The Bank of Canada did not increase the overnight lending rate, otherwise known as prime, today. As expected.
Some of the words Mr. Carney said though has led some experts to beleive that we may have a rate hike sooner than expected.
Only time will tell!
Here's the article from the BoC website.
Ottawa, Ontario -
The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
The profile for global economic growth has improved since the Bank released its January Monetary Policy Report (MPR). Europe is expected to emerge slowly from recession in the second half of 2012, although the risks around this outlook remain high. The profile for U.S. growth is slightly stronger, reflecting the balance of somewhat improved labour markets, financial conditions and confidence on the one hand, and emerging fiscal consolidation and ongoing household deleveraging on the other. Economic activity in emerging-market economies is expected to moderate to a still-robust pace over the projection horizon, supported by an easing of macroeconomic policies. Improved global economic prospects, supply disruptions and geopolitical risks have kept commodity prices elevated. In particular, the international price of oil has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum.
Overall, economic momentum in Canada is slightly firmer than the Bank had expected in January. The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated. As a result, business and household confidence are improving faster than forecast in January. The Bank projects that private domestic demand will account for almost all of Canada’s economic growth over the projection horizon. Household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk. Business investment is projected to remain robust, reflecting solid balance sheets, very favourable credit conditions, continuing strong terms of trade and heightened competitive pressures. The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. The recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.
The Bank projects that the economy will grow by 2.4 per cent in both 2012 and 2013 before moderating to 2.2 per cent in 2014. The degree of economic slack has been somewhat smaller than the Bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013.
As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer than anticipated in January. After moderating this quarter, total CPI inflation is expected, along with core inflation, to be around 2 per cent over the balance of the projection horizon as the economy reaches its production potential, the growth of labour compensation remains moderate, and inflation expectations stay well-anchored.
Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.
Tuesday, April 17, 2012
Thursday, April 12, 2012
3 year variable cap mortgage
There`s a neat product that was introduced a short time ago that I think is interesting and could be an option for some.
It is a variable product, however, payments are based on the current 3 year term (3.99%) and if prime continued to rise over the length of the term, you would be capped at the 3.99%
At the forefront prime is currently at 3%, so the extra payments will go directly to principal which in turn saves you a ton in interest and pays down your mortgage much sooner. With the predictions of variable not moving upwards in the near future, this is a good forced savings plan.
This product is eligible for purchase at any loan to value up to 95%, refinances and transfer in.
It is a variable product, however, payments are based on the current 3 year term (3.99%) and if prime continued to rise over the length of the term, you would be capped at the 3.99%
At the forefront prime is currently at 3%, so the extra payments will go directly to principal which in turn saves you a ton in interest and pays down your mortgage much sooner. With the predictions of variable not moving upwards in the near future, this is a good forced savings plan.
This product is eligible for purchase at any loan to value up to 95%, refinances and transfer in.
Wednesday, April 4, 2012
Collateral charges: Why banks like them
By Rubina Ahmed-Haq | Sun Apr 01 2012 | http://www.moneyville.ca
If you’re buying a house and are shopping for a mortgage this spring you may come across something called a collateral mortgage. This home financing tool has been around for a while, but mainly in the background. Now it’s going mainstream with both TD Bank and no-frills ING Direct abandoning the conventional mortgage in favour of this type of financing exclusively. Other big banks make collateral mortgages available, but for now offer both kinds.
Many consumers hunting for a mortgage would be hard pressed to explain the difference between the two, but here it is:
With a conventional mortgage, you and your lender agree on how much you can borrow, the length of the term and the interest rate. As an example, say the house you’re buying is worth $200,000. With 20 per cent down you would borrow $160,000. You might select a fixed-rate, five-year term, which this week is between 3 and 4 per cent.
With a collateral mortgage, you still have an agreed interest rate and term, but the bank registers a charge of up to 125 per cent the value of your home, provided you have at least 20 per cent equity in it. In this example the charge would be $200,000 plus up to another $50,000.
That’s because a collateral agreement assumes you will want to borrow more in the future and so makes this extra amount available now. As long as you maintain 20 per cent equity in your home, you borrow up to 80 per cent of its value.
So a collateral mortgage can be a great product for homeowners who want that extra borrowing ability along with their mortgage. Doing all the paperwork while applying for the mortgage saves fees that would apply later if a homeowner tried to apply for a credit line.
This is important:
The advantage to the bank is that a collateral agreement makes it harder for you to leave because it interlocks your lending. As Toronto real estate lawyer Mark Weisleder, a Moneyville columnist, points out, a collateral mortgage secures all debt held with that lender under one agreement. So a line of credit, a credit card, car loan or any personal loan will all be secured by the same agreement.
Most banks do not allow transfers of collateral mortgages because they are tied to other consumer loans (even if you don't have any). This means that at the end of your five-year term, you have to pay discharge fees to get out of one mortgage and additional fees to register a new one at another financial institution. On the other hand, a conventional mortgage is easy to transfer when the term is up.
Another difference is that in a conventional agreement your rate cannot be increased during the term, even if you default or fall into arrears with your payments.
With a collateral mortgage, if you go into arrears or default, the bank has the right to raise your interest rate by up to 10 percentage points.
This is because a collateral mortgage is registered at a charge of prime plus 10 per cent. Senior TD Bank mortgage official Farhaneh Haque says this higher rate is charged to protect customers from incurring more legal and administration fees when they want to borrow more. Without this, the bank would have to reregister the loan when you want to borrow more. Since the loan is already registered at this higher rate, when you qualify, the bank can offer it to you with no questions asked, even if the loan is 10 points higher.
Tom Hamza, president of Investor Education Fund, a consumer agency funded by the Ontario Securities Commission, says it’s clear why collateral agreements are attractive to the banks.
“The fact that people can access money more easily and the fact that they won’t leave are two pretty compelling reasons for financial institutions to offer these,” he says.
Hamza says collateral mortgages are good for homeowners who have a lot of debt in a lot of different places, or those who “frequently need to access to cash”. But for all others it may not be the right product.
If you don’t want the extra money and want the freedom to move your business elsewhere when the mortgage matures, a collateral agreement is probably not the best option. It’s a classic case of buyer beware, before you sign up for a collateral agreement make sure it’s the product that suits you and your lifestyle.
If you’re buying a house and are shopping for a mortgage this spring you may come across something called a collateral mortgage. This home financing tool has been around for a while, but mainly in the background. Now it’s going mainstream with both TD Bank and no-frills ING Direct abandoning the conventional mortgage in favour of this type of financing exclusively. Other big banks make collateral mortgages available, but for now offer both kinds.
Many consumers hunting for a mortgage would be hard pressed to explain the difference between the two, but here it is:
With a conventional mortgage, you and your lender agree on how much you can borrow, the length of the term and the interest rate. As an example, say the house you’re buying is worth $200,000. With 20 per cent down you would borrow $160,000. You might select a fixed-rate, five-year term, which this week is between 3 and 4 per cent.
With a collateral mortgage, you still have an agreed interest rate and term, but the bank registers a charge of up to 125 per cent the value of your home, provided you have at least 20 per cent equity in it. In this example the charge would be $200,000 plus up to another $50,000.
That’s because a collateral agreement assumes you will want to borrow more in the future and so makes this extra amount available now. As long as you maintain 20 per cent equity in your home, you borrow up to 80 per cent of its value.
So a collateral mortgage can be a great product for homeowners who want that extra borrowing ability along with their mortgage. Doing all the paperwork while applying for the mortgage saves fees that would apply later if a homeowner tried to apply for a credit line.
This is important:
The advantage to the bank is that a collateral agreement makes it harder for you to leave because it interlocks your lending. As Toronto real estate lawyer Mark Weisleder, a Moneyville columnist, points out, a collateral mortgage secures all debt held with that lender under one agreement. So a line of credit, a credit card, car loan or any personal loan will all be secured by the same agreement.
Most banks do not allow transfers of collateral mortgages because they are tied to other consumer loans (even if you don't have any). This means that at the end of your five-year term, you have to pay discharge fees to get out of one mortgage and additional fees to register a new one at another financial institution. On the other hand, a conventional mortgage is easy to transfer when the term is up.
Another difference is that in a conventional agreement your rate cannot be increased during the term, even if you default or fall into arrears with your payments.
With a collateral mortgage, if you go into arrears or default, the bank has the right to raise your interest rate by up to 10 percentage points.
This is because a collateral mortgage is registered at a charge of prime plus 10 per cent. Senior TD Bank mortgage official Farhaneh Haque says this higher rate is charged to protect customers from incurring more legal and administration fees when they want to borrow more. Without this, the bank would have to reregister the loan when you want to borrow more. Since the loan is already registered at this higher rate, when you qualify, the bank can offer it to you with no questions asked, even if the loan is 10 points higher.
Tom Hamza, president of Investor Education Fund, a consumer agency funded by the Ontario Securities Commission, says it’s clear why collateral agreements are attractive to the banks.
“The fact that people can access money more easily and the fact that they won’t leave are two pretty compelling reasons for financial institutions to offer these,” he says.
Hamza says collateral mortgages are good for homeowners who have a lot of debt in a lot of different places, or those who “frequently need to access to cash”. But for all others it may not be the right product.
If you don’t want the extra money and want the freedom to move your business elsewhere when the mortgage matures, a collateral agreement is probably not the best option. It’s a classic case of buyer beware, before you sign up for a collateral agreement make sure it’s the product that suits you and your lifestyle.
Monday, March 12, 2012
Collateral charge
This past weekend I sat down with some clients who have a mortgage with a local credit union. Of course, as do all credit unions and a lot of the bigger banks do, their mortgage was registered as a collateral charge.
The lender will say it's a bonus. I say it's a huge negative especially when there's no real difference in product with any other lender not doing this.
When I received these clients 'land titles Form B' I had noticed that the 'registered mortgage amount' was $700,000. Let's keep in mind the clients purchase price was a mere $315,000 (original mortgage balance of about $240k or so). I almost fell off my chair as this amount is massive. They're essentially tying you up for life unless you pay legal fees to get out.
For full explanations on these style of mortgages read a couple past blogs here and here
The lender will say it's a bonus. I say it's a huge negative especially when there's no real difference in product with any other lender not doing this.
When I received these clients 'land titles Form B' I had noticed that the 'registered mortgage amount' was $700,000. Let's keep in mind the clients purchase price was a mere $315,000 (original mortgage balance of about $240k or so). I almost fell off my chair as this amount is massive. They're essentially tying you up for life unless you pay legal fees to get out.
For full explanations on these style of mortgages read a couple past blogs here and here
Thursday, March 8, 2012
Bank of Canada holds rate but says outlook improved
OTTAWA (Reuters) - The Bank of Canada held its key interest rate unchanged on Thursday, as anticipated, but issued a more upbeat outlook for the Canadian and global economies that suggests it is starting to think about an eventual rate hike.
The central bank maintained its overnight lending rate target at 1 percent for the 12th straight time. It said the Canadian economic outlook was "marginally improved", uncertainty around the global economy had decreased and the profile for inflation was somewhat firmer than it had foreseen.
It also added a line about the dangers of high household debt levels in a sign of increasing worry about the consequences of ultra-low borrowing costs.
"Canadian household spending is expected to remain high relative to GDP (gross domestic product) as households add to their debt burden, which remains the biggest domestic risk," the bank said in a statement.
The bank repeated that there was "considerable monetary policy stimulus" in Canada but made no mention of the need to eventually withdraw that stimulus, language that it used in May and July of last year.
It tempered its more optimistic tone by noting that while it expected the economy to perform better in the first quarter than forecast, it would be due to temporary factors. Exports will contribute little to growth despite stronger U.S. demand because of persistent Canadian dollar strength and competitive challenges, it predicted. (Reporting by Louise Egan; Editing by Randall Palmer)
Tuesday, February 21, 2012
BC First Time New Home Buyers Bonus of up to $10k.
Requirements to Qualify for the Bonus ELIGIBLE FIRST-TIME NEW HOME BUYER
You will qualify as a first-time new home buyer if:
»» You purchase or build an eligible new home located in B.C.;
»» You, or for couples, you and your spouse or common law partner, have never
previously owned a primary residence;
»» You file a 2011 B.C. resident personal income tax return, or if you move to B.C.
after December 31, 2011, you file a 2012 B.C. resident personal income tax return (you will not be eligible for the bonus if you move to B.C. after December 31, 2012);
»» You are eligible for the B.C. HST New Housing Rebate; and
»» You intend to live in the home as your primary residence. ELIGIBLE NEW HOME
An eligible new home includes new homes (i.e., newly constructed and substantially renovated homes) that are purchased from a builder and
that are owner-built. The bonus will be available in respect of new homes purchased from a builder where:
»» A written agreement of purchase and sale is entered into on or after February 21, 2012;
»» HST is payable on the home (e.g., HST will generally be payable if
ownership or possession of the home transfers before April 1, 2013 – see
further details below); and
»» No one else has claimed a bonus in respect of the home.The bonus will be available in respect of owner-built homes where:
»» A written agreement of purchase and sale in respect of the land and building is
entered into on or after February 21, 2012;
»» Construction of the home is complete, or the home is occupied, before April 1, 2013; and
»» No one else has claimed a bonus in respect of the home. A substantially renovated home is one where all or substantially all of the interior
of a building has been removed or replaced. Generally, 90% or more of the interior of the house must be renovated to qualify as a substantially renovated home (90% test).
Amount of the Bonus
MAXIMUM AMOUNT
The bonus is equal to 5% of the purchase price of the home (or in the case of owner-built homes, 5% of the land and construction costs subject to
HST) to a maximum of $10,000.
PHASE-OUT FOR HIGHER INCOME EARNERS
The bonus will be reduced based on an individual’s/couple’s net income (line 236 of your income tax return) using the following formula:
»» For single individuals, the bonus is reduced by 20 cents for every dollar in
net income over $150,000 (bonus is reduced to zero at $200,000 net income).
»» For couples, the bonus is reduced by 10 cents for every dollar in family net
income over $150,000 (bonus is reduced to zero at $250,000 family net income).
APPLICATION PROCESS
Individuals must apply for the bonus through the B.C. government. Individuals can apply once
application forms have been posted on the B.C. Ministry of Finance website later this year. Applicants will be required to submit documentation demonstrating eligibility for the bonus.
ELIGIBLE NEW HOME
The bonus is available in respect of new homes (i.e., newly constructed and substantially renovated homes) where HST is payable. HST will generally be payable on homes purchased from a builder where ownership or possession transfer before April 1, 2013.
Potential buyers should consult with the builder to determine if the home will be subject to the HST.
For owner-built homes, the bonus will be based on land and construction costs subject to the HST. Eligible new homes will include:
»» Detached Houses, semi-detached houses, duplexes and townhouses,
»» Residential condominium units,
»» Mobile homes and floating homes, and
»» Residential units in a cooperative housing corporation.
For examples by property price click here
You will qualify as a first-time new home buyer if:
»» You purchase or build an eligible new home located in B.C.;
»» You, or for couples, you and your spouse or common law partner, have never
previously owned a primary residence;
»» You file a 2011 B.C. resident personal income tax return, or if you move to B.C.
after December 31, 2011, you file a 2012 B.C. resident personal income tax return (you will not be eligible for the bonus if you move to B.C. after December 31, 2012);
»» You are eligible for the B.C. HST New Housing Rebate; and
»» You intend to live in the home as your primary residence. ELIGIBLE NEW HOME
An eligible new home includes new homes (i.e., newly constructed and substantially renovated homes) that are purchased from a builder and
that are owner-built. The bonus will be available in respect of new homes purchased from a builder where:
»» A written agreement of purchase and sale is entered into on or after February 21, 2012;
»» HST is payable on the home (e.g., HST will generally be payable if
ownership or possession of the home transfers before April 1, 2013 – see
further details below); and
»» No one else has claimed a bonus in respect of the home.The bonus will be available in respect of owner-built homes where:
»» A written agreement of purchase and sale in respect of the land and building is
entered into on or after February 21, 2012;
»» Construction of the home is complete, or the home is occupied, before April 1, 2013; and
»» No one else has claimed a bonus in respect of the home. A substantially renovated home is one where all or substantially all of the interior
of a building has been removed or replaced. Generally, 90% or more of the interior of the house must be renovated to qualify as a substantially renovated home (90% test).
Amount of the Bonus
MAXIMUM AMOUNT
The bonus is equal to 5% of the purchase price of the home (or in the case of owner-built homes, 5% of the land and construction costs subject to
HST) to a maximum of $10,000.
PHASE-OUT FOR HIGHER INCOME EARNERS
The bonus will be reduced based on an individual’s/couple’s net income (line 236 of your income tax return) using the following formula:
»» For single individuals, the bonus is reduced by 20 cents for every dollar in
net income over $150,000 (bonus is reduced to zero at $200,000 net income).
»» For couples, the bonus is reduced by 10 cents for every dollar in family net
income over $150,000 (bonus is reduced to zero at $250,000 family net income).
APPLICATION PROCESS
Individuals must apply for the bonus through the B.C. government. Individuals can apply once
application forms have been posted on the B.C. Ministry of Finance website later this year. Applicants will be required to submit documentation demonstrating eligibility for the bonus.
ELIGIBLE NEW HOME
The bonus is available in respect of new homes (i.e., newly constructed and substantially renovated homes) where HST is payable. HST will generally be payable on homes purchased from a builder where ownership or possession transfer before April 1, 2013.
Potential buyers should consult with the builder to determine if the home will be subject to the HST.
For owner-built homes, the bonus will be based on land and construction costs subject to the HST. Eligible new homes will include:
»» Detached Houses, semi-detached houses, duplexes and townhouses,
»» Residential condominium units,
»» Mobile homes and floating homes, and
»» Residential units in a cooperative housing corporation.
For examples by property price click here
Tuesday, February 7, 2012
CMHC - Stated Income Programs - BIG CHANGES
There’s a growing air of uncertainty in the mortgage industry, one we haven’t sensed since the tail end of the credit crunch.
Regulators, media and politicians are waving the caution flag on housing and mortgages, and the foundation of our market (CMHC) is suggesting they’re running out of insurance room.
This has much of the industry in a risk minimization (“risk-off”) mode. In turn, mortgages that are not insurable, income-qualified and owner-occupied are now attracting more scrutiny.
Here’s what we’re hearing…
On CMHC’s $600 billion insurance cap…
CMHCThe consensus among industry executives we spoke with is that CMHC will not receive near-term approval to write more than $600 billion worth of mortgage default insurance. Political and risk concerns are the most cited reasons for this.
That may change if CMHC approaches parliament with urgency to lift its cap. (We don’t have enough information to judge this probability, so we won’t.)
“The government doesn't want lenders insuring low loan-to-values,” one capital markets expert told us, on condition of anonymity. Insuring low LTV mortgages suggests banks are abnormally concerned about risk and eager to find a way around OSFI’s capital guidelines (buying mortgage insurance lowers banks' capital costs in many cases).
Lenders are reportedly disproportionately relying on low-ratio insurance to cover themselves on mortgages in Toronto and Vancouver where price risk means 80% LTV is less security than in most cities.
“There is a false comfort in loan-to-values.” It’s often better to have more room to service debt, than more equity, said the above source. “If I’m choosing between an 80% LTV with a 42% TDS and a 95% LTV with a 30% TDS, I’ll take the latter.”
We’ll find out how close CMHC is to its present $600 billion cap when it issues its 4th quarter financials (due by month’s end).
On covered bonds…
Pressure to increase the $600 billion ceiling may wane if the government decides it will no longer guarantee covered bonds. (We could hear more about that in the next 30-60 days when new covered bond legislation is rumoured to be due).
Covered bonds used up roughly $24 billion of insurance capacity in 2011.
The government’s position is that covered bonds don’t need to rely on insurance, and that’s true in some cases.
The Covered Bond Report cites evidence that RBC’s covered bonds (which are backed by uninsured conventional mortgages) demand yields as low as five basis points above insured covered bonds. (That’s a tight spread. Albeit, other issuers would likely pay more than RBC, given its strong credit rating.)
Our key source above told us: “The Feds are going to have to increase the covered bonds limit if they're serious about not harming liquidity.”
On lenders' backup plans…
Word is, a slew of lenders have been on the phone with Genworth and Canada Guaranty. They’re looking for a replacement to the bulk insurance they can no longer buy in size from CMHC.
We spoke with other knowledgeable sources who speculate that private insurers may only be able to fill demand for a year or so before hitting their own insurance limits.
Another question is, what cost premium will investors demand from lenders in order to buy mortgages backed by private insurers (who have a 90% government guarantee versus CMHC 100% guarantee). At the consumer level, a 10 basis point interest rate disadvantage is a turnoff in today’s competitive mortgage arena.
Non-bank lenders have been calling “every available liquidity source” one lender executive told us yesterday.
Another lender said: “Investors' appetite for private insurance will dictate how much conventional business monolines do…Banks can withstand this because they will put it on their balance sheet....with no conventional rate premium.”
On CMHC portfolio insurance limits…
The ramifications of CMHC nearing its $600 billion insurance cap are potentially great. The most noticeable outcome so far has been CMHC’s first-ever bulk insurance rationing system. Depending on how CMHC allocates bulk insurance to lenders, it could:
adversely impact smaller lenders who rely on portfolio insurance for liquidity OR provide an advantage to certain smaller/newer lenders (depending on whether their cap on buying bulk insurance is based on an industry average [which could be relatively large for a small lender])
adversely impact major banks that use portfolio insurance for capital relief.
adversely impact consumers by way of fewer product options and higher rates on low-ratio mortgages
Ron-SwiftRon Swift, CEO of Pacific Mortgage Group Inc., told us yesterday: “The result of these restrictions ultimately means there will be an impact on liquidity in the market place. I think this will first impact products that have the higher insurance costs, such as stated income & self-employed. They will either be stopped or the rates charged to these clients will have to be significantly increased. Either way, tightening liquidity, reducing mortgage options or increasing the costs will take some buyers out of the market, which will affect all of us.”
Thus far, we’ve seen a handful of non-bank lenders announce higher conventional (<=80% LTV) mortgage rates. More are expected to follow.
On stated income mortgages…
OSFI, Canada’s bank regulator, has been concerned about stated income mortgages for months.
firstlineFirstLine, a major lender and one of CIBC’s mortgage divisions, dropped a bombshell on brokers Tuesday. It announced that it’s suspending stated income approvals effective immediately. (Refis and switches among CIBC’s own brands are not impacted.)
We’ve already heard of other lenders either terminating their stated income programs or upcharging the rates.
As a side note: CIBC says its “changes affect FirstLine only,” which will really tick off brokers. It seems that CIBC’s decisions to: a) apply this policy only to brokers, b) severely undercut brokers on renewal, and c) apply rate favouritism to its retail channel, are destroying FirstLine’s long-standing goodwill among brokers. We hate saying that because we have all the respect in the world for the BDMs, underwriters and management we have had the privilege of knowing at FirstLine. This decision obviously comes from above their heads.
This information came from http://www.canadianmortgagetrends.com
Regulators, media and politicians are waving the caution flag on housing and mortgages, and the foundation of our market (CMHC) is suggesting they’re running out of insurance room.
This has much of the industry in a risk minimization (“risk-off”) mode. In turn, mortgages that are not insurable, income-qualified and owner-occupied are now attracting more scrutiny.
Here’s what we’re hearing…
On CMHC’s $600 billion insurance cap…
CMHCThe consensus among industry executives we spoke with is that CMHC will not receive near-term approval to write more than $600 billion worth of mortgage default insurance. Political and risk concerns are the most cited reasons for this.
That may change if CMHC approaches parliament with urgency to lift its cap. (We don’t have enough information to judge this probability, so we won’t.)
“The government doesn't want lenders insuring low loan-to-values,” one capital markets expert told us, on condition of anonymity. Insuring low LTV mortgages suggests banks are abnormally concerned about risk and eager to find a way around OSFI’s capital guidelines (buying mortgage insurance lowers banks' capital costs in many cases).
Lenders are reportedly disproportionately relying on low-ratio insurance to cover themselves on mortgages in Toronto and Vancouver where price risk means 80% LTV is less security than in most cities.
“There is a false comfort in loan-to-values.” It’s often better to have more room to service debt, than more equity, said the above source. “If I’m choosing between an 80% LTV with a 42% TDS and a 95% LTV with a 30% TDS, I’ll take the latter.”
We’ll find out how close CMHC is to its present $600 billion cap when it issues its 4th quarter financials (due by month’s end).
On covered bonds…
Pressure to increase the $600 billion ceiling may wane if the government decides it will no longer guarantee covered bonds. (We could hear more about that in the next 30-60 days when new covered bond legislation is rumoured to be due).
Covered bonds used up roughly $24 billion of insurance capacity in 2011.
The government’s position is that covered bonds don’t need to rely on insurance, and that’s true in some cases.
The Covered Bond Report cites evidence that RBC’s covered bonds (which are backed by uninsured conventional mortgages) demand yields as low as five basis points above insured covered bonds. (That’s a tight spread. Albeit, other issuers would likely pay more than RBC, given its strong credit rating.)
Our key source above told us: “The Feds are going to have to increase the covered bonds limit if they're serious about not harming liquidity.”
On lenders' backup plans…
Word is, a slew of lenders have been on the phone with Genworth and Canada Guaranty. They’re looking for a replacement to the bulk insurance they can no longer buy in size from CMHC.
We spoke with other knowledgeable sources who speculate that private insurers may only be able to fill demand for a year or so before hitting their own insurance limits.
Another question is, what cost premium will investors demand from lenders in order to buy mortgages backed by private insurers (who have a 90% government guarantee versus CMHC 100% guarantee). At the consumer level, a 10 basis point interest rate disadvantage is a turnoff in today’s competitive mortgage arena.
Non-bank lenders have been calling “every available liquidity source” one lender executive told us yesterday.
Another lender said: “Investors' appetite for private insurance will dictate how much conventional business monolines do…Banks can withstand this because they will put it on their balance sheet....with no conventional rate premium.”
On CMHC portfolio insurance limits…
The ramifications of CMHC nearing its $600 billion insurance cap are potentially great. The most noticeable outcome so far has been CMHC’s first-ever bulk insurance rationing system. Depending on how CMHC allocates bulk insurance to lenders, it could:
adversely impact smaller lenders who rely on portfolio insurance for liquidity OR provide an advantage to certain smaller/newer lenders (depending on whether their cap on buying bulk insurance is based on an industry average [which could be relatively large for a small lender])
adversely impact major banks that use portfolio insurance for capital relief.
adversely impact consumers by way of fewer product options and higher rates on low-ratio mortgages
Ron-SwiftRon Swift, CEO of Pacific Mortgage Group Inc., told us yesterday: “The result of these restrictions ultimately means there will be an impact on liquidity in the market place. I think this will first impact products that have the higher insurance costs, such as stated income & self-employed. They will either be stopped or the rates charged to these clients will have to be significantly increased. Either way, tightening liquidity, reducing mortgage options or increasing the costs will take some buyers out of the market, which will affect all of us.”
Thus far, we’ve seen a handful of non-bank lenders announce higher conventional (<=80% LTV) mortgage rates. More are expected to follow.
On stated income mortgages…
OSFI, Canada’s bank regulator, has been concerned about stated income mortgages for months.
firstlineFirstLine, a major lender and one of CIBC’s mortgage divisions, dropped a bombshell on brokers Tuesday. It announced that it’s suspending stated income approvals effective immediately. (Refis and switches among CIBC’s own brands are not impacted.)
We’ve already heard of other lenders either terminating their stated income programs or upcharging the rates.
As a side note: CIBC says its “changes affect FirstLine only,” which will really tick off brokers. It seems that CIBC’s decisions to: a) apply this policy only to brokers, b) severely undercut brokers on renewal, and c) apply rate favouritism to its retail channel, are destroying FirstLine’s long-standing goodwill among brokers. We hate saying that because we have all the respect in the world for the BDMs, underwriters and management we have had the privilege of knowing at FirstLine. This decision obviously comes from above their heads.
This information came from http://www.canadianmortgagetrends.com
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