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.
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.
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.
Mortgage lenders got another boost yesterday from the federal government. The Finance Department announced it will now buy up to $75 billion of Canadian mortgages under it’s recently announced Insured Mortgage Purchase Program (IMPP). Ottawa’s original pledge was $25 billion.
The Toronto Sun has a good explanation of the program:
Put simply, the government is selling bonds and treasury bills to raise cash and then giving that money to the Canada Mortgage and Housing Corp. — a Crown corporation — to buy mortgages from the bank. Homeowners still make their mortgage payments to the bank which then passes that money along to the CMHC for a service fee.
In other words, the government is buying mortgages from lenders so lenders can lend that money to the next guy–at decent interest rates.
All the mortgages being purchased are insured and considered “high-quality assets.”
The IMPP has been hugely popular with lenders thus far. Banks have been pushing Ottawa to expand the program ever since it first launched. The reason is simple. Selling to the government is more profitable than selling to other investors.
As a side note, before the IMPP came to town, most lenders were relying heavily on the Canadian Mortgage Bond (CMB) program. The IMPP has essentially become a supplement to the CMB program. (It’s different though because, under the IMPP, mortgages are purchased by CMHC itself and remain on CMHC’s books.)
Interestingly, most Canadians are oblivious to how vital Canada’s CMB program is these days. The fact is, it’s exceedingly tough to securitize (re-sell) mortgages at good prices in our subprime-rattled market right now. Without the CMB program, some lenders we know would probably not survive. The government performs a critical service by supporting the securitization market with the Canadian Mortgage Bond.
Anyway, back on topic. As most people know, money for mortgages has been scarce. Because of this, mortgage rates have been higher than normal. Finance Minister Jim Flaherty knows this and is concerned about how it’s affecting our economy. In yesterday’s release he said: “The Government will not allow Canada’s financial system, which has been ranked as the soundest in the world, to be put at risk by global events.”
He said the IMPP will:
- “Provide Canada’s financial institutions with significant and stable access to longer-term funding,” and;
- “Earn a modest rate of return for the Government with no additional risk to the taxpayer.”
Point #2 is true enough. The government will make $190 million on its first three IMPP purchases according to the Globe. This profit comes from the difference between the interest the government earns on the mortgages it buys, and the interest it pays on the bonds it sells. The Sun says:
Of the bonds sold yesterday, the government is paying out an average of 2.7% to the bond holder while collecting an average interest rate on the mortgages it buys, of 3.78%.
The Finance Department announced other liquidity enhancing initiatives as well. One of them was to reduce the cost of government insurance on interbank loans. (The original 1.85% premium was too high to begin with.)
Here’s more background information on all the government’s announcements yesterday.
In a nutshell, all of these efforts are geared to one thing: keeping money flowing and lenders lending. In the short-term that’s a good thing for borrowers. Then again, we haven’t seen mortgage rates come down very much since the IMPP first took effect. Hopefully that changes in the near future.
The acronym of the day: CLAF. It stands for Canadian Lenders Assurance Facility. It's essentially loan insurance that the government has just created to guarantee credit among federally-regulated deposit-taking institutions.
The goal of the CLAF is to encourage more lending in the midst of Canada's worst credit crisis in memory.
The cost of the insurance isn't cheap, however. It's 1.60%-1.85% of the loan amount. As the government puts it, "it is being made available as a backstop in case conditions in global credit markets disrupt Canadian lenders’ access to the funds they need to keep lending."
Given the price, there's a fair chance it won't have any major uptake, or impact on reducing mortgage funding costs. The CEO from low-cost lender ING was quoted by the Globe as saying, "Of the various options that we have to cost-effectively fund our business, this is not something we would probably be interested in."
The CLAF is totally voluntary and is set to expire next April 30.