Canadian Mortgage News & Canada's Mortgage Trends

Mortgage Securitization Up 15% Since 2006

The government’s mortgage securitization programs helped Canada sidestep a major mortgage crisis last fall.

Those programs, which include the Finance Department’s $125 billion IMPP initiative, led to $1 billion of bank profits last quarter, according to the Globe. That’s roughly 15% of their total profits, says the newspaper.

While securitization has taken more prominence, BMO analyst, Ian de Verteuil, told the Globe: "there are negative macro policy implications of the extremely high level of securitization of Canadian residential mortgages.”  He says the residual mortgages being left on banks’ balance sheets are now of lower quality.

That was an interesting point, and one we hadn’t heard before. 

On the other hand, Verteuil didn’t quantify the “problem,” so it’s hard to say if there’s anything to be concerned about. Our gut feel is that there’s not.

For one thing, banks securitize only a minority of their mortgages and have billions of excess capital.  Moreover, most of the mortgages left on banks’ books are very low risk, as evidenced by CBA’s arrears data.

Just as importantly, securitization has allowed banks to be more liquid—and that’s a very good thing for consumers, as we’ve seen in the past year.  Securitization lets lenders sell off mortgages, generate more immediate revenue, free up their capital, and relend it at lower rates.

The Globe’s story goes on to imply that greater degrees of securitization may not be prudent because of the U.S. debacle. In the U.S., however, it was not the mere act of securitization that caused problems, it was the low-quality mortgages going into U.S. securitization programs (as well as unsupervised mass leveraging) that caused problems. 

By comparison, U of T finance professor, Laurence Booth, calls Canadian mortgages “incredibly low-risk” and “incredibly good-quality assets."

It will be interesting to see if lower funding costs reduce lenders’ desire to securitize mortgages in Canada.  The Globe story speculates that securitization will decrease.  However, a lot of lenders rely on these programs and they generate significant profits from them.

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Mortgage securitization facts:

• Canada has $267 billion of securitized mortgages (IMF)
• Only 29% of Canadian mortgages are securitized, versus 60% in the U.S. (IMF)
• Bank leverage ratios (assets to capital) are far more conservative in Canada:  ~18:1 versus 25:1 in the U.S. (Brookings)
• Canada has “circuit breakers” that help prevent losses on mortgage-back securities from impacting bank balance sheets.  Canadian lending restrictions and Canada’s default insurance system are two such protections. Here’s a report on the topic from BMO.

Genworth MI Canada Starts Trading

Today is Genworth MI Canada’s first day of trading on the TSX. The firm’s shares were priced at $19 and are currently trading at $18.45. (TSX Quote)

The company is Canada’s second-biggest mortgage default insurer and a spin-off of US-based Genworth Financial.

Genworth Financial Chairman and CEO, Michael D. Fraizer, had this to say : “We'll receive a meaningful level of capital through the transaction and continue to benefit from the earnings associated with our majority ownership position in Genworth MI Canada."

Genworth MI Canada will receive about $97 million of the roughly $753 million IPO proceeds. The company will use the money to pay off its outstanding debt and enhance its capital position.

Genworth’s IPO underwriters have an option to buy 6.7 million more shares by August 6. If that happens, 44% of the company will be in public hands.

Genworth Canada to IPO July 7

Genworth Financial Canada announced the details of its initial public offering today.

Canada’s 2nd largest mortgage default insurer will sell 44.7 million shares at $19 each.  The target issue date is July 7, 2009. Thereafter, Genworth Canada will trade on the TSX under the symbol MIC.

The IPO will line Genworth’s coffers with about $635-$730 million.

More…

Cancellation Fees

We heard from a bank rep today that one or more lenders are considering charging cancellation fees when a client cancels an approval.  (We’re not sure if the fee would be charged to the broker or the borrower.)

Hearing this was both surprising, and unsurprising, at the same time.

It was surprising because some might consider cancellation fees a gutsy move for a lender. 

It wasn’t surprising because this is arguably a logical progression in the trend towards lender efficiency. 

The idea behind a cancellation fee is to recoup underwriting costs and discourage frivolous applications.  Lenders we’ve talked to say it costs them at least $150 to $200 to underwrite a mortgage application. Moreover, cancellations add delays to the system, which disadvantages other customers.

From our own perspective, cancellation fees would be a tough pill to swallow unless the lender’s offerings were clearly superior to the competition.  For example, suppose today’s best 5-year fixed rate was 4.15%.  Then suppose a lender comes along and offers the option of 4.09% (the best rate in the market), on two conditions:

1. If the customer cancels before closing, there is a $250 fee to the customer
2. If the file is declined for obvious reasons (that were clearly stated in the lenders’ guidelines before submission), there is a $150 fee to the broker.

These are just random numbers but the point is this.  Lenders will get creative to gain efficiencies.  Some will likely implement a derivation of the above in the months or years to come.  As long as the client/broker is given the option of saving money, in exchange for helping the lender improve efficiency, the model could be viable.

Pre-Approval Costs

After posting yesterday’s pre-approval story, one reader asked:

Will you undertake to provide your readers with more information regarding the process of hedging?

We surely will. Here’s the gist of it…

Lenders hedge pre-approvals in a variety of ways.  Among them, they may do so by buying listed or over-the-counter bond options (puts), or by short-selling bonds.

The cost of doing this can be massive.  One industry exec we spoke with said it costs his lender $900 to $1,200 to hedge a 120-day rate hold on a $100,000 mortgage.  It’s basically a linear relationship so the costs on a $300,000 mortgage are three times higher.

With pre-approval funding ratios as low as 15%, at some lenders, you can see why these costs are a concern for the industry.  That doesn’t include the human resource and other expenses that apply to underwriting and supporting pre-approvals.

By the way, for whatever reason, bank-branch funding ratios are higher than broker-funding ratios.  If that doesn’t correct itself, it is very possible that the best pre-approval choices will someday be limited to the big banks.  That would really be unfortunate because it would mean far less choice for consumers.

Pre-Approvals: A Dying Breed?

Pre-approvals are something many lenders could do without.  The problem (from a lender’s perspective) is that people get pre-approved and then frequently don’t close.

One bank that recently did away with pre-approvals in the broker channel was rumoured to be losing $20 million a year on them.

Pre-approvals are pretty expensive, and the return for lenders is debateable.  In most cases, less than one-third of pre-approvals actually close.  Meanwhile, the lender is tying up human resources to process the applications, as well as capital to hedge the rates (if rates move adversely, the lender is on the hook, so lenders pay to lock-in the interest rates using derivatives).

In recent weeks, some very big-name lenders have halted pre-approvals--either altogether, or in the broker channel.  Two of the most prominent have been FirstLine (a division of CIBC) and TD.

There are still some good lenders doing pre-approvals but their numbers are dwindling. Among the best is ING.  ING has solid rates, great perks, and they do a full rate look-back (meaning:  if rates fall and then rise again, you automatically get the lowest rate during the pre-approval period).

It’ll be interesting to see what the future holds for pre-approvals.  If we had to guess, more lenders may eventually either:

A)  Eliminate them; or,

B)  Start charging rate premiums (some lenders, for example, already charge 0.10% more for pre-approvals).

We’d love to hear your thoughts and predictions!

Brokers on Lenders Survey

Canadian Mortgage Professional recently surveyed 300 brokers about their view on lenders. The full results will be in CMP Magazine’s July edition.

One of the things brokers ranked were underwriters. According to CMP’s poll, the lenders with the highest scores (out of 5) for underwriters were:

1. First National (Score: 4.22)
2. Home Trust (Score: 3.72)
3. Equitable Trust (Score: 3.68)
4. Street Capital (Score: 3.55)
5. ING Direct (Score: 3.54)

Source: MortgageBrokerNews.ca

Early Payout Ratios

Just when you thought lenders couldn’t come up with any more ratios…

We read this article (click link) in CAAMP’s Mortgage Journal this month.  It talks about how lenders use a variety of metrics to gauge the performance of mortgage brokers.

Two ratios currently in vogue are approval ratios and funding ratios. 

Approval ratios (the percentage of a broker’s applications that get approved) are a useful measure of efficiency.  Brokers with really poor approval ratios take up a lender’s time unnecessarily, and they should be dealt with.

Funding ratios (the percentage of approvals that close) are also based on reasonability—although it’s debatable whether they’re always in the client’s best interests.  Some lenders are also quite unreasonable in their expectations of funding ratios, but that’s another story.

But now, we read about lenders tracking “early payout ratios.”  That’s the percentage of broker-referred mortgages that are terminated by the borrower before their term is up.

The implication is that brokers should be held responsible when clients break their mortgage early—as if we have complete control over it.

It’s true that lenders are best served when borrowers ride out their full term, but penalizing brokers for a client’s decision to refinance (when it wasn’t known in advance to the broker) is ludicrous.

Despite our distaste for this particular measure, there is no disputing the fact that lenders have to make money.  Early payouts affect their ability to do that. 

The story discusses how it takes four years of revenue to pay for all the costs that go into a 5-year fixed mortgage. 

The article also includes this seemingly inconceivable quote: “…all mortgages that pay out early result in a loss for the lender.” 

Wow.  Maybe if lenders are losing this much on early payouts, they should adjust their penalties.  You would think that if a customer chooses a closed mortgage, and breaks his or her contract early, the penalty should be sufficient to bring the lender back to breakeven.

Whatever the case, there are certain lenders out there that are getting a little too ratio-happy.  They should reconsider any and all ratios that penalize brokers for the effects of competition and customer behaviour. 

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Sidebar:  Renewal ratios are yet another broker metric some lenders are tossing around.  There is a quote in the story that states: “Lenders expect to renew 80% of their maturing portfolio of mortgages.” 

Really?  Someone better adjust that statistic because it ain’t gonna happen.  Homeowners today harness the power of the Internet, and the power of choice.  Lender loyalty is not high on their list of concerns. A lender has to earn their business, and the competition is waiting to snatch a lender’s renewing customers faster than you can say “discharge statement.” 

But wait!  How about we claw back brokers’ commissions when a client doesn’t renew!!  Stick it to the broker when the client goes somewhere else for a better deal.  Now that’s brilliant!

ResMor Statement On GM Filing

ResMor Trust, a subsidiary of GMAC Financial Services, says it’s business as usual, despite GM’s bankruptcy filing.

In a press release today, ResMor President/CEO, Tracie Tesser, said, “There are no actions that need to be taken as a result of this filing.”

GMAC Financial Services is a creditor of General Motors Corp. GMAC has not filed for bankruptcy, nor does it intend to, says ResMor.

ResMor Trust Company is a federally regulated trust company focused on providing residential mortgages, mortgage servicing and deposit products through independent brokers.  As of April 3, 2009, it had more than $5 billion of mortgages under administration representing more than 33,000 homeowners.

BMO Sues Top Mortgage Specialist

BMO mortgage specialist, Josephine Tortora, earned a reported $100,000 a month...until she got fired in late 2008. 

This is according to The Vancouver Province newspaper.

BMO reportedly fired Tortora for conspiring with her branch manager, Shenaz Poonja, to extract unwarranted commissions from the bank. 

The lawsuit also claims Tortora and her manager facilitated mortgages based on over-inflated appraisals.

Tortora and Poonja both deny the claims.  Tortora called the suit “untrue, misleading and inflammatory, high-handed, reprehensible and malicious in nature,” while Poonja’s lawyer charged BMO with “lax” lending practices.

None of these claims have been proven.  A court hearing is set for October 2010.

If you’re a bank PR manager, you’ve got to love it when stuff like this gets out.  As intriguing as this tale is, however, it’s equally interesting to hear that BMO mortgage specialists can make near 7 figures.  Maybe this story will help their recruitment efforts.