Mortgage Rates & Mortgage Broker News in Canada

Avoiding Policy-made Crises

A mortgage executive at a major bank (who requested anonymity) wrote to us today saying:

“Mortgage policy decisions are being made that may lead to the very outcomes that we are trying to avoid.”

He’s referencing the potential rule tightening and new mortgage liquidity constraints that are making headlines.

Both of those factors could raise the cost of mortgages and adversely impact homebuyer demand. These are risks, he says, that could cause a natural housing correction to snowball into something worse.

Pennying the Mortgage Competition

In the stock market, “pennying” (a.k.a. penny jumping) happens all the time.

Pennying is when a seller offers shares one cent below a competing seller in order to undercut them (and vice versa when buying).

The equivalent in the mortgage business is pricing under a rival lender or broker by one basis point. (A basis point = 1/100th of a percentage point.)

Lenders and brokers penny each other because they know that the lowest rate often generates the most inquiries. An example from this week is First Ontario’s new 4-year promo priced at 2.98%, one basis point below the big banks’ 2.99%.

This pricing relies on the same psychology that motivates people to drive two kilometres to save two cents a litre on gas. The difference is: Gas is a pure commodity. Not so with mortgage services.

Top 5 Mortgage Trends of 2011

Cheap money fuelled another buoyant year for real estate in 2011.

That helped housing values climb a wall of worry (prices rose another 4.6% Y/Y as of November) despite numerous predictions of a correction. Mortgage balances went along for the ride, growing another 7%.

2011 was a year marked by new mortgage regulations and a rate market that continually surprised most observers. Among all of the various developments, however, there were five mortgage stories that stood above the rest:

Mortgage Document Fraud

Last week we spoke to a crown attorney whose caseload consists largely of mortgage fraud.

He says he comes across document-related fraud day in and day out and cites a surprising number of cases where bank insiders claim to “accidentally overlook” or turn a blind eye to doctored job letters, pay stubs, etc.

Most of the cases that make it to court involve calculated criminal plots where there’s more than one criminal party and/or the lender has incurred material losses.

The bulk of fraud, however, is fraud for shelter. That’s when mortgage applicants plan to live in the home and misrepresent their qualifications to get approved.

The “Best” Mortgage Brokers…

There’s been a debate underway in Saturday’s thread about what characteristics comprise the “best” mortgage brokers.

Someone said that the best brokers were not salespeople, but educators. That was shot down by another, more cynical reader who felt commissions are our master.

For what it’s worth, here’s our take on the whole thing…

Covered Bonds in Canada

Most homeowners don’t know what a “covered bond” is. But they’d probably be happy to hear that covered bonds help lower mortgage rates (indirectly) and provide borrowers with more options.

In the story that follows, we take a brief look at the growing Canadian covered bond market and what it means to everyday borrowers and lenders.

Debt-Payments-to-Income. A Trend to Watch

The statistic making headlines this week is the latest debt-to-disposable-income ratio. It just hit a record 150.8%. Not all of that is "bad" debt, and much is offset by assets, but it's still a head turning number.

Despite the widespread use of this statistic, however, CIBC economist Ben Tal says folks should focus less on that figure and more on debt payments vs. income (aka., the TDS ratio). That’s a better indicator of people’s ability to stay solvent.

When asked what a reasonable debt-payments-to-income number is, he told the Vancouver Sun:

ING Direct Goes Collateral

“Collateral charge” is like a bad word to many consumers and mortgage professionals.

That’s why some were disappointed to hear today’s announcement by ING Direct Canada (ING) that all of its new mortgages will be registered as collateral charges.

The main rub with collateral charges is that it’s harder to switch lenders without paying legal fees. Collateral charges also impact people’s negotiating leverage at renewal and restrict borrowers from taking out second mortgages or HELOCs elsewhere (unless one’s property value skyrockets).

The upside, however, is that ING customers with collateral charges will now be able to refinance (with ING) without any legal costs.

Reviewing Scotia’s 2-Year Fixed

Scotiabank’s 2.49% two-year fixed has been enticing borrowers since it launched three months ago.

It’s the country’s best 2-year term, priced 31 basis points below the average variable rate (competitive variables now average roughly 2.80%, or prime – 0.20%).

What’s more, Scotia guarantees your rate won’t rise for two full years, which many find attractive.

Some people, however, are taking this offer in hopes of riding out low rates for a year and a half, and then locking in to something longer. And therein lies a risk…

CIBC Revises its Mortgage Gameplan

CIBC has made a fundamental change in its mortgage strategy.

Canada’s #5 bank says it will no longer focus as heavily on mortgage market share. It will instead aim for higher profit margins and “deeper client relationships.”

When we heard that on CIBC’s earnings call Thursday, we immediately wondered one thing: How is this good for consumers?

Econo-Talk

Four prominent economists met on a CAAMP panel Monday:

Avery Shenfeld (CIBC), Warren Jestin (Scotiabank), Stefane Marion (National Bank Financial) and Carlos Leitao (Laurentian Bank).

The eurozone crisis, employment, rates and CMHC were the topics of the day. Here’s what they expressed about each:

On Interest Rates

• “It is not normal to have 2% inflation and a 1% overnight rate,” said Marion. Rates will normalize. “Do not sell (mortgages, especially shorter or variable-rate terms) to clients who may not be able to afford higher rates.”
• “Prime should be the norm for variable rates.”—Leitao

Can Economists Help You Pick a Better Mortgage? — Part I

“Isn't anyone fed up with the genius economists and their behind-the-curve predictions?” – John McCrae

********

That quote is from a reader responding to Thursday’s article on rate cut speculation. It nicely reflects the pervasive frustration with economists today.

Indeed, it's been a bad year for financial forecasters. (Some would say: “a bad four decades.”) Economists have been changing their rate forecasts more frequently than some people change their kitty litter.

In part I of this two-part story we’ll examine why that is, and look at why economists fail—try as they might.

In part II we’ll evaluate where they come in handy and how their research can help with mortgage term selection.

West Coast Investor Forum Promotion

Canadian Real Estate magazine has just announced a 30% discount for CMT readers to this weekend’s real estate Investor Forum in Vancouver.

The event is designed for those who want to learn more about real estate investing and financing.

It starts the morning of Saturday November 12 and runs until Sunday afternoon. Here is the agenda.

There’s also a one-day broker workshop on Saturday November 12, starting at 8 a.m.

The 30% off coupon code is: IFPS. Tickets are available here.

Globe: Variable Rates Are “So Over”

“For 10 years, I’ve said don’t waste your money on a fixed-rate mortgage. Today, I just cannot in good conscience put a borrower into a 3-per-cent variable when for the same rate I can put them in a four-year fixed.”

That’s mortgage planner Peter Majthenyi, as quoted in this recent piece by the Globe’s Rob Carrick.

Majthenyi is one of the most successful mortgage planners in the country, and (normally) a big variable-rate proponent.

When you get professionals like him calling it quits from variables (however temporary) you know there’s been a shift in planetary alignment.

Banks Dominate in Australia, and Why It Matters

Australia’s conservative mortgage market is in many ways similar to Canada’s. For that reason, the Canadian mortgage industry often looks to Australia to spot mortgage trends that haven’t yet arrived here.

One Aussie trend that’s remarkable is the growing dominance of its banks. Banks account for a whopping 93.1% of mortgage market share, according to Phil Naylor, CEO of the Mortgage and Finance Association of Australia. That figure has been rising and is now at its highest on record. (By comparison, in Canada, banks control about 60-70% of the mortgage market.)

Most Canadians couldn’t care less about what’s happening in Australia’s banking sector. But here’s why it’s interesting…

Less Broker in Your Broker

“There are lenders that are taking the brokering out of brokering” — IMBA President Albert Collu, via CMP

That line is symbolic of what’s happening in our business.

The face of mortgage brokering is changing. Lender policies meant to drive efficiencies are impairing brokers from doing their jobs.

This is no more evident than with volume minimums. More and more, lenders are electing to cut off brokers who don’t send them a minimum volume of business (such as one deal a quarter, $2.5-$5.0 million per year, etc.).

Lenders do this because they don’t want to expend limited resources on non-producing brokers. On the face of it, it makes sense. But it’s having undesirable effects.

Remembering Fraser Smith

Canadians in the thousands have found financial independence due to the untiring efforts of a man named Fraser Smith.

Fraser, best known as the father of “The Smith Maneouvre,” passed away Sunday morning after a battle with cancer.

“It is a great loss,” expressed Karl Straky, a friend of Fraser’s and Canadian First Financial Holding’s CEO. “Fraser will be truly missed by many.”

The Fed’s Constraint on Canadian Rates

One could wax on about how grim the U.S. economy is, but Mark Carney put it succinctly:

“The (U.S.) housing market remains a mess, the consumer is weak, and government actions can be expected to reduce growth…The U.S. economy is close to stall speed…”

That sort of thing puts Canada in a quandary. When the American economy is in the toilet, the Canadian economy is usually on the rim, ready to fall in.

The Fed itself admits that the U.S. is facing "significant downside risks” and 3 out of 4 Canadian exports go to the States.

The mortgage-relevance here pertains to how America’s woes affect Canadian interest rates. To answer that, let’s first have a look at the historical policy rate differences between the two countries…

Low Rates Help Short-term Affordability

The ability to afford a house depends on lots of factors, not the least of which are mortgage rates.

In fact, the Bank of Canada’s rate hike campaign (when it comes) could “dominate all other factors determining affordability,” according to RBC economist, Craig Wright.

U.S. Default & Canadian Mortgage Rates

We’ve all heard about the impending fiscal calamity south of the border. The issue, of course, is whether lawmakers in the U.S. will increase the $14.3 trillion debt ceiling by August 2 (or thereabouts) so the U.S. can pay its bills.

That’s got many Canadians concerned about how this mess will impact interest rates north of the border.