

IMBA has partnered with other provincial mortgage associations (MBABC & AMBA) to fight and re-establish the mortgage services tax exemption. They will advise once a ruling has been handed down.

For a general discussion of the financial services exemption see this KPMG Advisory Bulletin.

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Sidebar:  If your livelihood is affected by this proposal, ensure your MP knows about it.

Here is a link whereby you can find your MP's email address:

MP by Postal Code

Posted Is The New Qualifying Rate!

Effective April 19, all high-ratio insured mortgages that have a variable rate or a fixed term under five years will be qualified using the greater of:

• the chartered bank 5-year posted rate (5.39% today), or
• the contract rate.

There’s been a lot of speculation surrounding this change. The new qualifying rate has been a big question mark ever since the Finance Department announced its new mortgage rules on February 16.

The posted qualifying rate will be published by the Bank of Canada each Monday at approximately 12:01am Eastern Time.  Here’s the link:  Posted Mortgage Rate  (Look for series V121764.)

Currently lenders use qualifying rates that range from discounted 3-year fixed rates (like 3.29% today) to posted 5-year fixed rates (5.39% today). 

Going forward, mortgages with terms of five years or more will use the contract interest rate.  This is key because it suggests lenders will still be able to qualify insured 5-year fixed borrowers using heavily discounted contract rates (e.g.,  3.75% instead of 5.39%, as of today). 

If so, guess which term is going to grow in popularity?  Yes sir; the venerable 5-year fixed.  It’ll be the easiest term to qualify for, for people with borderline debt ratios. 

CAAMP estimates that 30% of home buyers choose a 1- to 4-year term. With this new qualifying rate, some of those people will be forced into a 5-year term (and a very small number will no longer qualify at all).

Keep in mind, these changes only apply to mortgages over 80% loan-to-value, says CMHC.  So if you’re putting down 20% or more, you probably won’t be affected.

For mortgages with multiple terms (e.g., hybrid mortgages), each term will be qualified using the applicable criteria above.

Based on the recent inquiries we're seeing from concerned borrowers, there may be a rush to get applications in under the old rules.

Federal Budget Mortgage Initiatives

The federal budget has just been announced.  Below are some of the implications for the mortgage market:

• Pre-payment Penalties: The government will “bring forward regulations” to standardize the calculation and disclosure of mortgage pre-payment penalties. (This applies to federally regulated lenders.)

This measure will likely be applauded by consumer groups. Interest rate differential (IRD) penalties have got tons of bad press in the last year.

• Credit Unions:  The government will introduce a “legislative framework to enable credit unions
  to incorporate and continue federally.”

This, too, could be a boon for mortgage shoppers. If credit unions are allowed to expand beyond their provincial borders, it will add further rate competition, more new products, and cross-border mortgage portability.

• Covered Bonds:  The government will “help federally regulated financial institutions diversify their funding sources by introducing legislation setting out a framework for covered bonds. Covered bonds are debt instruments that are secured by high quality assets, such as residential mortgages. The legislation will increase legal certainty for investors in these debt instruments, thereby making it easier for Canadian financial institutions to access this low-cost source of funding.”
  
• Insured Mortgage Purchase Program (IMPP): “The Insured Mortgage Purchase Program will continue to make purchases of qualifying insured mortgages until the end of March 2010. This program has been successful in moderating the impact of the global financial crisis on credit conditions in Canada by providing funds to financial institutions that were then able to continue lending to businesses and consumers. To date, over $60 billion of term funding has been provided to banks and other lenders at a positive spread to the Government’s funding costs. Recently, lenders have not participated as aggressively in the program, as access to funding through capital markets has improved and investor demand for issuance from financing institutions, particularly Canadian banks, has resurfaced.” (Quoted from the budget release)

More to follow…

Update From the Finance Department

Just in from an official at the Finance Department:

“The Government will provide additional details shortly” on which rate will be used to qualify mortgages starting April 19.

That, of course, refers to which interest rate lenders will need to use to calculate people’s debt ratios.  (See “Small Oversight”)

Devilish Details From Yesterday’s Announcement

Yesterday’s mortgage rule changes sparked as many questions as answers.  Here’s what we know (to the best of our knowledge) at this point. The quotes come from an insurer memo we received…

Qualifying Rate: 

• Regardless of the mortgage term you choose, the interest rate used to qualify you will be “the greater of the contract rate and the Approved Lender’s five-year fixed rate.”
• There is big confusion about which 5-year fixed rate will be used:  discounted or posted.  A source at CMHC tells us this is the #1 question they’ve been getting. 
• It’s a key point because posted 5-year rates are as much as 1.6% higher than 5-year discounted rates.  If posted rates are used, it means borrowers will qualify for lower mortgage amounts.
• The Finance Department is apparently aware of this ambiguity and is expected to announce clarification on this point in the next few days.
• It’s interesting to note that CMHC used to require that lenders use the 5-year posted rate to qualify people on variable-rate mortgages. Perhaps they’ll go back to this?  We’ll see.

Second Homes:

• CMHC will no longer insure 2nd homes with more than one unit.
• The borrower or his/her relative must live in the property “at some point during the year” and on a “rent-free” basis.  Lenders must confirm that this will be the borrower’s intention.

Rental Debt Servicing Changes:

• This is a biggy if you want to buy rental properties.  CMHC is changing how rental income is used in a borrower’s debt service calculations (TDS formula).
• Previously, CMHC allowed 80% of the gross rental income from all rental properties to be deducted from the total household debt service cost when calculating the TDS ratio.
• Effective April 19, “50% of the gross rental income from the subject property may be included into the borrower’s gross annual income for the purposes of calculating the borrower’s TDS ratio.”
• Rental income for all other rental properties will be treated the same as regular non-salaried income.  Borrowers will need to prove rental income. That will be done “using the average income for the previous two-year period from line 150 of the borrower’s two most recent CRA NOAs.”  Borrowers will be able to “gross up” the non-salaried portion of that line 150 income by 15%.
• In practice, lenders may instead simply choose to rely on line 126 (“Rental Income”) on the borrower’s tax return.
• For non-subject rentals, lenders may be allowed to make exceptions where the borrower does not have a two-year track record of a property and can prove rental income by some other means. (This is unconfirmed.)
• The new TDS formula:

   PITH (subject property) + Other Debt Costs 
      Gross Annual Income + 50% rental income

*  PITH = Mortgage payments, taxes, heat, and 50% of condo fees.

Borrowed Down Payments:

• We hear that borrowers might no longer be able to borrow their down payments on an insured rental mortgage.  We’re awaiting confirmation of this.

Porting Existing 95% Rental Mortgages:

• If you switch an existing rental mortgage to a new lender, and the loan-to-value is over 80%, you will not be affected by the new 80% maximum LTV requirement. (As long as the loan amount, LTV, and amortization do not change.)

5+ Unit Rental Properties:

• 5+ unit rental mortgages will not be affected by these changes when insured under CMHC’s Multi-Unit program.

The above changes will apply to all mortgages with signed commitments dated after April 18.  The rules are still subject to final review by the Department of Finance.

If these rental rules go through, they’ll have drastic effects on rental financing. We’ll do another piece on the repercussions of this shortly…

New Mortgage Rules: The Good, The Bad, The Ugly

On April 19 our government will lay down three major rule changes to “prevent” a housing-price bubble and keep homeowners from getting “overextended.”

Here is the official announcement from today:  Finance Department release

These new rules apply to government-backed insured mortgages only.

The Good:  5-Year Fixed Qualification Rates

• The New Rule:  Borrowers will need to qualify using a 5-year fixed rate regardless of what term they choose.  If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate, like 4.09%.
• The Government’s Reasoning:  “This initiative will help Canadians prepare for higher interest rates in the future.”
• The Effect: It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use three- or five-year mortgage rates to calculate a borrower’s debt service ratios.  For many discount lenders, this means the qualifying rate will go from something like 3.25% to 3.89%—not a huge difference.
• The Verdict: A sound and necessary change--although many lenders already use similar guidelines.

The Bad:  90% Maximum Refinancing

• The New Rule:  No longer will you be able to refinance your home to 95% of it’s value. 90% will be the new refinance maximum.
• The Government’s Reasoning:  “This will help ensure home ownership is a more effective way to save.”
• The Effect:  Borrowers will be less able to pay off high-interest debt with lower-cost mortgage money.  On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when home prices fall). It also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt.
• The Verdict:  Bad…for people who need to restructure debt in an effort to pay more principal and less interest.  On the other hand, a 90% refinance limit is beneficial in that it deters people from racking up debt and using their homes as a proverbial ATM machine.

The Ugly:  80% Maximum Insured Financing On Rentals

• The New Rule:  People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously.
• The Government’s Reasoning: To reduce speculation.
• The Effect:  The number of investors creating rental housing will drop notably. Investors will need to borrow down payment funds elsewhere (assuming it’s allowed) or use higher-cost non-insured lenders (like TDFS) to get 90% financing. Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).
• The Verdict:  Ugly.  How the government can go from 100% rental financing (17 months ago) to 80% today is confounding. The intent is understandable, but the government could have increased net worth requirements, increased Beacon minimums, tightened debt servicing guidelines, or limited the number of insured rental mortgages a person can qualify for. Instead, the solution was near-draconian, and it will have an effect on the rental stock in Canada. Will it cause a material rise in rents?  That’s a tough call, but it will definitely reduce the supply of rental units and limit Canadians’ investment options.

What to Expect:

• Undoubtedly there will be a rush of applications to beat the April 19 deadline. 
• The government says “Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.”
• The 80% rental rule will crush the income property financing business for some lenders and brokers.
• If history is a guide, certain lenders will implement these guidelines early (i.e.  before April 19).

Interestingly, Minister Flaherty took a small jab at lenders in his release today, saying these rule changes are designed to “help prevent some lenders” from “facilitating” irresponsible lending. 

"If some lenders aren't willing to act themselves, we will act,” said Flaherty.  That’s bold talk given that Canadian lenders have exceptionally low default rates, and already conform their mortgages to all existing government guidelines.

Ottawa to Impose New Mortgage Guidelines

Various media are reporting that the Finance Department will announce new mortgage qualification rules tomorrow (Tuesday, February 16).

Among the possible rumoured changes:

• An “income test” to ensure people can make their variable-rate mortgage payments if rates rise (Canadian Press)
• Higher down payments for “certain borrowers” (Globe)
• Changes to investment property lending guidelines (CBC)
• Restrictions on home refinancing (CBC)

Across-the-board down payment increases and a reduction in maximum amortization (from 35 to 30 years) are not part of tomorrow’s changes, according to CBC.

None of the above have been confirmed as of yet.

The government last made wide-ranging mortgage rule modifications in October 2008. (See: Goodbye to 100%/40-year Mortgages)

We’ll have full coverage of any announcements tomorrow. Flaherty has a press conference set for 8:00am ET.

More… 

• Ottawa ready to tighten mortgage rules
• Flaherty to toughen mortgage rules
• Flaherty Said to Tighten Canadian Mortgage Rules

The Latest Talk On Policy Changes

From the rumour-mill:

• Sources say the Finance Department is considering mortgage qualification rule changes, which could potentially be announced with its March 4 budget. (We’ve found no confirmation on this.)
• The government is evaluating standardized qualifying rates to ensure variable-rate mortgagors can afford payments when rates rise. (Globe story)
• Finance Minister, Jim Flaherty is reportedly not fond of broad-based rules to increase minimum down payments and decrease maximum amortization.  Some say he may introduce more targeted rule changes instead.

Big Six Bank CEOs Reportedly Meet With Mark Carney

According to unnamed sources, the heads of the Big Six banks met with the Bank of Canada’s Mark Carney on Nov. 25. That’s according to this Globe & Mail article.

The Globe writes that the banking giants privately told policy makers to tighten mortgage qualifications—including increasing minimum down payments and reducing maximum amortizations.

The Globe says “Not one [of the bankers] disputed the idea that it would be wise for Ottawa to take action” and make it harder for people to get mortgages. That is “according to people familiar with the discussions,” states the Globe’s story. Apparently Mark Carney himself wouldn’t confirm any of this.

Assuming these accounts are factual, what could be behind the banks' seemingly altruistic desire to sacrifice short-term mortgage profits for stricter insured mortgage lending?

• The Globe suggests banks are concerned about a potential housing crash. That could increase mortgage defaults and spill over into non-insured loans—costing the banks a lot of money.
• The Georgia Straight feels the banks’ motives may be more ulterior. It says their concern may be due to brand new OSFI accounting rules that make high-ratio insured mortgages less attractive to hold on banks’ balance sheets.
• “An added bonus for the banks,” according to the Straight, "would be that tighter mortgage rules would make life harder for the banks’ competitors, like credit unions, which rely heavily on mortgages."

In a follow-up story published today, the Globe says Finance Minister, Jim Flaherty, sees no bubble threat at this time, and has no immediate plans to tighten mortgage rules.

Carney Suggests No Need For New Mortgage Rules

Bank of Canada chief, Mark Carney, says there is no housing bubble in Canada.

“We are following it closely but we would not characterize the current state of the housing market in those terms," he said yesterday.

In reference to the need for further mortgage restrictions, Carney said: “We've seen the strength of the system of mortgage insurance…It's allowed our housing market to weather the storm.”

“I must say we don't see a need for structural change in the mortgage market."

More from Reuters…

Flaherty Threatens Tighter Lending Standards

Finance Minister, Jim Flaherty, told CTV yesterday that the federal government would “take some action” and tighten mortgage guidelines if borrowers (or real estate prices) become irrational.

Flaherty said:  "The likely action we will take is to increase the size of the down payment from 5% to a higher figure, and probably once again, reduce the amortization period – so bring it down from a maximum of 35 years to something less."

Flaherty’s statements come amid ascending home prices, a threat of rate hikes in 2010, and lots of “bubble”-talk in the press.

His worry, of course, is that homeowners are taking on too much debt and won’t be able to handle:

A)  The higher payments that come with rising interest rates; and/or,

B)  Losses from falling home prices

If Flaherty changes lending guidelines, the impact on Canadian housing could be significant and immediate. 

On the plus-side, Flaherty would be keeping a certain number of Canadians out of trouble.  That’s a good thing because overinflated real estate markets usually end badly…and people can be financially ruined when they buy into them with little equity.

On the other hand, the dosage of Flaherty’s medicine must be carefully measured. He first needs to understand how many home buyers are actually at risk (see Rising Rates & Mortgage Arrears). He then has to determine what action is needed to save them from themselves. 

If rates jump in 2010 as many expect, this in itself will brake the housing market without any government intervention. Low rates are fuelling home prices more than any other factor.

Economists also have another worry.  Canada’s real estate market is like a giant airliner. Turning the rudder too quickly can rip the tail right off.  If 90% LTVs and 30-year amortizations are imposed in knee-jerk fashion, it would eliminate significant demand from the market.  Home values could drop shortly thereafter, and no one knows how much.  Canadians who rely on their home equity could be hurt (perhaps more than if the government did nothing) and hundreds of thousands of young buyers (mostly well qualified young buyers) would be shut out of home ownership.

That’s not to say tightening mortgage standards is necessarily a bad idea. If home prices and debt ratios continue climbing, it may be quite appropriate. The issue is, which tool does one use to remove the “cancer”: a chainsaw or a scalpel. 

Many would argue there are more surgical alternatives than what Flaherty proposes.  Instead of dropping an A-bomb on the whole market, Flaherty could instead make precision strikes where the threats are high. The finance department could require that lenders:

• Not extend 95% financing to borrowers with debt service ratios over the standard 40%.
• Increase minimum credit score requirements for 95% financing. (e.g.  From the current 600, to 650 or 680)
• Tighten down payment guidelines in locations with overinflated home prices--using the Finance Department’s definition of “overinflated”, or some other objective measure.  (It’s important to remember that most local Canadian real estate markets are not materially overvalued.)
• Impose small but reasonable minimum net worth requirements on 5/35 mortgages (those with only 5% down and 35-year amz).

These things, singularly or in combination, could address the problem of overleveraged home buyers while encouraging a softer landing for house prices. 

More importantly, a targeted solution would avoid penalizing the majority of well-qualified and responsible Canadians, for whom 35-year amortizations and 5% down payments are sometimes reasonable choices.

Ontario’s Tax Disharmony

Starting July 1, 2010, Ontario’s tax harmonization plan will add 8% to the price of new homes over $500,000.

(22.7% of new homes sales in Ontario were over $500,000 in 2008.)

Homes under $400,000 will not be subject to the tax.

We asked various lenders if they expect to allow borrowers to finance the new tax (as is the case with the GST now).  Most expect it to be possible, but no one knew for sure.

If homebuyers do finance the tax, it will raise mortgage payments hundreds of dollars a month for buyers of new $1/2-million+ homes, costing several thousands in extra interest over a 5-year term.

The new tax will also increase the cost of Realtors' commissions, appraisal fees, home inspections, and legal fees by 8%.

More from CP and CBC…

Mortgage Bytes

Commentary

• “By the time that inflation is on the rise it has already been well 'priced in' to the bond markets and thus fixed rates have already been adjusted to reflect inflation. There is not one exception to this rule in the last 75 years of mortgage market history.” – Mortgage Broker, Calum Ross via CMP.  The takeaway: It’s easy to be late when timing interest rates.
• If the TSX rebounds back to 10,000, investors may rotate out of (i.e. sell) bonds. If inflation reappears, investors will sell bonds even quicker. When bonds go down, yields and fixed mortgage rates go up. Some observers feel it’s not a question of if this will happen. It’s a matter of how soon.
• Mortgage researcher, Dr. Moshe Milevsky, poses this thought about the benefit of long mortgage terms versus short mortgage terms: “If you're going to renew in a year or two, what if your housing price is lower than the value of the loan, and the banks won't give you that again? What about locking in as long as possible? If I get the five-year rate, they're not going to bother me.” (National Post)
• Extremely low mortgage rates are “now generating a refinancing wave we have not seen in many years.” -- CIBC economist, Ben Tal

Mortgage News

• “A recent decision by the (BC) Court of Appeal held that mortgages placed on property by persons who had fraudulently transferred title to themselves were invalid, and the lenders could not collect from the legitimate owners. This means the (BC) Assurance Fund is not liable for the mortgages. Look for more and more lenders to insist on title insurance after this decision.” -- Real estate attorney, Tony Spagnuolo.  (More on this ruling from the Vancouver Sun and CBC News)
• Unemployment and falling home prices have hit some Canadians hard. CMHC and Genworth, Canada’s top two mortgage default insurers, have now launched websites geared to people who have trouble meeting their mortgage obligations:
  • CMHC link  
  • Genworth link

Rates and the Economy

• CIBC’s Bank of Canada Forecast:  “The Bank of Canada may not announce a change in its overnight target, since that would raise technical issues in the money market without helping the economy materially.”  CIBC expects the BoC’s key interest rate to stay the same for the next 12 months. (CIBC)
• Unemployment is at a 7-year high of 8%, writes CEP.  CIBC says Canada has shown “three-times the percentage decline in employment than at the equivalent stage of recessions in the early 1980s and early 1990s.” TD expects unemployment will hit 10% by year end.

Mortgage Broker News

• CMHC holds a 67% share of Canada’s mortgage default insurance market according to CEO Karen Kinsley. (Reuters) Some feel that number is higher now that many lenders have temporarily pulled back from using competitors Genworth and AIG.
• Filogix has launched Exchange 2.0, its electronic document transfer and storage system.  Link.  We’ll have more on this story in coming days.
• FirstLine, one of the most popular broker lenders, has “temporarily” suspended pre-approvals. FirstLine recently integrated new underwriting systems.  In turn, it’s chosen to devote its staff resources to live deals to improve turnaround times. FirstLine is a division of CIBC.
• Here’s a rather unfair rant against CMHC:  Editorial
  Like most critics of “0-40” mortgages, it’s interesting that the author appears unaware that 100% financing still exists today. If he knew this, he’d be even more ticked off because the current crop of $0-down mortgages are far worse than the old 100% financing programs (thanks in part to much higher interest rate premiums).
• It’s Canadian Western Bank’s 25th anniversary. (90% of CWB’s loans are commercial.)
• Mortgage Alliance’s new radio campaign is driving new business. (FP story)
• CAAMP says 90% of its AMP dues are directed back into promoting the [AMP] designation. But should more be spent on broker education/training and less on advertising? What do you think?

Miscellaneous

• If you’re in an industry vulnerable to layoffs (autos, lumber, oil, construction, etc.), have over 20% or more equity in your house, and have high interest debt, you may want to look closely at a refinance while the getting’s good. If mortgage rates go up or property values drop further, your benefit from refinancing may decline. There are simple changes you can make to your mortgage now that may save your butt if times get tight. If this applies to your situation, find a good mortgage planner and seek out your options.
• Big applause to the Toronto Star’s Ellen Roseman on her recent piece about post-claim underwriting. She writes: “Banks can issue (mortgage) insurance and deny coverage years later if they think there was misrepresentation on an application.”  More…
• Here’s a story about “mortgage helpers" (i.e. basement suites): MetroNews article. 

Remember, if a suite is illegal, you can’t use its rental income to qualify for a CMHC-insured mortgage.

• TD wants folks to know that its mortgage specialists make house calls. Link  They’re not the only ones, however. Other banks have mobile mortgage reps as well. It’s a great way to build relationships with customers. If you’re really pressed for time, an alternative is to find a good mortgage planner that works by phone and email.
• Canada’s patchwork of foreclosure laws: Globe Story

Lenders Want Government-Backed Subprime Money

Up to an estimated 25,000 Canadians may lose their homes--despite making all of their mortgage payments, says the Globe.

A dozen subprime (and former subprime) lenders are now asking for government assistance with the problem. The Globe says these lenders are unable to renew mortgages for higher-risk borrowers because funds for uninsured mortgages have dried up.

The lender lobby apparently wants the government to pony up (or guarantee) lending capital as a result.

While serious enough, this is far from a crisis.  It affects a very small percentage of homeowners—many of whom have other options not touched on in the Globe story (like other alternative lenders, private lending, etc.).

The homeowners it does affect are mostly people who have not improved their credit since getting their last subprime mortgage. Many of these folks have dug their own grave.  Subprime borrowers must rebuild credit. It’s their obligation. Non-prime mortgages, with their high rates and restrictive terms, are simply not meant for long-term borrowing.

FSCO Suspends 79 Brokers

FSCO, Ontario’s mortgage broker regulator, has inactivated the licenses of 79 mortgage brokers “for not having errors and omissions insurance coverage.”

Recent legislation requires that all licensed mortgage brokerages carry errors and omissions insurance with extended coverage for fraudulent acts.

FSCO discovered that these brokers did not have E&O insurance after auditing insurance company records in October.

The brokers named were apparently unaware of the rule (despite repeated notices by FSCO), or didn’t plan on continuing in the business, or simply procrastinated a bit too long.

FSCO says, “Along with the Interim Orders, these mortgage brokerages were served with Notices of Proposal to revoke their licences and impose an administrative monetary penalty of $1000 for not meeting this requirement.”

This enforcement affects a tiny fraction of mortgage brokers in Ontario.  The vast majority of brokers are fully compliant with the new E&O insurance rules, especially brokers from National brokerage firms--who generally have more robust compliance departments.  The alleged offenders seem to be mostly small independent brokers.

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Sidebar:  In March 2009, FSCO will be selecting “a sample of mortgage brokerages to visit, in order to determine whether they are in compliance with the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA).”  More…

Mortgage Buyback Largely Unsubscribed

CMHC offered to buy $7 billion of 5-year variable-rate mortgages from lenders on Friday.

Lenders, however, wouldn’t sell them more than $2.3 billion worth.

Scotia Capital’s Roger Quick says this spells hope.  He told Bloomberg that it’s “a sign that bank financing conditions may be improving.” 

He may be right because Friday’s CMHC buyback was surprisingly undersubscribed. That means banks didn’t need to rely as much on government liquidity to sell their mortgages, and/or they didn’t have as many to sell.  By comparison, just four weeks ago CMHC was able to attract $8 billion of interest for the same type of mortgages.

Lenders got rid of their mortgages Friday at a cost that equates to 1.71% interest, or 0.76% above the CDOR rate. (CDOR is the benchmark rate for bankers' acceptances)  This 1.71% is a very rough snapshot of the cost of funds for the lenders who chose to sell those mortgages to CMHC.  In the previous variable-rate mortgage buyback, lenders had to pay 1.13% above CDOR—or 0.37% more than last Friday.

Generally speaking, falling premiums like this imply that the cost of variable mortgage funds is improving.

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Government mortgage buybacks began in October 2008. They were meant to supplement lenders’ ability to raise capital in the face of Canada's historic credit crisis.

The State of Canadian Mortgage Insurers (Special Report)

The Globe & Mail ran another controversial piece on Genworth and AIG last week.

The article suggested that Canada’s two private mortgage insurers have "unsustainable" business models and are writing virtually no new insurance. 

There is more to this story than meets the eye, however.  Our report examines the issues surrounding this topic in depth.

More…