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Canadian Mortgage News
Blog
The Future of 85% LTV Bundles
Posted on October 11, 2013 at 10:34 AM |
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Federally-regulated lenders cannot lend more than 80% of a home’s value without the borrower getting mortgage insurance. But a few banks have developed a way around that. What they do is loan the borrower 75-80% loan-to-value as a first mortgage. Then they facilitate a 5-10% LTV second mortgage with a separate private lender. This allows for financing totalling 85% LTV with no insurance fee. Optimum Mortgage,
a division of Canadian Western Bank, had just such a product—until
recently. It was called the Opti-85 Bundle, and here’s why it was pulled
from the market. According to Lester Shore, Vice President, Optimum Mortgage:
Brock Kruger, a spokesperson for banking regulator OSFI,
says that OSFI does not prevent combo mortgages in general. He adds
that mortgage combinations totalling 85% LTV “could technically be
onside, but this is highly dependent on other conditions. For example,
one must also verify whether the principles laid out in (regulation) B-20 are being met in their entirety.” Equitable
Bank is another lender offering an 85% LTV bundle mortgage. We haven’t
heard any talk whatsoever about it pulling this product. Indeed, given
Equitable’s conservative nature and prudent underwriting, one has to
assume that it believes it is in full compliance with B-20 as written. Home Trust
used to offer an 85% bundle but stopped a while back. “We were being
prudent from a risk standpoint,” says President Martin Reid. (Home Trust
does, however, allow second mortgages behind its first mortgages.) Interestingly,
Reid notes that 85% bundle mortgages actually perform better
statistically than standalone 80% LTV mortgages. That’s because “the
lender in second position tends to keep the mortgage current.” The
second mortgage lender doesn’t want the borrower to default, in which
case the first mortgage lender would have priority if the property was
foreclosed on. In any case, hopefully Optimum puts its Opti-85
mortgage back on the market. It would be sad to see these products
regulated out of existence. 85% bundles offer a valuable alternative for
borrowers who don’t qualify for traditional insured mortgages, and who don’t have a 20% down payment. The truth is, these products are not a hazard. They are carefully underwritten and the bank or trust company (who’s lending against the first mortgage) does not incur a meaningful degree of extra risk. It is the second mortgage lender, which lends its own uninsured
capital, that takes the brunt of the risk. And, as mortgage
professionals all know, second mortgage providers tend to be extra
vigilant risk-conscious lenders. Rob McLister, CMT |
Rate Hikes and Housing: TD Research
Posted on September 8, 2013 at 10:10 AM |
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August 30, 2013
Rate Hikes and Housing: TD Research
In just a few short months, long-term mortgage rates have burst higher by almost ¾ of a percentage point.
People naturally want to know if the hikes are sustainable, and how they’ll affect the overall housing market.
TD Economics weighed in on these points in a report last week. Here’s
a quick overview of the implications TD foresees, and some observations
of our own…
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Variable vs. Fixed Rates - The Latest
Posted on June 5, 2013 at 10:46 AM |
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As many as 85% of new mortgagors are choosing fixed rates, says CAAMP. It makes you wonder, what is it going to take to get that number back to its historical average of ~65%?
For one thing, the fixed-variable spread
(i.e., difference between fixed and variable rates) needs to widen.
With today’s typical 5-year fixed at 2.84% and discounted variables at
2.45%, that spread is currently ~39 basis points. As a rough rule of thumb, when the fixed-variable spread hits 100
basis points, demand for variables noticeably increases. Spreads are
currently a ways off from that point, but we may inch closer this
summer.
Despite prime rate
being stuck at 3.00% for 1,000 days now, floating rates have slowly
been improving. They’re being aided, in part, by falling short-term
funding costs. The 1-year LIBOR (chart below) is a very rough proxy of
these.
(Click to enlarge – Chart by Quotemedia)
The proof is in lender offers, and the latest comes from RMG Mortgages. Last week it launched a prime
– 0.50% product (more on that below). That’s the biggest variable
discount of any national lender since 2011, when they hit prime – 0.90%
(or better).
The fixed-variable spread is also widening because of slightly higher long-term rates. The 5-year yield (which leads fixed rates) hit a fresh 4-month high today at 1.53%, before falling 6 bps on concerning news that U.S. manufacturing contracted.
(Click to enlarge – Chart by Investing.com)
There’s no way to tell if the recent spurt up in bond yields has
staying power. Considerable resistance lies above at the 1.55% to 1.60%
level. Yields have been rebuffed twice before when attempting to pierce
that range. Until they do, odds are low that 5-year fixed rates and the
fixed-variable spread will increase significantly.
More on RMG’s New “Low Rate Basic” Variable
|
First-Time Down Payments
Posted on May 13, 2013 at 10:02 AM |
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A wide majority of first-time buyers-to-be plan to put down less than 20%, according to new data from RBC/Ipsos.
Here's the breakdown of their expected down payments:
Over half of newbie homeowners will likely pay the maximum default insurance
premium to buy their home.* That maximum ranges from $2,750-$2,900 per
$100,000 of purchase price (i.e., 2.75%-2.90%), depending on the source of down payment.
If home prices rise 2% a year (a rough rule of thumb for the
long-term growth rate), buyers can easily make up that insurance premium
in a few years. If prices drop, it's just one more thing that eats into
their equity if they have to sell.
*********
How long do young buyers expect to save for their first down payment?
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The Market Pulse from Genworth
Posted on May 13, 2013 at 9:59 AM |
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Last year’s mortgage regulations shrank the overall high-ratiomortgage insurance market by about 15%, according to recent estimates from Genworth Canada.
Those rule changes also eliminated high-ratio refinances and
contributed to a 15% drop in housing sales last quarter versus Q1 2012. Genworth CEO Brian Hurley spoke today on BNN about the pulse of the market. Here are some of his insights of note (our comments in italics):
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OSFI Considering Mortgage Amortization Changes
Posted on May 13, 2013 at 9:15 AM |
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Federal policy-makers are exploring additional mortgage rule tightening, CMT has confirmed.
A spokesperson from Canada’s banking regulator, The Office of the Superintendent of Financial Institutions Canada (OSFI), verified that it is looking at the issue of limiting amortizations to 25 years on conventional mortgages (those with 20%+ equity). Currently, those “low-ratio” mortgages can have amortizations up to 35 years.
OSFI is “doing some preliminary consultation with financial institutions” on the matter, said the spokesperson.
Those communications appear to be behind the scenes with banks and
federally-regulated trust companies. OSFI will not be issuing a public
statement in the very near term (i.e., next week).
The
regulator added, “We are working to determine the desirability of some
changes given current conditions in housing markets and recent trends in
household indebtedness.”
“A decision in that regard would be taken once we hear back from the
industry. Any proposed changes to our mortgage guideline that may result
from this work would be subject to a public consultation process.”
Officials from OSFI, the Department of Finance (DoF) and the Bank of
Canada have been working together closely. Their aim is to stabilize
housing, moderate debt levels and reduce economic exposure to rising
rates.
When implementing the last set of mortgage changes in 2012, Finance Minister Flaherty made it crystal clear that he considers it “desirable” to make home buying more difficult.
In December, he told reporters:
“Less demand, lower prices, modestly, in the housing market are much
better for Canadians than a boom followed by a bust. So I'm all for a
soft landing.”
But real estate has been more resilient than many expected. And some
at the DoF are not satisfied that housing is slowing fast enough.
Recent data show national home sales down roughly 15% year-over-year.
Mortgage volumes have dipped as well. But home prices are marching
stubbornly higher, hitting a new record high in March according to
Canadian Real Estate Association (CREA) figures.
There’s every reason to suspect that the DoF will keep applying air
brakes until the housing plane has no more lift. Then it becomes a
question of whether home prices glide lower or break into an all-out
dive (a lower probability).
This article is in follow-up to Friday’s story: Death Sentence for Extended Amortizations?Rob McLister, CMT |
Flaherty Talks Another Bank into Higher Rates
Posted on March 20, 2013 at 9:38 AM |
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On Friday, Manulife Bank posted its lowest rate ever on a 5-year fixed mortgage, 2.89%. It lasted for four days.
When our big brothers at the Department of Finance (DoF) caught wind of it, they dialed up Manulife and swayed the bank into raising its rate back to 3.09%. “We don’t want a race to the bottom on mortgage rates by our
financial institutions…,” said Finance Minister Jim Flaherty, as quoted
by Bloomberg. “I had one of my staff call (Manulife) and indicate my displeasure.”
Manulife responded today by saying:
"After consulting with the Department of Finance, Manulife Bank has
withdrawn the (2.89%) promotional campaign and reverted to our previous
posted rate."
So now we have Manulife, the 10th largest bank by assets, being told
by bureaucrats how to price its mortgages. Two weeks ago, BMO got the
same call.
Where does this end? The DoF seems set on breaking the knees of home
prices, one way or another. With it so intent on regulating real estate
transactions, will the next round of headlines read: "Ottawa Legislates
Price Ceilings on the Sale of New Homes?" (Yes, this is an
exaggeration...I think.)
The Political Reaction
In an interview
with Canadian Press, NDP Leader Tom Mulcair called Flaherty’s actions
"Banana Republic behaviour,” saying the minister has no right to
interfere with a free marketplace (somewhat ironic commentary from the
NDP, but that’s another matter).
"Either we have a market or we don't," Mulcair added. "The banks have
huge profits. The idea that they shouldn't be able to give a break to
consumers is ridiculous and the idea that the Minister of Finance would
basically be trying to create some kind of a cartel among the banks and
the financial institutions as to what they can offer consumers by way of
interest rates is I think completely inappropriate, completely
wrong..."
Liberal interim leader Bob Rae expressed similar sentiments, calling the minister’s actions “ridiculous.”
The DoF is now asking banks to use their rates as tools to regulate
the housing market. That’s not their role. Banks, as private sector
entities, have an obligation to legally maximize profit. It's their job
to set rates as high or as low as may be required to achieve
that goal. Banks have every right to compete as hard for mortgages as
the myriad of other lenders currently advertising 2.89% or less.
One might argue that banks benefit from selling government-backed insured mortgages, and that they should therefore defer to the Finance Minister’s wishes. But all
lenders sell insured mortgages. Why single out just the banks by
compelling them (and only them) to advertise artificially high rates?
Moreover, what if rates continue lower and stay low for years? Or
what if home prices dive after the spring market? In these cases,
governmental rate tampering would prove pointless, with the sole effect
of taking money from borrowers' wallets (through higher interest) and
transferring it to bank coffers.
Prudence Misdefined
Each time banks advertise sub-3% five-year fixed mortgages, Flaherty exhorts that lenders be “prudent.”
But lowering rates (to match one’s competitors and reflect
market-wide improvements in funding costs) is not “imprudent.” Lending
to borrowers who don’t qualify for a mortgage is imprudent. There’s a difference.
Some suggest that when big banks advertise low rates, it fuels excess
home demand. But few people see 3.09% and say “I can’t afford a house”
and then see 2.99% and say “Hey, I can afford a house.”
A one-tenth of a percentage point rate reduction lets someone qualify
for less than a 1% higher purchase price (based on standard debt ratio calculations). That is far from bubble-inducing.
Behind the Hype
When banks advertise rates that are already widely available, they’re
not triggering a “race to the bottom” as the minister suggests. Rates
are driven lower by market forces—which currently include shrinking
mortgage volumes, narrowing spreads
and falling funding costs. Micro-pricing adjustments by individual
banks, however large those banks may be, barely impact market demand—and
only in the short-term.
If anything, it is Flaherty’s own public crusade against rate
promotions that is raising the profile of low rates. It’s sparking more
consumer mortgage interest than any bank advertising could.
Indeed, if it weren’t for all the media attention Flaherty has
caused, sub-3% rates would just blow over. But instead, a small number
of buyers may now actually rush to get a mortgage “before the government
bans 2.89%,” as one of our worried readers expressed today.
Patience…
Mr.
Flaherty doesn't want spiralling home prices to lead to a real estate
collapse. And that’s completely understandable. But a few tenths of a
percent off rates will not trump market fundamentals in determining
where home prices go from here.
At this stage, the real estate market needs time to digest all of the
mortgage restrictions from 2012 and find its own equilibrium. And we’re
already seeing signs of that with inventories building for the last three quarters and sales down sharply.
If the market doesn’t self-correct, the DoF, in its quest to moderate
home prices, has the ability to tighten lending regs further. At least
in that case, market-wide regulation would apply to all mortgage
providers equally, and not just handicap the banks.
As I wrote in the Globe & Mail yesterday (story link),
consumers are the losers here. If a bank customer pays one-tenth of a
percentage point more as a result of Flaherty’s actions, that’s $1,200
more interest over five years on a $250,000 mortgage.
So far, the other bank on Flaherty’s radar, BMO,
hasn’t caved to the pressure and is still advertising a 2.99% five-year
rate. It’s refreshing to know that some bankers are brave enough to
give consumers a fair shake and do what they're paid to do: sell
mortgages.
Rob McLister, CMT |
BoC Decision: Lower for Even Longer
Posted on March 11, 2013 at 9:15 PM |
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Canadian macro-economists are mostly in agreement that the overnight rate should go nowhere in the next 9-12+ months. And the Bank of Canada gave no indication today that such projections are off the mark.
The Bank left Canada’s core lending rate unchanged at 1% for the 29th straight month, with no change in sight. Part of the Bank’s reasoning is reflected in these comments from its statement:
For an excellent deciphering of the Bank’s press release, click here. Today’s announcement shed little new light on the timing of the next prime rate
change. Of course the BoC is still suggesting that the next rate move
is up, but others, like David Madani of Capital Economics, aren’t so
sure. On Sunday, Madani said the "inevitable" rate hikes that so many predict could actually be pre-empted by policy loosening. He noted:
For now, as long as the 5-year bond yield
stays under or within the psychological 1.50% to 1.60% range, there’s
little danger of any notable rise in rates. After this morning's rate
announcement, bond yields remained flat at 1.32%. |
TD Takes Heat for its Collateral Mortgages
Posted on January 30, 2013 at 10:50 AM |
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Author: Rob McLister, CMT Published: January 28, 2013 Link to original article provided below Collateral charge mortgages got more bad press on Friday after CBC’s Marketplace ran this report.
The gist of it is that collateral mortgages "effectively trap you at the bank," says the CBC (which is not entirely true… more on that below).
TD Canada Trust, which sells only collateral charge
mortgages, was caught in CBC’s crosshairs. An undercover reporter went
into a TD branch with a hidden camera, asking the mortgage rep what made
TD mortgages different than those at other banks.
After being questioned in four different ways, the TD rep finally disclosed that TD’s mortgage was a collateral charge, saying:
CBC approached TD corporate for comment, but TD apparently wouldn’t respond about its collateral mortgages on camera. Collateral charges are designed so that you don’t need to pay
refinance fees if you add more money to your mortgage. But they’re also
criticized because, in most cases, they force you to pay
legal/registration fees to switch to another lender (due to the way
they’re registered). In turn, that roadblock helps the lender retain
more customers. Even TD itself does not accept collateral mortgages from other
lenders. In its mortgage guidelines (which we obtained freely off the
Internet) TD says: “Collateral mortgages (e.g. Manulife One accounts and
Scotia Total Equity Plan accounts) are secured by collateral mortgages
and cannot be transferred [to TD].” It should be noted, however, that a handful of lenders currently pay
legal fees to attract business from people with collateral mortgages.
ICICI Bank (for status brokers) and Royal Bank (according to a rep we
spoke with) are two such lenders. One of the bones CBC picked with TD was that its collateral
registration is not disclosed to clients until the customer is signing
in the lawyer’s office, at which point it's too late to switch lenders.
CBC might have been referring to old documentation, however, because
TD’s approvals now clearly disclose that their mortgages are a
“COLLATERAL CHARGE.” (Whether the borrower reads this disclosure and
understands it, and whether the TD rep or broker explains what it means,
are separate issues.) Collateral mortgages are useful and can save you roughly $500 to $800 in legal costs if you:
But they also have potential drawbacks, over and above the additional switching cost:
A number of other lenders sell collateral charge mortgages besides
TD. They do so even if the borrower wants just a regular mortgage with
no line of credit. Such lenders include ING Direct, National Bank and
various credit unions, for example. And most of these lenders don’t give
you an option to refuse this type of registration. All in all, collateral mortgages are right for some but clearly
unsuitable for many. A few years ago, TD said that “20 times” as many
customers refinanced with them versus leaving for another lender. But
that figure has to be less now, given that government rules prohibit
refinances above 80% loan-to-value, and given that home price appreciation isn't what it used to be. To that extent, the net benefit of collateral mortgages is questionable for most of today's borrowers. Rob McLister, CMT |
Canadian Mortgage Rates Hinge on the Americans
Posted on January 25, 2013 at 2:27 PM |
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Link to original article at bottom of page. Author: Rob McLister, CMT If you want to know what’s moving Canadian mortgage rates, watch the American news.
The reason? Canadian bonds are 95% correlated with American bonds
(Treasuries) and bond yields are 97% correlated with 5-year fixed
mortgage rates. (See: Yields and Fixed Mortgage Rates)
In other words, Canadian rates are married to U.S. rates. So it’s no
wonder that our mortgage rates are being shifted by things like the U.S.
debt ceiling and fiscal cliff.
Below is a list of factors weighing on mortgage rates right now:
Rates are in a tug of war between bullish factors (those lifting
yields) and bearish factors (those depressing yields). Here’s a current
summary of each: Bullish factors for rates
Bearish factors for rates
Wildcards for rates
At the moment, there is maximum uncertainty. While nobody expects major rate increases near-term, a 20-30 basis point increase would shock no one. So if you need a mortgage in the next six months, don’t hesitate to lock in at today’s epic low rates. Rob McLister, CMT |
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