Mortgage Bytes

In Brief…

  • 100% financing isn’t dead. It’s just a lot more expensive. A 5% cash-back downpayment mortgage will generally run you near 7.20% these days.  A good fixed-rate mortgage with 5% down is closer to 5.60%.
  • According to an anecdotal poll by Genworth, 56% of brokers who responded think the elimination of 40-year amortizations and 100% financing will hurt their business.
  • The Toronto Sun’s Linda Leatherdale says to “shop around, negotiate the best rate and lock in for five years or more to ride out this storm.” Interesting. Telling Canadian readers to lock in for five years is pretty gutsy.
  • Dominion Lending Centres issued a press release about what the “Current Market Crisis” means to Canadians.
  • As far as we know, there is just one lender left with a readvanceable mortgage (HELOC) at prime rate. Call your mortgage planner for details.
  • Million Dollar Journey examines the Smith Manoeuvre during tough times.
  • Lenders cost of funds in a picture… Source: Bloomberg & The Finance Department. (Click to Enlarge)

Cost-of-Funds_thumb[2]

Mortgage Industry News

  • Canadian taxpayers don’t need to worry about funding a mortgage bailout. Quite the contrary. The government could make $250 million to $1 billion as it buys back Canadian mortgages, says the Globe.
  • How do Canada’s mortgage buybacks work? The government essentially buys back mortgages from the 30 lenders participating in the program based on the offered rate of return. Lenders offering the highest rate of interest will be able to sell their mortgages to the government first. As these “winning” lenders offload their loans, their balance sheets are cleared to make new loans. (An illustration)
  • “We are happy with the funding that we got and the price we paid.” – ING CEO Peter Aceto on CMHC’s mortgage buyback last Thursday (Globe)
  • Lenders have been relying more and more on the Canadian Mortgage Bond program.  In the first half of this year, as much as 40% of all mortgages were financed through the CMHC’s mortgage-back securities program.  (Globe)
  • Home buyers rushed to beat the government’s tighter mortgage rules and Oct. 15 deadline, says Canwest.
  • Here’s the difference between mortgage brokers and bank “specialists” by Centum LendingMax.
  • wal-mart In a year or so, Canadians may have one more place to shop for mortgages: Wal-Mart Canada Bank. Wal-mart has applied for a Canadian banking license.  It follows in the footsteps of Canadian Tire, Loblaws and Sears. Knowing Wal-Mart, it’ll probably have some pretty good rates without a lot of frills. “Our approach in everything we have done to date is to be a price leader and eliminate costs that would pass on to customers,” says a Wal-Mart Canada’s spokesman.
  • 20,000 to 25,000 Canadian mortgagors are behind in their payments by 90 days or more according to CAAMP. That’s about 0.27% overall. During the 1992 recession it was 0.60%. In the U.S. today it is 4%! (Globe)
  • Can you say “consolidation?” Canada’s top 15 credit unions account for 50% of all credit union assets. Eight years ago the top 28 commanded 50%. (RRV Echo)
  • Why Canada’s mortgage market is stronger than in the U.S. (CAAMP)

Commercial Lending

  • commercial lending The Commercial mortgage market is constricting further says the Globe.  It says “lenders now want to see 70 per cent of condo units presold before providing funding, for example, up from about 60 per cent when the credit markets were looser. The amount banks are willing to lend compared with a property’s value has also dropped after the collapse of the market for commercial mortgage-backed securities, which was once a major source of funding.”
  • “Instead of approving loans of up to 75 per cent of the value of a property, many [commercial] lenders have pared that number back to 65 per cent. They’re also charging higher interest rates in many instances — say, six per cent instead of 5.25 or 5.5 per cent. The amortization periods are also getting shorter — 20 or 25 years instead of 25 or 30.” (Winnepeg Free Press)

Interest Rates & Economy

  • interest_rates There is “widespread if not unanimous expectations that the [Bank of Canada] will trim a further 50 basis points,” says COMTEX.
  • Traders are pricing in a 100% chance of a 1/4% cut and a 14% chance of a 1/2% cut on Tuesday. (CEP)
  • RBC expects a 1/2% cut Tuesday as well. ( ref=”http://www.economicnews.ca/cepnews/wire/article/138699″>CEP)
  • “I expect the Bank rate to be lowered by a full 50 basis points with considerable pressure on the banks to lower their prime rates as well.” InYourBestInterest‘s Hank Cunningham
  • “Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary.” – Warren Buffett (NY Times)
  • BMO’s is calling for a recession. (Globe)
  • The government’s mortgage buyback will require it to issue new bonds, increasing supply up to 10%. That should have a slight upwards influence on bond yields, and potentially fixed mortgage rates. (CEP)

Real Estate Market

  • housing price decline Canadian home prices are down 6.2% in the last year. They could fall up another 10% in the next six months says CIBC economist Ben Tal. (FP)
  • Toronto home prices are down 15% in the last year. Vancouver home prices are down 8%. Calgary is -6%. Yet prices are still rising in 17 of Canada’s 25 major markets. (Star & FP)
  • “The owner of an ‘average’ home purchased at the height of the Kelowna housing bubble has been losing $11,000 per month, or about $370 per day of their home equity.” (Greaterfool)
  • Almost 1 in 6 Americans owe more than their house is worth. (Globe)
  • Why Canada’s housing market is not headed for a crash. (Globe story)
  • CIBC’s Ben Tal sees something akin to a “trivial moderate cyclical slowing” in Canada’s housing market.

Miscellaneous

  • Apparently the government isn’t overly concerned with taking the froth off Canada’s real estate market. Last month Stephen Harper proposed offering first-time buyers tax credits of $750 (eventually up to $5000) to cover closing costs.  That’s a big incentive to the ~300,000 first-time home buyer in our country. (National Post)
  • CREA wants the government to raise the RRSP Home Buyers Plan maximum to $25,000 from its present $20,000. This amount has not changed since 1992. (CEP)
  • ING, the massive international bank, is getting a huge cash boost from the Dutch government.  ING’s Canadian operations are not expected to be affected at this point.
  • Canada has the world’s soundest banks.
  • Finance Minister Jim Flaherty has told Canada’s banks to: “Do as much as possible in the present circumstances.” (CP)
  1. With all due respect, Linda Leatherdale, her credentials are skeptical at best, she does not know topics at an indepth level, why would you lock into a 5 year right now, when an expected rate cut is coming, good luck if you go to her for your finance advice.

  2. The so-called “difference” between mortgage brokers and bank “specialists” can go both ways.
    – A mortgage broker is working for a commission, just like the bank specialist.
    – Brokers are generally paid more for longer term mortgages as it decreases the chances of the client leaving the lender. Bank specialists are paid the same for long, short, variable or creditlines. It is considered bad business to offer anything less than the full discount, for which they are well compensated.
    – Brokers are under stricter licensing conditions to prevent mortgage fraud. Banks train and police their employees internally and are under much more scrutiny than a mortgage broker.
    – Mortgage brokers generally work with a small number of preferred lenders who offer volume bonuses. Many bank specialists have access to brokered lending for clients who fall outside of bank guidelines.
    – Mortgage brokers do not do much negotiating with multiple lenders. A good mortgage broker will have prior knowledge of what is available from any given lender and will not submit multiple applications lest he/she incur the wrath from underwriters. A good bank specialist will also know what is on the market and price accordingly. The broker may have access to 30 lenders, the question is, which one pays the most commission?
    – Bank specialists don’t charge broker fees.
    But here are some more…
    – Bank specialists have access to products and specials not available to brokers.
    – Bank specialists can control the flow of the mortgage from start to finish, able to troubleshoot every step of the way.
    So in my opinion,

  3. Mike S are you a mortgage specialist and defending yourself? I do not think broker works just to make more commission, they try to bring best selection to their client, my personal choice is experienced broker

  4. the amount of “capital injection” into banks by gov will ultimately lead to inflation, which will prevent long term rates from dropping much. i think one should lock in long term rates.
    refinancehelp.info

  5. ” FYI, Today, 75% of people in the United States use mortgage brokers. Because the Mortgage Brokerage Industry is relatively new in Canada, the numbers are lower, however, those numbers are increasing every year.”
    I can’t help but think that mortgage brokers played a pivotal role in the use of exotic mortgage products in the U.S. Sell the MTG, get paid on the transaction then move to the next Schmuck. Let’s hope we do not get to 75% in the Canadian Markets lest we suffer the same mess that the U.S. market is in.

  6. Agreed with Mike S
    Lenders pay brokers therefore brokers work for lenders.
    The concept is very simple. People work for the person who provides them money.
    Any statement to the contrary is a lie.

  7. TD specialist won’t tell me that Scotia specialist is giving better rates, that is right people work for the person who provides them moeny

  8. Hi Mike and John,
    This provides fodder for a great little debate so thank you both for posting your comments.
    Here’s my friendly take on each of your points to provide some more perspective….
    – A mortgage broker is working for a commission, just like the bank specialist.
    True. And brokers live or die based on referrals and repeat business. Therefore the commission they receive should never influence the product or lender they recommend. In our case, we frequently refer clients to lenders who do not even pay brokers (BMO, RBC, CT, etc.)—simply because those lenders have the best product for the client at that given time.
    – Brokers are generally paid more for longer term mortgages as it decreases the chances of the client leaving the lender. Bank specialists are paid the same for long, short, variable or creditlines. It is considered bad business to offer anything less than the full discount, for which they are well compensated.
    This pertains to compensation-based conflicts of interest. Again, for professional mortgage brokers this is not an issue.
    Remember, conflicts of interest happen in all businesses. For example, there are honest lawyers (the vast majority) and there are lawyers that pad their bills.
    While uncommon, it’s no different in the mortgage world. You simply have to find a good professional advisor that you feel you can trust.
    – Brokers are under stricter licensing conditions to prevent mortgage fraud. Banks train and police their employees internally and are under much more scrutiny than a mortgage broker.
    Brokers are ever vigilant for fraud because they risk compliance sanctions and/or getting shut down by lenders if they submit fraudulent documents.
    – Mortgage brokers generally work with a small number of preferred lenders who offer volume bonuses.
    Some do, but far from all. Like any advisor, it pays to interview them and ask these questions before signing up. It takes effort to find an advisor you feel comfortable with, but once you do, that mortgage planner can be a trusted ally for life.
    – Many bank specialists have access to brokered lending for clients who fall outside of bank guidelines.
    Mortgage specialists almost never have more options available to them for clients who fall outside of bank guidelines. Most specialists deal with a small number of set lenders that take their “turn-down” business—often for compensation or quid pro quo.
    Good mortgage brokers, on the other hand, have dozens of different lenders who service non-bankable clients.
    – Mortgage brokers do not do much negotiating with multiple lenders.
    A good mortgage broker will have prior knowledge of what is available from any given lender and will not submit multiple applications lest he/she incur the wrath from underwriters. A good bank specialist will also know what is on the market and price accordingly. The broker may have access to 30 lenders, the question is, which one pays the most commission?
    A good mortgage broker helps the client choose the best product. So by default, there is no need to submit to multiple lenders. On the contrary, broker negotiate with lenders regularly to get tough deals through and get things like appraisal costs covered, for example.
    Regarding the commission point, that’s been discussed above.
    – Bank specialists don’t charge broker fees.
    Professional mortgage brokers also do not charge broker fees for bankable clients, as well as in cases where alternative lenders pay a placement fee.
    – Bank specialists have access to products and specials not available to brokers.
    Professional mortgage brokers always have access to the most mortgage options. This is an area where bank specialists cannot parallel. Accordingly, brokers have access to a much wider array of unpublished rate specials and unique products from multiple lenders—not just one.
    – Bank specialists can control the flow of the mortgage from start to finish, able to troubleshoot every step of the way.
    This is not a difference. This is what mortgage brokers do for a living!
    Further to John’s point…
    – Lenders pay brokers therefore brokers work for lenders. The concept is very simple. People work for the person who provides them money. Any statement to the contrary is a lie.
    John I would submit that the person who ultimately “provides the money” is the client. Without the client’s trust and business, mortgage professionals (brokers or specialists) do not get paid, regardless of which lender provides the placement fee.
    Again, this post is just another perspective in the spirit of friendly debtate. Mortgage specialists are good people. They just happen to have a very different business model. If ethics are adhered to by both the broker and specialist, it is very difficult to make a case that a mortgage broker is not the best advocate of the client overall.

  9. Rob-Cad Mtg–Most can see by reading your comments that you are not impartial in this “debate” as you call it. My 2 cents, most people can and should educate themselves, if you have half a melon–you can walk into any branch of any major bank and get at least 1.40 off posted 5 year rates at the branch level and an additional 0.15 if you escalate it further–mortgages are not rocket science as the propoganda machine caamp and broker community make them out to be–this is from someone that has been in lending for the past 15 years, last 10 years exclusively dealing with brokers–one more point–a large portion of mortgage brokers are unscrupulous–from being in the trenches Rob–you would probably be surprised what your colleagues try and push, remember you do not see 50 plus new deals a day–times that by 10 years=120,000 broker deals in 10 years–that’s a lot and I have seen some shady stuff pushed, not saying all do, but a lot will sell there soul to make money.

  10. Not taking any sides here, but your local Bank Rep and/or Mortgage Specialist can easily sell their soul to make money as well – for the bank.
    1) They only call you when they want to “sell” something and then you don’t hear from them ever again. Until you want to buy something from them.
    2) They promote Mortgage Insurance from the bank. I got burn for awhile until I know better. Does that call care for customer’s best interest?
    3) Can you guarantee that the rep helping you out will be there in 4 – 5 years? Mortgage Broker most likely will be.
    At the end of the day, we all work for ourselves. Why not have both work for you and from there, you must be able to figure out what works the best for you. I am sure this website had helped both clients from a mortgage specialist and mortgage broker. I am sure it is a great resource for all first time home buyers out there.
    Some questions, I’ve never work for a bank, but what happen when a bank rep hasn’t sell anything for a long period of time? and what happen when that situation happens? What is their incentives? I know its not ALL clients’ best interests. If everybody trust the bank, none of us will be searching for information else where, like the great information we gets here. Good debate though, I like reading other people’s point of view :) I met some great people at the bank, but I also met some untrustworthy ones. It’s all depends on your luck.

  11. Hi John,
    If you really believe in something, and you’re passionate about it, you’re going to appear biased to alternate viewpoints. Everyone has their own beliefs (“propaganda machine CAAMP” is case in point. BTW, I would strongly disagree with that point—but that’s for a different post).
    What we believe here, based on what we see every day, is that mortgage planners offer clients a better chance at saving interest–not just with better rates, but with better planning and product choice.
    Is mortgage planning rocket science? Not exactly, but neither is flying an airplane–if you know what you’re doing.
    As with the lawyer analogy (sorry lawyers! it’s just an example), no industry is without bad apples. In my view, brokers who violate certain ethics should have their license shredded. But we can’t invalidate an entire industry based on the minority’s actions.
    Integrity is everything in any kind of advisory profession (be it financial planner, insurance agent, mortgage planner or mortgage specialist). You simply have to find the best, and most honest, advisor you can.
    Rob

  12. Mike S says: “It is considered bad business..for banks..to offer anything less than the full discount, for which they are well compensated”
    That is easily the funniest thing I’ve read this month.
    Mike S. do you have any idea how many people get different rates on the same mortgage on the same day at the same bank? Bank “Specialists” are paid MORE if they sell above the base rate. In the words of our distinguished friend John, any statement to the contrary is a lie!

  13. Dennis, you are correct.
    I used the service of a Mortgage Specialist over a Broker only because he is a friend. And he explained their commission structure. Anything over the base is theirs.
    Obviously, any sales person wants MORE commission, so naturally it is not good business for the employee to offer the full discount…whatever that means. There is no real “FULL” discount – does the poster assume the FULL discount is 0% commission? The employee has his discretionary floor prices, but generally they’d want to give you a higher rate, not lower (as high as they can while still keeping you as a customer).

  14. Quoted from above
    “Sell the MTG, get paid on the transaction then move to the next Schmuck. Let’s hope we do not get to 75% in the Canadian Markets lest we suffer the same mess that the U.S. market is in.”
    Nothing personal Fesnaris but this reflects a lack of knowledge about the Canadian system. Our U.S. counterparts had an absence of regulation, supervision, and professionalism. What is worse, U.S. mortgages (option ARM’s, NINJA loans, etc) were like firecrackers in baby’s hands. They were bound to explode and take off a finger.
    In Canada we don’t have timebomb mortgages and brokers have a much higher duty to their clients.
    The higher the market share of brokers, the more Canadian consumers will benefit for competition.
    Don

  15. ROB–“Is mortgage planning rocket science? Not exactly, but neither is flying an airplane–if you know what you’re doing”
    Difference is to be a mortgage agent I just have to promise to take FSU 101 in a year–i.e. I can set up shop and never have taken a course about mortgages, this is slowly changing. A pilot 400 plus hours required in the air to get a license and after that they fly small planes not 747’s, poor analogy.
    As for CAAMP-if you believe it is anything other than propoganda, then you are biased. Think about it, they try to promote the mortgage broker community and collect dues from lenders and brokers–what else would that be called, lobbyist group?

  16. Reply to CMT comment
    John I would submit that the person who ultimately “provides the money” is the client. Without the client’s trust and business, mortgage professionals (brokers or specialists) do not get paid, regardless of which lender provides the placement fee.
    Agreed the customer is the one who ultimately pays but a mortgage broker is as motivated as a mortgage specialist to push a client into a product that is more profitable to them.
    The second you accept money from someone else you cannot state that you operate in an unbiased and ethical manner. You may or may not run your business in an ethical manner but you are constantly motivated to push clients into products that are more profitable to yourself.
    Why do lenders offer volume bonus, differential finders fees, loyalty programs etc?
    The answer is because they work. If they didn’t work no lender would offer them because they would be wasting money.
    My point is that a customer needs to educate themselves on the products they purchase because they have no reasonable expectation that they will get fair and unbiased advice from either a broker or a specialist.
    Are brokers required to disclose their finder fee rate? Are they required to disclose any loyalty volume bonus programs they receive? Are they required to disclose the potential for conflicts of interest? Are they required to disclose all rates offered by all lenders? How can a broker be employed by a borrower and work for a borrower when they are unaware of how much they are paying for the service and are unaware of potential conflicts of interest?
    In the end this doesn’t mean brokers are good or bad but it does mean that brokers are exactly like any other business. They are in it to make money.

  17. John,
    Coursework is actually a PRE-requisite to licensing in most big provinces. More importantly, 400 hours doesn’t get your feet wet in this profession. Borrower scenarios are virtually infinite and one bad piece of advice can cost a client thousands of dollars. You don’t get more than 1% of the experience you need in this business by reading a text book. I see top brokers with 10+ years of experience who still learn something new each week.
    Products and guidelines are almost always changing. To expect a rookie broker to have considerable effectiveness before a year of on-the-job training is naive. Heck, I think brokers should take a minimum one-year practicum/apprenticeship before ever advising a client.
    As for CAAMP, they are a reputable industry organziation and they work hard to improve professionalism in our business. CAAMP’s efforts benefit all Canadians through things like working to get new immigrants exceptions to the Finance Department’s insurability rules, public education initiatives, development of broker standards, etc.). Every business has an industry association that collects dues (Canadian Bar Association, Canadian Dental Association, Insurance Brokers Association, etc..). Dues are what fund their programs.
    In any event, thanks again for the posts. Gotta run…. – Rob

  18. Canadian Bar–lobby group for lawyers, Dental Association–lobby group for Dentists, thank you for proving my point Rob.
    We will agree to disagree. Caamp is clearly a lobby group for the broker industry.
    What I say is factual anyone can become an agent, doing it well and ethically is a different response.
    My point is and still stands this is not rocket science–ANYONE can walk into a branch of ANY Canadian Bank and get 1.40% off 5 year fixed and if you escalate further you can get another 0.15% for a total of 1.55% off 5 year fixed rates.
    Whenever there are easy entrance points to doing a certain job i.e. realtor, agent, edward jones advisor, then you get people in for the quick buck, yes good ones look at it as a career, many look at it as a quick way to make $$$’s!

  19. John,
    Do you buy shoe for your wife as well? because ANYONE can buy a shoe and ANYONE can pick a color and if you take it further to the store manager, may be you can get a purse throw in as well!
    My point is yes ANYONE can, but not EVERYONE will be able to – or have the expertise. You shouldn’t be so negative. Everybody have different needs. Mortgage Broker’s services might not be your thing. My broker was very honest to me. She told me to go with the Bank because she can’t get me a better rate at the time. This also proves that Bank treated every customer differently. Great…

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