Mortgage Bytes


  • Subprime-mortgages-in-Canada Canada’s mortgage credit slump started just over a year ago, when the bottom fell out of the ABCP market.  Since that time, the AMBA says 18 lenders have pulled out of the Canadian mortgage industry.  Dozens of others have cut products and notably tightened lending standards.  Based on the estimates we heard from lender executives last fall, the credit markets have taken longer than expected to revert to normal.  Some in our industry now think it could be next spring or longer before credit loosens up for subprime borrowers.
  • “The official Alberta Mortgage Brokers Association’s position [regarding the federal government’s new mortgage restrictions] is that the market should be allowed to function on its own with very limited government involvement,” says AMBA’s Frank Hickey. AMBA suggests the new rules will hurt housing demand and may lead to a “crisis of confidence in the real estate and mortgage markets.”
  • A comment from a Real Estate Talks visitor on the Smith Manoeuvre:  “…how does that work if your property drops in value, say 10%, and your investment makes 5%, and you are paying 6.5% on the loan, which goes up to 8%? There’s better ways to die broke.” We thought we’d post this opinion because it encapsulates the short-term risk of the strategy and emphasizes the importance of a long-term time horizon.

Interest Rates

  • mortgage-rates Does anyone really know where rates are going?  Not if you listen to the big economists.  The contrasting opinions that follow illustrate this.  Invis’s Gary Siegle says, “If trained economists can’t agree on where interest rates are going, how could the average consumer do so?”
  • CIBC is looking for a 1% hike in prime rate by September 2009.
  • Counterpoint: “We think the downside risks to Canadian growth are mounting and the pressures on inflation are ebbing gradually and that should give the Bank of Canada room to cut by half a point.” — Scotiabank, via CEP
  • Counter-counterpoint:  “A weaker CAD removes an important factor that had helped keep Canadian inflationary pressures under control…With monetary policy already stimulative, the [Bank of Canada] is unlikely to corroborate market expectations of at least one rate cut by year end.” — RBC strategist David Watt, via CEP
  • “The bond market isn’t fully braced for what lies beyond that in 2009—a fairly aggressive rate hike cycle that will be needed to ward off the spillover from food/energy prices into core inflation.” — CIBC World Markets
  • “Today, prime has flattened and is poised to go up — It’s simply a matter of not if, but when and how much.  So now might be a good time to look at locking in.” — The Mortgage Centre’s Peter Kinch
  • “Assuming commodity prices stabilize around where they are, or at somewhat lower levels, the peak headline inflation numbers should begin to look a little bit better next year.” — Scotiabank economist Adrienne Warren, via Financial Post
  • The Bank of Canada will ponder 2nd quarter GDP on Thursday.  It’s the last big piece of economic data before the BoC’s interest rate meeting September 3.
  • 5-year bonds, which drive fixed mortgage rates, crept higher last week. They’re currently yielding 3.17%.
    • The average yield in the last year has been 3.57%
    • The high has been 4.43% (on October 9, 2007)
    • The low was 2.74% (on March 17, 2008)Canadian-Bond-Yields

Housing Market

  • Desjardins says housing affordability has increased 10% in the last two quarters thanks to falling home prices and mortgage rates.  “Affordability” is the ratio of disposable income to the income needed to qualify for the average Canadian mortgage.  The all-time low in affordability was in 1990.
  • Edmonton’s Real Estate Board says don’t panic!


  • A chart of inflation since 1990 — Courtesy of RBC (The core inflation figure is displayed)
  • Off-the-Wall Mortgage Product of the Day:  BMO offers an 18-year open mortgage at 8.95%.  Hmmm.  Would anyone ever hold an open mortgage at that rate and term, given all the alternatives below prime?
  • Reverse mortgages are based largely on your age.  The older you are, the more money you’ll get.  Here’s a table from Seniors money that illustrates this.
  • Ed McMahon has avoided foreclosure!
  • Canadians’ debt-to-income ratio (i.e.  household debt-to-income), has leaped from 122% to 130% in the last year.
  • Crucially Unimportant Fact of the Day…  Did you know that if you sell a mortgaged property in the Monopoly board game, the player buying it has two choices: A) He/she can repay the principal and 10% interest and lift the mortgage immedi
    ately; or, B) He/she can leave the mortgage intact, but must pay 10% of the mortgage value immediately as a “transfer tax”. He/she must also pay the normal 10% interest when the property is later un-mortgaged.
  1. …the market should be allowed to function on its own with very limited government involvement.” That’s according to AMBA’s Frank Hickey…
    Hopefully Frank realizes that the CMHC in and of itself represents excessive government involvement in the housing market. And there is nothing stopping AIG/GE from continuing with 40 year amz/0 down. The products will simply be priced based on AIG/GE’s credit rating rather than Canada’s.
    In Fact CMHC canceling 0 downs and 40 year amz limits government involvement since those products if offered will now be driven purely by market forces and not government intervention.

  2. What is Frank Hickey trying to say? That the government should completely discontinue mortgage insurance (and thus the CMHC)? Or that the government should insure every mortgage that the market comes up with?
    Either way, that’s a silly statement.

  3. In fact Genworth and AIG can’t and won’t offer these programs as they (though privately run) enjoy the same government guarantees that CMHC do. There is no advantage for them to offer these programs if they are not backed by the goverment guarantee, just an immense amount of risk that neither can afford to take given their current exposure in other countries.

  4. Complaining about government intervention in the mortgage markets is more than a little arch… real estate values themselves are largely a function of government policies all the way from government guaranteed mortgage products to local government zoning and land use rules than ultimately determine value.
    There is no shortage of land in Canada, but there are severe restrictions on its use, imposed by the crown.
    Even an overly simplistic view of land values would demonstrate that governmental intervention is the core of a sustainable real estate market, and of affordable residential housing.
    I think it is useful for governments to allow the broadest discretion possible to the various parties involved in administration of government policy, like the mortgage insurer.
    Reducing discretion, like fixing an exact Beacon Score rather than setting more general guidelines, ties the hands of the whole industry. If there were good reasons for the changes made recently by the feds, fine, but there has been a complete absence of any real justification of these changes other than a gut reaction to events outside of Canada.

  5. Hi, Donald
    Did you know that there is a strong correlation between size of equity and likelihood of default?
    Imagine a parallel world where your finders fees become repayable each time a borrower defaults.
    Anytime a borrower fails to meet their obligations it costs you money.
    Now that default risk is placed squarely in your lap how willing would you be to accept higher risk customers?
    Would you be willing to offer 40 year or 0 down mortgages?
    Would you become risk adverse and preach about the need for good credit and large down payment not just the minimum required?
    Would you worry about whether a client is able to pay not just today but over the life of the mortgage?
    Just something to think about

  6. Default rates in Canada are minuscule. Even with 100% financing and 40 year amortizations history should prove that all but a fraction of 1% of Canadians pay their bills on time.

  7. I think Frank is saying that the government is not good at cultivating efficient markets. In this case the government has unilaterally decided what is good for Canada’s real estate industry. Economies usually seem to do better when the government’s role is limited to protecting the public from clear danger instead of meddling with billion dollar industries.

  8. “Default rates in Canada are minuscule.”
    Just as they were in America…
    Until a few years ago.
    “Even with 100% financing and 40 year amortizations history should prove that all but a fraction of 1% of Canadians pay their bills on time.”

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