Last week’s CMHC mortgage buyback was undersubscribed again. It’s the 4th straight time that’s happened.
The government offered to buy $4 billion of mortgages but only attracted $1.57 billion.
This is good news actually. It means lenders aren’t as reliant on the government’s money as they were a few months ago. That in turn, implies that mortgage funding costs are declining, which in turn means that lenders can offer better mortgage rates.
The buybacks started on October 16, 2008–in the midst of the credit crisis. They were designed to help lenders obtain funds for mortgages at more reasonable costs than could be found in the open market. Since the first auction in October, fixed rates have dropped about 1.4%. (Due as much to the drop in treasury yields as to the buyback program […and due to lenders/investors believing that mass numbers of Canadians aren’t about to start defaulting on mortgages].)
Another interesting point, however, is that deposits have soared. They’re up 14% over last year according to TD economist Grant Bishop. When lenders are flush with cash rates often drop accordingly.
“We believe at this point in time there is a fair amount of liquidity in the system,” CMHC CEO, Karen Kinsley, told a Senate finance committee. As a result, she said CMHC will probably “slow it down a bit” (the buyback program) to match the declining demand from lenders.
(More from FP, Reuters, and Bloomberg)
Sidebar: The Finance Department has authorized $125 billion in insured mortgage purchases since last fall. So far, the government has bought $54.94 billion worth. The next auction is scheduled for April 15.
Sound bytes from the Bank of Canada‘s Mark Carney, from a speech he gave yesterday:
- “The Canadian economy is expected to begin recovering later this year.”
- “…cutting the policy rate by 350 basis points since December 2007…with the usual lag…will have a powerful impact on economic activity and inflation.”
- “Since the easing cycle began in December 2007, we have lowered the overnight rate by 350 basis points. The prime rate has fallen by 325 basis points, Bankers Acceptance rates (key short-term financing instruments for corporations) have fallen by about 380 basis points, and variable rate mortgages by about 185 basis points.”
- “Our focus is clear, our actions consistent, and our objective explicit: 2% CPI inflation.”
- “The Bank has taken into consideration the higher risk premiums demanded in today’s markets in setting its overnight rate. As well, it has taken into account the effect on future Canadian inflation of the lower level of foreign demand that has resulted, in part, from financial difficulties in other countries. The policy rate is lower than it otherwise would be in the absence of these difficulties.” [CMT: As a result, rates may move up quickly once the economy heats up again…whenever that will be]
Liberal Party leader Michael Ignatieff wants the Conservatives to check in with parliament regularly to report on the budget’s costs and impact. Given that, his party will support it, he says. (Financial Post)
And what a budget it is for the real estate industry.
The Tories reached into the goody bag and pulled out:
- A $5000 increase to the RRSP Home Buyers Plan, meaning first-time home buyers can now withdraw up to $25,000 from their RRSPs for a down payment–tax and interest-free.
- A $750 tax credit for first-time home buyers to help with closing costs, such as legal fees, disbursements and land transfer taxes.
- A 15% tax credit of up to $1,350 on eligible home renovation expenses undertaken before February 1, 2010.
- $300 million for ecoENERGY Retrofit grants.
- Up to $50 billion worth of additional mortgage buybacks. The government called this a “successful program” that “will reassure lenders that stable long-term financing will continue to be available…” (See sidebar below)
- More “disclosures” for mortgage insurance designed to “help consumers better understand the mortgage insurance transaction. The Government will also propose new measures to ensure that Canadian consumers are charged no more for mortgage insurance than the true cost of obtaining that insurance.”
Liberal chief Michael Ignatieff is expected to announce whether the Liberals will support the budget today at 11am ET. Pundits expect him to back it, albeit hesitantly.
The New Democratic Party and Bloc Quebecois have already vowed to vote it down.
The government had this to say about the Insured Mortgage Purchase Program (IMPP) in its budget announcement:
As the mortgages that will be purchased already carry government backing, they represent no additional risk to the taxpayer. The competitive auction process used to purchase the mortgages is also designed to protect taxpayers by ensuring that the rate of return on the purchased mortgages exceeds the Government’s cost of borrowing. As a result, the IMPP program will continue to earn a positive financial return for the Government while at the same time filling a key gap in financing markets. The program has facilitated a reduction in prime and mortgage rates since its introduction.
There are three mortgage default insurers in Canada. CMHC is the biggest and it is 100% backed by the federal government. Genworth and AIG are #2 and #3 respectively, and are only 90% backed.
As a result of this difference in guarantees, a lot of lenders (and lenders’ investors) prefer CMHC, because the perceived risk is less. Genworth and AIG feel it’s time to level that playing field.
As the Globe reported this week, Genworth and AIG want the finance department to guarantee their mortgage insurance 100%, just like it does for Crown corporation CMHC.
Genworth and AIG say the risks to doing so are remote. Not only are their underwriting standards prudent (basically the same as CMHC’s), but they contribute to a guarantee fund and maintain reserves–as required by law–to offset any losses.
On the upside, a 100% guarantee for Genworth and AIG would mean more insurer competition, more new mortgage products, and lower insurance fees for Canadian homeowners. Default insurance is required for most borrowers with down payments under 20%.
We’ll see if Tuesday’s federal budget makes any mention of new insurance guarantees.
The Supreme Court of Canada has ruled against a complex strategy to make mortgage interest tax deductible.
The court said the defendants, Earl and Jordanna Lipson, effectively abused tax laws.
According to the Calgary Herald: "The scheme involved paying down their mortgage immediately after obtaining it, then using the repaid principal as collateral for an investment loan, which is tax deductible under the Income Tax Act."
There's no clear indication yet on if/how this may affect the popular Smith Manoeuvre. The Smith Manoeuvre is different in many key respects but there is at least some overlap in principal.
The Globe's Rob Carrick, for one, suggests it might not impact the Smith Manouevre. He quotes a tax lawyer that says the ruling has no effect on borrowing against one's home to invest and making the interest tax deductible.
We'll take some time to research and get opinions on the verdict and then report back.
Here is the Supreme Court's decision: Lipson v. Canada
Note: This story is for general interest only and not advice! As always, seek professional tax counsel before jumping into any tax-related strategy.
The Independent Mortgage Brokers Association of Ontario (IMBA) has put out an excellent interpretive document summarizing several new rules being introduced by FSCO.
Here’s the link.
If you’re an Ontario mortgage broker, have a read through it. These rules will take effect on Thursday.
Here is a small sampling of things for brokers and agents to remember:
- Mortgage agents can no longer call themselves anything other than “Mortgage Agent” or “Agent” when doing business in Ontario.
- The authorized name and licence number of a Broker or Agent’s Brokerage must be prominently displayed on all promotional materials.
- You must disclose if you are receiving a finder’s fee, bonus, basis points or any other remuneration on the mortgage, and the method of calculation of these
- You need to disclose the number of lenders your Brokerage acted for in the previous fiscal year.
- The cost of high ratio mortgage default insurance will no longer need to be included in the cost of borrowing.
- You must disclose any and all material risks of a particular mortgage and clearly establish why the mortgage you recommend is suitable for the client.
More information can be found on IMBA’s Mortgage Legislation page.
FSCO is Ontario’s regulator of the mortgage brokering industry.
Finance Minister Jim Flaherty has echoed Mark Carney’s request that banks loosen up their lending.
“I expect [banks] to make it evident to us that they are taking steps to make [lending] more available in Canada,” Flaherty said yesterday.
Ottawa has provided billions of dollars in liquidity so banks can offload their mortgages. Flaherty says, “We expect the banks to reciprocate. We expect the banks to provide adequate credit.”
Flaherty and Carney will meet with bank execs in January to discuss Canada’s tight lending market.
From our perspective–as a general observation–banks seem to be lending more freely than non-bank lenders these days. In addition, it’s not the availability of credit so much as the price of credit that we’re seeing issues with.
Financing options have definitely decreased in the last 12 months (especially for subprime or commercial borrowers), but mortgage professionals are still finding ways to get tough deals done.
Bank of Canada chief Mark Carney isn't afraid to confront Canada's financial titans.
He aimed these comments in the big banks' direction yesterday:
"We expect our banks to make lending available, to have credit available and affordable in Canada. We're acquiring a lot of their mortgages … up to $75 billion worth. We've given a guarantee with respect to some of their obligations. So this is a two-way street. We expect credit to be available through our financial institutions." (Reuters)
Carney also had concerns about upcoming potential risks. According to CTV:
- He feels household incomes could drop significantly. Vulnerable households could then default on loans causing significant losses for Canada's banks he says.
- Carney also said that banks who hoard capital because they fear loan losses will worsen the situation.
Well, that doesn't exactly make banks want to lend.
On the other hand, based on historical credit spreads, 5-year fixed rates should be in the low 3% range right now. Instead they're close to 5%. There is room to drop if lenders want to–on the fixed side at least. A lot of people know that and they aren't happy that rates are being held up.
(On a related note, there's been a nice drop in the "TED spread" lately. The TED spread is a good measure of perceived credit risk and it has been tracking mortgage rate premiums pretty closely…so down is good.)
Given all this, the big banks have increasingly been under the spotlight to loosen up lending. Canadians can thank Mr. Carney for making the spotlight brighter.
The very first 10-year Canada Mortgage Bonds (CMBs) launched last Thursday. As expected, investors ate them right up.
$2 billion worth of the 10-year notes were sold at a 4.11% yield. That’s 0.73% above comparable government bonds.
Like regular 10-year Canadas, CMBs are also fully guaranteed by the Canadian government. Their 0.73% premium over regular bonds is therefore one of the closest things to free money you’ll get in a government-backed bond.
This newest issuance continues to support Canada’s lending market. While CMBs have been in existence since 2001, in the last year or so they’ve become an increasingly vital source of mortgage capital. That’s because fear of mortgage defaults has chased many traditional mortgage investors into hiding. The CMB program picks up some slack and provides sustaining capital to lenders who might otherwise have few other sources of funds.
The new 10-year CMBs join Canada Housing Trust’s existing 5-year and variable-rate issues. Going forward, 10-year CMBs will likely be sold on a quarterly basis according to CMHC.
As 10-year CMBs attract a broader pool of investors, they will continue to provide much-needed capital to the mortgage market. That, of course, has a positive effect on interest rates for Canadian homeowners.