Mortgage Rates & Mortgage Broker News in Canada

1-on-1 With Hank Cunningham

We have abundant respect for traders who stand the test of time. It’s so incredibly hard to be right more than you’re wrong in the financial markets—that is, right enough that you can generate consistent long-term returns. Hank is one of those people.

We spent a little time with him last week to get his take on rates and the Bank of Canada (BoC).

Here are some of the nuggets from our chat…

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On long-term interest rates…

Hank:  I don’t see much upward pressure on rates—not in the developed world. There’s no inflation to speak of. In fact, inflation continues to recede in most places if anything.

On the European debt crisis…

Hank:  The sovereign debt issue is a major problem, but it’s confined to a part of the globe where it’s not going to have a material impact on the rest of the world. Certainly not from a growth point of view.

On long-term rates one year from now…

Hank:  You’re going to see a flatter yield curve looking out a year. The spread between a 1-year mortgage and a 5-year mortgage is going to be a lot narrower. The yield curve is still steep right now. I think (mortgage) clients are still better off floating than they are fixing.

One of the other things you have to think about is the amount of debt coming due by governments. The U.S. has 40% of its debt maturing in the next three years. They don’t want higher inflation and interest rates.

On inflation risk…

Hank:  Inflation is just under 2% in Canada. In the U.S. it's under 1% actually.

There are 21 central banks with anti-inflation targets that are embedded in their legislation. You know they’re going to raise rates to beat back inflation and demand.  It almost defeats inflation before it starts. If the market sees central bankers acting aggressively to control inflation, the long end of the (yield) curve will come down. It becomes a self-fulfilling prophesy.

The good news is that, if inflation does become a problem, the Bank of Canada will accelerate increases in the overnight rate and dampen demand, which is actually bullish for bonds long-term because investors see that the Bank is going to fight inflation.

The 5-year rate might go up a bit, but the market will get anticipatory (and discount the Bank of Canada’s future rate increases)…and then, longer-term yields should come back down. People tend to underestimate the discounting nature of the market.

On a 2.40% to 2.50% floor in bond yields…

Hank:  That's going to be huge resistance for price—or support for yields—whichever way you want to look at it. I really can’t envision a situation for yields to drop below 2.40% for five years. This is probably as cheap as rates are going to be.

On economists’ forecasts of the Bank of Canada…

Hank:  Economists generally do straight line forecasting. They don’t allow a lot of room for (unexpected) changes in the marketplace. Rate forecasts depend on your view of the world. My view of the world is one of growth with very little inflation. In that scenario there is no need for serious tightening. Market rates will rise if the demand for money rises. The market really acts independently from the Bank of Canada, as you know.

On where we go from here…

Hank:  The BoC has already indicated that rates are going up. It (the hike in June) won’t be the last increase in the Bank rate. You’re going to see a flatter yield curve for sure.

The banks have been funding longer-term mortgages with short-term money. They pay nothing on savings and charge 4% for a mortgage. It’s been easy arbitrage. In 12-18 months that will be over.

In the meantime, people with mortgages will be “forced” to fix at the wrong time, right before rates come back down again. It happens, and it’s going to happen again. We’ve already had one false move in rates.

On going fixed or variable…

Money has been cheap. If people have fear of rates rising, you can fix right now and still have cheap money. I have no problem recommending that. But if you’re playing it close to the chest, I would stay floating right now.

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About Hank:  Hank Cunningham is the Fixed Income Strategist at Odlum Brown. Hank has more than 40 years of experience in fixed income markets. He has been a trader, institutional salesman, portfolio manager, and zero coupon specialist. Since 1988, he has specialized in the retail aspect of the investment business, building and managing three different retail fixed income trading desks for Dean Witter Canada, First Marathon Securities, and Blackmont Capital.

Hank is the author of "In Your Best Interest: the Ultimate Guide to the Canadian Bond Market" and a frequent guest on the Business News Network. (You can view his latest June 7 appearance by clicking here.)

The New Rules of Rental Financing, With Peter Kinch

Rental property financing will change dramatically on April 19.

Here are the new rental mortgage rules, as decreed by the federal government.

For a take on these changes we spoke with mortgage planner, speaker, and author, Peter Kinch. Peter was the top Canadian broker in 2008 by volume, according to Canadian Mortgage Professional Magazine, and is a major participant in the rental financing market.

See --> Peter Kinch Interview…

Q&A With Invis’s Bryan Devries

After a long and successful tenure at mortgage lender, MCAP, Bryan Devries took a big leap over to the broker side of the business.

In November, Bryan was named Executive Vice President, Sales and Operations, at Invis and Mortgage Intelligence. 

We recently caught up with Bryan to chat about lenders, banks, and brokers.

Q&A - Bryan Devries

Inside CMHC

CMHC is the biggest mortgage default insurer in Canada, and one of Canada’s biggest companies in general.

The federal government mandates that CMHC create policies to support Canada’s housing market. Yet, with home prices getting lofty, these very policies have been under the media microscope.

Most journalists analyze the default insurance market with the best of intentions. Due to a lack of publicly available facts, however, it’s become more common for the media to mischaracterize certain policies.  Recent stories from the National Post and the Globe made industry claims that left readers with a variety of unanswered questions. It therefore seemed logical (to us) to contact CMHC directly, pose these questions, and clarify from the source.

The primary goal was to learn about what happens behind the scenes of mortgage insurance, and share what we learned.  In the end, the information that follows gave us a much better sense for how insurer policies impact Canada’s housing market. 

Along the way, we were fortunate enough to speak with Pierre Serré.  Pierre is CMHC's Vice-President of Insurance Products and Business Development.  Below you’ll find the interview we did with Pierre, sprinkled with “side notes” (the stuff in italics) that we collected throughout our research.

Inside CMHC…

Q&A With John Vogel

If you’re a student of the industry, it’s fun to learn about the inner workings of the mortgage business.  So, we try to chat with different people and get different perspectives.

Recently, we had our first chance to speak with John Vogel. John is Chairman of MyNext Mortgage, our firm’s (Mortgage Architects’) proprietary lender.

John has a somewhat unique view on the world thanks to his background in the fixed income markets. Prior to helping launch MyNext Mortgage, John created, sold, and traded various fixed income products for over 20 years. He’s worked on the fixed income desks at major Canadian and international banks in New York, Toronto and London, England.

In this first of a two-part interview, we speak with John about lending spreads, interest rate risk and more....

John Vogel Interview

A Lender’s View of the World

What’s on the minds of mortgage lenders these days?

Four of them sounded off at CAAMP’s lender panel last Monday.

The panel featured:

• Boris Bozic, President of Merix Financial
• Stephen Smith, Chairman & President of First National
• Ivan Wahl, Chairman & CEO of Xceed Mortgage
• John Webster, President of Scotia Mortgage Services

Here’s what they had to say… (Our thoughts in italics.)

On Canada’s mortgage market:

• Liquidity “was non-existent” for lenders a year ago, said John Webster, but it didn’t last as long as many predicted.
• Lenders expected a 30-35% drop in mortgage originations this year. Stephen Smith says: “It hasn’t happened.”
  
  (This year definitely exceeded expectations, but partly at the expense of 2010 volume. Many people accelerated their home buying and refinancing to this year. After rates eventually do rise, volume could fall noticeably.)
  
• “We were going down a slippery slope. Some of our products were getting pretty exotic.  Time saved us.” – Boris Bozic

On borrowers’ mindsets:

• For today’s home buyers, “dollar amount doesn’t matter anymore,” says Bozic.  Instead they’re concerned about, “What is my carrying cost?”

On advising homeowners:

• With the potential for rising rates, mortgage brokers should counsel borrowers to leave “a little wiggle room” with their debt ratios. – Wahl

On the risk of rates rising:

• “Refinance risk is certainly nothing I am concerned with,” said Smith. He believes, in 5 years, people will be earning more money. Moreover, debt ratio standards and personal covenants are being vigorously enforced, Smith said.

On lender incentives to underwrite prudently:

• “Canadian lenders retain risk after they underwrite a mortgage,” said Smith. Therefore, unlike in the U.S. before the crisis, Canadian lenders have incentive to lend wisely.
• “Delinquencies have not been a big part of the industry.” – Webster

On the future of Canada’s broker industry:

• Four banks in Australia have 94% market share with brokers, according to Bozic. When non-bank competitors disappeared, broker compensation fell 40%.
• “We've seen a decrease in broker share because of the banks’ pricing policies.” - Bozic
• “We're going to see bank sales channels compete directly on price....Banks will use the strength of their balance sheets to gain back market share.” – Smith
• Webster disagreed. He said consumers want service when they need it, not during banks hours. "I am quite confident the broker channel will continue to gain market share."
• Smith agreed that broker share would rise in time, saying, “Mortgage brokers provide a phenomenal value proposition…In 10 years we see the mortgage broker share up to 70%.”
  
  (After watching banks retaliate these past few quarters, that seems very optimistic.)
  
• For younger people, mortgage brokers will be the "first call." – Smith
  
  (Industry stats bear this out. First-time homebuyers use brokers far more than the average homeowner. They have far less loyalty to banks and far more loyalty to quick service and “the best deal.”)
  
• The “shelf life is expiring” for volume bonus, said Bozic. He thinks broker bonuses will soon be based on portfolio performance.
  
  (At the time he said it, it was almost like Bozic was throwing out a trial balloon on this point. The truth is, it wasn’t the first time we’ve heard that traditional volume bonuses are “dead.”)

On broker/lender relationships:

• “Brokers can no longer do business with any lender they want,” said Wahl. His firm, Xceed, prefers to do business with the top 20% of brokers. 
  
  (How many times have we heard that lately. [Rhetorical question]  For you bottom 80%, thanks for coming out. Lenders are saying [indirectly]:  “Go find a super-agent to work under.”)
  
• Scotia wants the top 20% too. Webster says: “I don't think you have to be all things to all people.”
• To this, Bozic retorted: “It appears we're all after the same 750 brokers across the country. There is a subset of brokers who are being left out.” 
  
  (You can say that again…)
  
• Brokers feel "direct access to lenders is a problem,” continued Bozic.
  
  (This problem can’t be understated.  With all the status programs and “preferred lists,” lenders are handicapping a broker’s main advantage: choice. New or lower volume brokers are forced to funnel deal volume through big agents, or suffer with subpar pricing and service.)
  
• Smith drew loud applause when he said First National opens its doors to all brokers.  “Some of our best brokers started with us 3 years ago sending us one deal.”
  
  (God bless Stephen Smith. Lenders want efficiencies, and that’s understandable, but cutting off skilled brokers who don’t succumb to volume minimums is not in the industry’s long-term interests.)
  
• “We want mortgage brokers who do what they say, return calls, never lie on an application, and check things out seven ways to Sunday. There are too many people who take an easy way out (and don't fully disclose things on apps).” – Wahl
• Xceed, like more and more lenders, closely watches approval rates, funding ratios, and default ratios.

On capital sources:

• In the future, “the Canada Mortgage Bond is not going to be as attractive as banks’ balance sheets as a source of mortgage funding.” – Smith
• Nowadays, Canada’s capital markets are “awash with liquidity,” noted Webster. However, “for a lender going forward, you either need a balance sheet, or need to rent one."

(In other words, relying on traditional securitization avenues to raise funds (like the Canada Mortgage Bond market) may not provide lenders with cheap enough capital to compete. It will be interesting to see if non-deposit-taking lenders, like Street Capital, MyNext Mortgage [our in-house lender], and Merix, can diversify their funding sources.)

Moderator and financial expert, Michael Campbell, said: "The number one financial issue people have is with their mortgage."

If brokers are to fill that need successfully, lenders must open their doors a little wider—especially for low-volume brokers who send up good quality deals and don’t waste lender reps’ time.

The broker industry has heard a lot of dialog lately about what lenders want, and what lenders “need.”  Let’s also ensure we pay close attention to what clients and brokers need, because a successful industry depends on more than the top 750 brokers.

BNN Interview

CMT’s, Robert McLister, spoke with BNN’s Andrew Bell yesterday. Topics included bubbles, rate strategy, 35-year amortizations, and more…

Video

Inside the Tax Deductible Mortgage Plan (TDMP)

For several years, the Smith Manoeuvre has been used to convert non-deductible mortgage debt to deductible investment debt. Lots of twists on this strategy have evolved and one of the more successful ones comes from a company called TDMP.com.

We spoke with Sandy Aitken, President of TDMP, about how TDMP works and what drives his success in this market.

Here is that interview: 

Inside the Tax Deductible Mortgage Plan (TDMP)

New Bankruptcy & Consumer Proposal Laws

Canada’s bankruptcy and consumer proposal laws are changing today.

Among other things:

• It is becoming more onerous to file a bankruptcy if a consumer has "surplus income” or is a 2nd time bankrupt
• Automatic discharge after 9 months will no longer apply for those with surplus income
• The maximum for simple (aka., “Division 2”) consumer proposals has been increased to $250,000 from $75,000. That is apart from any principal mortgage. 

These changes are meant, in part, to encourage debtors to make proposals to creditors as opposed to going bankrupt.

From a mortgage perspective, one obvious implication is that people with surplus income will need to wait longer to get a mortgage after bankruptcy.

We had an opportunity to speak with Eric Putnam, a Senior Financial Coach with BDO New Beginnings, for details on how the new law will play out.  Eric is an expert on insolvency rules and regularly advises Canadians coast-to-coast on how to deal with debt and improve their finances.

Here is that interview:  New Bankruptcy & Consumer Proposal Law

ING’s New Rate Holds

ING has launched one of the most helpful broker tools in a long time.

It’s essentially a website where brokers can enter simple information about a borrower—including name, mortgage amount, email address, etc.—and get an instant rate hold for that person. 

(Normally, brokers must submit a full application to a lender to hold a mortgage rate.)

The technology is the first of its kind, as far as we know.  It is also extremely easy for brokers to use.

We spoke with Martin Beaudry, Vice President, Retail Lending at ING DIRECT for more insight into ING’s new Rate Hold, as well as ING’s pre-approval strategy in general…

CMT: Some lenders have totally eliminated pre-approvals because they're viewed as too expensive, have poor closing ratios, and subject the lender to adverse selection (i.e. whereby pre-approvals only fund if rates go up). ING, however, has embraced pre-approvals and rate holds.  From a purely numbers and business standpoint, why is that?    

Martin: Very simply, for 3 reasons:  One, Rate Holds are primarily designed for people who generally have a good knowledge of their ability to qualify for a mortgage. Guaranteeing a rate allows them to shop around for their home while ensuring they have the best rate up to 120 days in advance of their home's closing date. They make up a significant portion of our Clients. Two, ING DIRECT has been successful in converting these Rate Holds into funded mortgages.  The automatic Rate Hold process allows ING DIRECT to do this cost-effectively. Three, as a consumer advocate, helping Canadians save on their mortgages by offering a Rate Hold that secures the best rate within 120 days is an important part of the mortgage ‘experience.’

CMT: Given this new technology and ING's excellent rate-lookback policy, it appears ING is consciously trying to position itself as the leader in rate holds and pre-approvals.  Is that the case?

Martin:  Our Rate Hold and Preapproval offers add a lot of value by making the process easy and by empowering customers to shop around for their home. We feel everyone should take advantage of these guarantees. This is one more way we can assist customers in saving their money. 

CMT:  Rate holds are obviously much less expensive because they don't need to be underwritten.  Is there a chance that ING may someday go entirely to an automated rate hold system and eliminate manual pre-approvals?  Or does ING consider full pre-approvals essential to its business model?  

Martin:  Pre-approvals require more time because they provide customers the mortgage amount they qualify for based on the information provided, while guaranteeing a rate for up to 120 days. People with limited or no experience in dealing with mortgages tend to prefer pre-approvals.  We have also been successful in converting these applications into funded mortgages. Therefore, we plan on continuing to offer pre-approvals for the foreseeable future.

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Sidebar:  Here are a few other points of note about ING pre-approvals and rate holds…

• ING’s pre-approvals are among the best in the business because of their “look-back” feature.  This benefit ensures all customers receive the lowest rate ING offers during each customer’s pre-approval period—even if rates drop and then go back up.
• ING rate holds and pre-approvals each enable borrowers to lock in rates for up to 120 days.
• All ING Rate Hold customers receive a rate hold certificate automatically by email—a handy, time-saving feature.

Alt. Lending & Home Trust

We had a nice chat with Pino Decina last week. Pino is Senior Vice President of Mortgage Lending at Home Trust. 

We talked about what’s new with alternative lending at Home Trust, and the subprime market in general.

About 12 months ago, Home Trust started trimming back its subprime business outside of Ontario. The company made this decision as real estate markets across the country began to weaken. It stuck it out in Ontario, however, because that’s where Home Trust started, and where it feels most knowledgeable and comfortable about real estate.

“There is danger in alternative lending when you’re not experts in the real estate,” Pino said. “We’re a niche lender and we need to know our real estate.”

Pino said that gauging property values has become tougher in the last year, especially in certain markets out west.  “If you lend against 80% of a property’s value, you need to know you’re 80% of the right number,” he said.

He noted that Home’s focus lately has shifted to it’s insured product line-up. “Our ‘A’ products have exploded,” he says. 

On the other hand, Pino believes Home Trust will re-enter the western markets with alternative lending at some point. “There will be a time in the near future,” he says. “You can kind of see the dust settling now.”

“I think alternative lending is a very attractive business.  The problem becomes the issue of rate. There are a lot more costs involved today (with non-traditional lending) versus one year ago.”

That’s made “B” lending spreads tighten significantly. 

Yet, Pino is optimistic: “With a proper spread it will become a lot more attractive once again.”

On the topic of subprime rates, Pino noted that the last few years have been really tough. With the credit crisis, it became a matter of “what can be sold in the marketplace. The rates lenders were charging didn’t cover their costs, so a lot of people exited,” he said.

Pino believes consumer education may be needed as the subprime market re-evolves. “Educating consumers is key,” he says. As we come out of this tight lending environment, “B” customers will not be able to expect “A” rates. People will have to understand how alternative lending products are priced he feels. “Alternative products are a short-term fix.”  They’re meant “for 1-2 years, to get people back on their feet.”

After talking with Pino, we got the sense that, in the next year or so, Home Trust may start aggressively reasserting itself in the alternative lending market.  That’s the place it made it’s mark, and there will probably be plenty of opportunities once things revert to normal.

“We’re starting to see stabilization in the market," Pino says. “The ‘B’ side is a core business and you’ll start to see us bring back old products.”

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More About Home Trust

Home Trust has been a primary Canadian lender for borrowers who don’t have traditional credit backgrounds. Home Trust and its predecessors began lending in Canada for 32 years ago. It’s now a wholly owned subsidiary of Home Capital Group Inc, traded on the TSX under symbol: HCG.

Globe & Mail Interview

The Globe’s Rob Carrick has been running an interesting series of 3-minute financial interviews. He has a really cool rapid-fire, bullet-point format. I had a chance to speak with him last week about rates, etc.  Video

Front-Loaded Variables With Martin Shao

With the Bank of Canada “promising” a low overnight rate until 2010, many homeowners are considering taking out variable-rate mortgages for a year and then locking in.

We spoke with Martin Shao, President of Valueland Mortgages, about how front-loaded variables fit into this picture.  Our chat follows here…

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CMT:  Martin, Thanks for being with us today. I noticed Valueland now offers a front-loaded variable at prime + 0.10%. Why is a front-loaded variable a good option in this market?

Martin Shao:  According to our central bank’s last monetary policy, Canada's overnight lending rate is expected to remain at a low level until mid next year. As a result, variable rates will remain low for about a year or so.

However, we expect elevated interest rates towards next summer.  People with variable-rate mortgages can then choose to convert into a fixed rate.

Variable-rate discounts after that conversion period do not provide much benefit.

CMT:  Okay, so in other words, a front-loaded variable packs the greatest discount in the first year. Given this, would you recommend that most well-qualified borrowers with sufficient equity choose a front-loaded variable, or a discounted fixed rate?

Martin Shao:  My top recommendation is still for a low discounted fixed-rate mortgage. However, for those who would like to take some risk and save in the first year (when their mortgage amount is the most), front-loaded variables provide more savings up front.

CMT:  What risk is there, over the next year, in choosing a front-loaded variable over a fixed-rate?

Martin Shao:  The risks are associated with the general Canadian economy. If the economy turns unexpectedly better before next summer, variable rate takers would see a negative impact on their mortgage payments.

The second risk is the uncertainty of fixed rates when a variable-rate borrower wants to lock in his or her mortgage rate.

CMT:  Last year, there were several lenders promoting front-loaded variables.  This year there are almost none.  Do you expect lenders will re-launch front-loaded variables anytime soon?

Martin Shao:  With short-term rates stabilizing, lenders may re-launch this type of product in the near future to differentiate themselves. Even without lenders re-launching them, Valueland has started offering front-loaded mortgages in a different form.

CMT:  That’s interesting that you’ve created your own version. Who would you say these products are best suited for?

Martin Shao:  The deep discounted rate for the first year would be best suited for those who are almost 100% sure they will convert their variable rate to a fixed rate mortgage.

CMT:  Excellent. Thanks again for the perspectives Martin.

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Martin Shao is founder of Valueland Mortgages. Valueland has a highly successful Internet brokerage model and is based out of Markham, Ontario. Before he became a mortgage broker, Martin had an extensive background in financial services. He holds a B.Sc. and a Master’s degree in financial information management and has been one of ING Direct's and INALCO’s top-performing brokers.

BNN Segment

Business News Network’s Kim Parlee and Andrew Bell talk about how to get the best mortgage deal, with our very own, Rob McLister. 

Video Link

Fixed or Variable? Updated Perspectives

When deciding between a fixed or variable rate, people often turn to the most quoted research on the topic: that done by Dr. Moshe Milevsky.

Dr. Milevsky found that 77%-90% of the time people pay less interest over the long-run by choosing a variable-rate mortgage.  (See CMT’s April 2008 story entitled Fixed or Variable Mortgages – Research Update)

But today is a new day.  A lot of people think things are “different this time.”  So we took the opportunity to speak with Dr. Milevsky for a current view of his previous findings.  It was a highly informative and reinforcing discussion that we’d like to share here.

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On How Today’s Economy and Market Impacts His Research

• "An environment like we're seeing today brings into question any type of historical study," says Dr. Milevsky.
• He notes that several things have changed since his original report in 2001:
  • The original study used prime rate as the proxy for variable rates. However, “You cannot get prime today,” he says. “The premium (of fixed rates over variable rates) has disappeared. That makes a difference.” 
  • Naturally, as the differential between fixed and variable rates decreases, the odds of a borrower doing better in a fixed rate increases.
  • Falling home prices, reduced availability of credit, and employment instability also add material risks to the equation.  Today’s mortgagors must consider these added risks carefully when evaluating a variable rate.  Dr. Milevsky believes this applies especially to those with small down payments, like 5%.

On The Effect of Historically Low Interest Rates

• A lot of people think rates can’t go much lower. However, Dr. Milevsky suggests considering this as a possibility nonetheless.  "Look,” he says. “I never would have said this three years ago, but prime is at 3%. Why can't it go to 1%?"
• Realistically, however, the odds of rates falling much further have declined, he says.
• On the other hand, Dr. Milevsky has never strayed from one central tenet.  "It’s not about speculating where interest rates are going,” he believes.  “It’s about risk management.”
• “In the original study we never said that floating your mortgage is better 100% of the time." There have been “periods of inversion” where fixed rates were actually lower than variable rates.  Indeed, the original study found that 10-12% of the time it pays to be in a fixed rate, “and this might be one of them" he says.
• Notwithstanding the above, Dr. Milevsky still maintains that "over long periods of time the odds favor a variable.”

On: Comparing Short and Long Mortgage Terms

• When comparing a short term (like a 1-year or 3-year) to a longer term (like a 5-year), Dr. Milevsky says calculating the “break-even rate” provides a helpful metric.
• The break-even rate is the hypothetical interest rate whereby a borrower will be “indifferent” between a shorter and a longer mortgage term.
• For example, if one is comparing a 3-year mortgage to a 5-year mortgage, Dr. Milevsky asks: “What is the number in 3 years that will make me regret not having gone with the 5 year?"
• To put it another way, think of two individuals:
• One locking into a 5-year fixed
• One locking into a 3-year fixed, followed by a 2-year fixed.

You can create an amortization schedule for each scenario, he says, and then solve for the interest rate that would make the total interest paid equivalent in each case.  That is the “break-even rate.”  If you feel interest rates will be above the break-even rate in three years, then it may make sense to consider the 5-year fixed instead.

On What to Look for in a Mortgage Today

• “As we’ve said before, people should strongly consider mortgages that are part fixed and part floating,” says Dr. Milevsky. Such mortgages are called hybrids, and they’re designed to offer interest-rate diversification. Diversification benefits borrowers just like it benefits investors who buy portfolios of stocks.
• Also worth considering are “all-in-one” accounts, which roll your mortgage and other debts into one low-rate loan.  Dr. Milevsky says the benefits of these accounts “compound over time” and are “larger than you’d expect.” He did a study in 2005 that supports this. Here is the link.
• The market’s current 3-year fixed-rate promotions might also have merit.  “If someone is looking at getting a 3-year fixed there is no way I can say to someone don't lock in for 3 years, especially if they have a high ratio mortgage.” With a rate of 3.75%, 3-year fixed rates are actually below most variable-rate mortgages.
• In general, “if you have a lot of assets, I would go with the lowest possible rate,” he says. That’s true whether it’s a fixed rate or a variable rate.
• However, folks with a small amount of equity (like many first-time homebuyers), or those with low or unstable income, should focus on “locking in at a low fixed rate.”

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Dr. Milevsky is an Associate Professor of Finance at York University’s Schulich School of Business, Executive Director of The Individual Finance and Insurance Decisions Centre, and author of the mortgage industry’s preeminent research on fixed and variable interest rates.

Dominion Lending – A Chat with Gary Mauris

Dominion Lending is one of the fastest growing mortgage brokerages in Canada. It opened its doors in January 2006 and flew under the radar for about 18 months before exploding onto the scene. Dominion is now on track to close a very respectable $7 billion in mortgage volume in 2008, and has its sights on the #1 broker volume ranking in 2009.

We recently had a moment to chat with its president Gary Mauris. The interview yielded some rather interesting observations about Dominion Lending, as well as market-wide developments.

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CMT: Thanks for being with us Gary. First off, I’d like to start by talking about Dominion itself. You’ve experienced rapid growth with about 1200 agents now across the country.  What benefits do clients get at Dominion that they might not get at a bank?

Gary: DLC brokers have access to virtually all the mortgage products from every lender in Canada. That ensures our clients have access to the very best mortgage products for their own situation.

Also, unlike most bankers, DLC agents are licensed in their originating Province and have completed the [mortgage agent] education requirements.

CMT: How comfortable do you think Canadians are becoming with arranging mortgages over the Internet?

Gary: We believe that the vast majority of Canadians begin their search for mortgage products on the Internet. The only people using the telephone book these days are seniors. It is incredibly important for agents to become as web savvy/tech savvy as possible to help them accelerate their careers in today’s market. DLC has the ultimate solution, a tech friendly company supported by 170 bricks and mortar locations, so that after the consumer has investigated the best solution they can go and meet an agent face to face. Every DLC agent in Canada has their own fully functioning website with streaming video, rate updates and a built in Customer Relation Management that we provide at no charge.

CMT: How important is the Internet to Dominion's business plan?

Gary: The Internet will continue to be a very large part of the future focus for DLC and our agents. Currently head office is completing our EMP (Elevated Marketing Platform) this platform gives every agent in Canada access to their own website for updates, press releases, easy link access, loading instant video footage and a myriad of other easy-to-use technology advantages.

DLC head office also advertises via Google Adwords and several other web portals to drive business back to our agents.

CMT: How do you feel the end of insured 100% financing and 40-year amortizations will affect brokers' volumes in 2009?

Gary: The loss of the 40 year amortization will not substantially affect our industry as most customers already qualify for mortgages with lesser amortizations.

The loss of the 100% mortgage will definitely have an impact, however, and we feel the changes were announced hastily. Canada’s default rate on subprime business was less than the US default rate on their “A” / prime mortgage business. There are thousands of Canadians who have the income to support the 100% mortgage product. Yet they struggle to amass the necessary down payment to enter the housing market. This move has dashed the hopes of thousands of Canadians who will now have to look far into the future before they realize the joy of home ownership.

CMT: What trends do you foresee materializing in Canada's subprime market over the next 12 months?

Gary: We believe we will begin to see many lenders starting to reenter the subprime space within the next 12 months. Our lending guidelines and policies are distinctively different than in the US. The sudden withdrawal in the Canadian market was reactionary and was not a reflection of Canadian foreclosures or unmanageable default ratios.

CMT: Do you feel there is any threat to mortgages becoming commoditized as consumers focus more and more on rate?  Or do you think consumers will start putting more value in the services of mortgage brokers and less on rate?

Gary: We do not think our industry runs the risk of becoming commoditized. Obviously we have to remain competitive when it comes to rate but consumers value time savings, convenience, expertise, flexibility, and the ability to shop the rates and products from all the lenders.

CMT: From a mortgage agent's perspective, what unique tools does Dominion offer to help an agent's business?

Gary: Among other things, we offer equipment leasing, a national advertising fund, a proprietary line of mortgage products, a free CRM system, and extensive support. In addition, we have more templates, tools, and training available than anyone else.

CMT: Do you see any threat to the franchise model from brokerages that charge agents a flat monthly desk fee?

Gary: Our franchise model is based on a 5% fee to head office. We are not threatened by flat-fee/discount models. Ask yourself, what happened to the flat fee/ discount model real-estate companies? Do any still really exist? The two most expensive Realty companies to work for have a commanding market share, REMAX and ROYAL LEPAGE. If people were only concerned with the cheapest most inexpensive model, we’d all be driving Hyundais.

We believe that we have to be very competitive with our agents and owners and very transparent. All agents are paid top-tier volume bonus, all of their personal volume bonus, and lender incentives. We provide our agents with the AUTOPILOT tools to keep in touch with their friends, family, past, present and future customers automatically and give them more brand awareness and confidence than any other company in the country. Today, DLC agents using our CRM system (at no cost) are averaging between one and two extra mortgages per month simply by keeping in touch with their sphere of influence a minimum of 12 times per year. Discount models cannot afford to provide these services and will struggle to exist in the years to come.

So tell me, what’s more important, getting an extra 5 basis points per deal or completing one or two extra mortgages per month?

CMT: Dominion is investing heavily in television and print ads.  What kind of return are you seeing from this investment? 

Gary: We believe in the value of building a brand, especially in the financial service sector. Our budget for advertising over the next 12 months is well over 2 million dollars, primarily directed towards television advertising. From September 2008 to September 2009 our base buy of television advertising will make more than 140 million viewer impressions via more than 7300 commercials across Canada.

Our advertising campaign was developed to make DLC top of mind with the consumer and have the consumer recognize our name when talking to our agents. DLC has more name awareness and familiarity than most other mortgage companies in Canada.  Whether the customer thinks our name is familiar because of RBC Dominion, the Dominion of Canada, Toronto Dominion, or Dominion Bond Rating, customers immediately recognize our name and believe we have been around forever. The response to our network has been amazing and all leads are given to our agents.

CMT: Agents sometimes question the effectiveness of print and TV advertising.  How are you able to measure the effectiveness of Dominion's campaigns so you can be confident they are paying off?

Gary: Our offices are getting more walk in than ever before and our agents are finding the consumer is choosing them when they are talking with more than one agent. Most people recognize our name as familiar and it automatically builds trust, confidence and security to the consumer when choosing a mortgage.

CMT: Dominion recently launched DLC Leasing, an equipment leasing division.  How does this help clients and provide an ancillary income stream to Dominion agents?

Gary: Many clients come to us to refinance their mortgage and grow their business. We can now offer this alternative financing source that is up to 100% tax deductible, does not affect their borrowing power, and does not force them to refinance their existing mortgage.

31% of existing customers are already in business for themselves. Why not offer them equipment leasing and earn up to 1000 basis points per deal? A $20,000 lease pays gross fees of $2,000 to the agent.  Our agents are actually using this service to help them close more mortgages.

CMT: Gary, these are intriguing insights. Thanks very much.

Hank Cunningham on the Credit and Mortgage Markets

Many folks are aware that mortgage rates are influenced by the bond market, but not everyone can explain how that relationship actually works. 

To break it down, we took an opportunity to speak with Hank Cunningham.  Hank is one of Canada's true credit market experts.  Hank is widely quoted in the media, is a frequent guest on BNN, and is author of "In Your Best Interest," a guide to the Canadian bond market. Hank also hosts of the popular fixed income website InYourBestInterest.ca.

********************CMT:  Hank, thanks so much for joining us. We'd like to start by talking about bonds and fixed mortgage rates.  A lot of people know that the 5-year bond influences fixed mortgage rates, but what actually causes them to be related?

Hank:  Canada's mortgage market is dominated by long-term mortgages whose rates are reset every 5 years. The lending institutions are therefore constantly monitoring the yield on five-year Canadian bonds to know the base risk-free rate (and help them price their mortgages).

Lenders may also use 5-year bonds to hedge. For example, they'll sometimes use the 5-year Canada to lock in a certain spread based on their forward commitments and their own rate views. If they didn't do this, and rates were to rise before their mortgage commitments were funded, financial institutions would see their spreads (profit) narrow or disappear.

CMT:  Ok. What about variable mortgage rates? While fixed rates are influenced by bond yields, variables are affected by bankers' acceptance yields. How does that relationship work?

Hank:  Bankers' Acceptances (BAs) fluctuate with Treasury Bill yields and are a valuable reference point for pricing floating rate mortgages.  They may also be used (by lenders) for hedging variable-rate mortgage commitments.

CMT:  Where can people monitor bankers' acceptance yields?

Hank:  One can find BAs in the Financial Post--in the Bond Yields and Rates section--and from one's advisor. You can also visit my website www.inyourbestinterest.ca and find BA rates in the Daily Fixed Income snapshot in the learning centre.  Live Treasury Bill yields are available at www.canadianfixedincome.ca.

CMT:  OK, on a slightly different note, I've heard you mention that the 2-year bond can be a useful indicator.  Is it possible to use the 2-year bond to help predict, for example, whether the Bank of Canada (BoC) will raise or lower rates?

Hank:  Yes. The two-year is, in my opinion, the most useful gauge. The Bank of Canada has little influence beyond the 3-month term. The market uses the 2-year for a variety of reasons, one of which is to gauge which way the Bank of Canada is going with rates. As you will see, the two-year yield moves below the Bank Rate before the bank eases and stays below while the period of monetary ease lasts, but begins to turn up and moves through the bank rate when the market perceives tightening. It is very reliable.

                     Chart courtesy of InYourBestInterest.ca (click to enlarge)

CMT:  What about Bankers' Acceptance (BAX) futures? How are they used to gauge Bank of Canada rate expectations?

Hank:  Market participants move the yields on the BAX futures to levels reflecting where they think the Bank rate will be at different maturity points.

CMT:  Are BA futures any more or less worthwhile as a BoC indicator than the 2-year bond?

Hank:  In my opinion, they are less worthwhile as they tend to get jerked around more by short-term sentiment, while the two year is out of the immediate range of the Bank of Canada. So while BAX futures represent the market consensus, in my view, the two year is a much more reliable indicator.

CMT:  The press sometimes quotes the "probability" of a BoC rate hike/cut, based on BA futures yields.  Here is a recent example:  "BAX contracts suggest a 68% probability the central bank will lower rates by a quarter-point at the Sept. 3 meeting."  How can BA futures be used to calculate this probability?

Hank:  If the Bank Rate is 2.00%, spot BAs are 2.25%, and 3-month BAX futures are 2.40%, that would imply that the market believes that there is a 60% chance of a Bank Rate hike. 

If the market was 100% convinced that the bank rate was going up 25 basis points, the BAX futures would be at 2.5%.

CMT:  Do you think mortgage professionals have any chance of accurately and consistently predicting mortgage rates 6-months or 1-year out?  Or is the market simply too random as most academics suggest.

Hank:  No more than any other market participants. No one has ever consistently forecasted interest rate movements. However, the yield curve is a great predictor and market professionals cannot only have a good idea where 6 month and one year yields are going, but they can also hedge their (future) commitments.

CMT:  For those unfamiliar with yield curves, how are they used?

Hank:  The yield curve basically tells you where rates will be. In other words, current forward rates provide the best forecast of future spot interest rates.  (Editor Note:  Here's a good overview of yield curves from the Globe & Mail.)

CMT:  Lastly, a quick question about Canadian Mortgage Bonds.  CMBs are fully backed by the government, yet always entail a premium over regular government bonds.  Is there any reason someone would be better off in a vanilla government bond than a Canadian Mortgage Bond?

Hank:  The current mortgage rate environment is dominated by the credit crunch situation. Despite monetary ease by the Fed and the Bank of Canada, mortgage rates have remained stubbornly high and will continue to do so for some time as there is scant evidence of any improvement in lenders' confidence.

The CMBs are a screaming bargain. Even at their normal 15 basis points over Canada's they are good value but when the credit crunch hit, ALL credits were affected. CMBs blew out to 65 over and are now in the mid 40's (basis points above Canadian government bonds), still a great deal for anyone.

One day the Government will raise the money directly and give the proceeds to Canada Housing. This would save us taxpayers a lot of money. Also provincial yields have blown out too and are very attractive.

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More About Hank

Hank Cunningham has been a fixture on Bay Street for over 40 years.  In that time, he's seen the credit markets from the perspective of a global bond trader at CIBC, a portfolio manager at Investors Group, and Head of Fixed Income at Blackmont Capital--with stops in between.  Hank is currently working on the second edition of his book In Your Best Interest, due to hit stores in early 2009. This next iteration will greatly expand on the current book and offer various bond market strategies accessible to the average investor.