“The interpretation of the maximum loan-to-value ratio section of regulation B20, specifically the section that deals with structuring a mortgage or a combination of a mortgage and other lending products that exceeds the maximum loan-to-value limit, is presently under review by the regulator.

With an abundance of caution, we’ve chosen to withdraw the Opti-85 Bundle Program until such time that the regulator provides further clarification on this section.”

• Future Rates: TD projects a 2.25 percentage point jump in 5-year bond yields by 2017. That would peg 5-year fixed rates at roughly 5.74%. Given economists’ poor forecasting record, this number is a pure shot in the dark. But it’s still a worthwhile number to use when stress testing your mortgage. That aside, one TD assertion that most would agree with is that future rate “increases are expected to be…gradual.”

• Securitization: The report notes that, “…The recently-announced changes to the amount of mortgage backed securities that will be guaranteed by CMHC will…lead to somewhat higher costs in funding for financial institutions.” As we wrote on August 6th, this impact won’t be extreme for most lenders (and consumers).

• The Variable Advantage: TD concludes that even if one assumes an abnormally high variable rate like prime + 1.00%, a variable-rate mortgage has still “yielded a lower average interest rate over a five year term (than a 5-year fixed) since the late 1990s.”

• The Best Rate Forward: According to TD’s analysis and rate projections, “…Locking into a 5-year mortgage rate would yield the lowest average interest rate over the next five years.” But TD analyzes just four other term scenarios including a 5-year variable and five consecutive 1-year terms. TD’s report does not touch on options like the 4+1 strategy (i.e. choosing a 4-year fixed and renewing into a 1-year fixed). The 4+1 is a decent play today with 4-year fixed terms near 3.09% (i.e., 30 bps below most five-year fixed offers). If you do the math, one-year rates would need to be above 4.80% at renewal for a 5-year fixed to beat the 4+1 strategy. That’s over two points higher than today, which makes it a good gamble given how modest inflation and growth have been (and are projected to be).

• Rate Impact on Housing: TD’s research finds that “every 1 percentage point increase in interest rates leads to an immediate increase in sales of 6 percentage points as buyers rush to take advantage of lower rates, followed by a 7% decline in the months that follow. Hence, the net impact is a 1 percentage point permanent decline in existing home sales due to every 1 percentage point increase in interest rates.” By our calculations that’s about 4,500 lost sales a year per 1 point of rate hikes (based on CMHC’s sales projections). That is not catastrophic by any stretch, and frankly it seems like an underestimate, if anything.

• Income Gains: TD expects that 3-4% income growth will “help offset much of the impact of gradually rising rates”

• Mortgage Affordability: The report states, “…Affordability using the 5-year posted rate (is) at the worst it has been in almost 13 years. And, if 5-year interest rates were at more normal levels of around 7%, housing would be unaffordable to the average Canadian household.” There’s just one caveat. That statement is based on posted rates (i.e. those rates that no one pays). “Using the 5-year special mortgage rate, housing affordability in this country is actually at its most favourable level since early 2000’s,” TD says. How long it remains that way is another question. Complacency can be devastating to one’s budget, so mortgage stress testing is once again key here.

• Rate: Prime – 0.50% (2.50% today)
• Term:  5 years
• Lump-sum prepayments: 20% annually
• Payment increase option: 20% annually
• Loan-to-value:  High-ratio insured only
• Conversion: Can be converted free of charge to a Low Rate 5-year fixed or standard 5-year fixed
• Penalty: 3% of outstanding principal
• Increase & Blends: Not available
• Maximum Mortgage: $750,000
• Online Account Access:  Not available
• Pre-Approvals: Not available
• Portable: Yes
• Rate Hold: 90 days

• 10% or less (62% of respondents)
• 11-20% (26% of respondents)
• More than 20% (12% of respondents)

• 53% say “up to three years”
• 25% say between four and six years
• 16% say seven years or more
• 6% say they’ll never save enough to buy a home

• 39% prefer a term over five years
  (versus 22% of all prospective buyers)
• 38% prefer a 5-year term
• 23% want a term less than five years.

• 14% of homeowners said they should have made a bigger down payment.
• 29% of prospective borrowers (42% of first-time buyers) are considering a hybrid mortgage (e.g. part-fixed and part variable). But far fewer (just 7% according to CAAMP) actually choose hybrid mortgages.
• Just 5% of homeowners admit to choosing the wrong type of mortgage. (From our experience, far more complain about their financing than 5%. Many don't realize they've taken an inferior mortgage until they learn of their lender's policy on penalties, porting, blending a rate, converting a rate and so forth. Those lessons typically come after closing, when it's too late.)

• As an insurer, "We make money by getting the risk right." That means "We've got to get the properties right," he told BNN.
  (If one is to read into this, and if history is a guide, we can expect more scrutiny on appraisals and property types as the market slows. This is especially true in richly valued markets like the Greater Toronto Area and Vancouver.)
• "Our two factors that drive our business performance are delinquencies, driven by unemployment (a very high correlation), and the size of our claims…(as) driven by home price declines."
  (As a result, Hurley hinted that Genworth is now focusing more on employment quality in its underwriting.)
• Genworth has been extra careful about insuring condos with a large investment component—typically those with small unit sizes.
• For the next few years "the mortgage market is going to be flat," he predicted. It will be "a couple of years until we see [the mortgage market] back to the 5-6% growth rate.”
• Genworth is seeing 24-25% average gross debt ratios (GDS) for first-time buyers
  (That may seem surprisingly low and well below the normal maximum of 32-39%. But CAAMP found that the average GDS of an insured fixed-rate borrower was 22.5% in 2010—the latest marketwide GDS data we know of.)

• Genworth says it now controls about one-third of the mortgage insurance market.
• Only about 60% of mortgage delinquencies actually require Genworth to pay a claim. The rest are “worked out” or otherwise resolved.
• Genworth’s principal balance of insured mortgages was approximately $150 billion at year-end 2012 and 2011. The company had previously estimated its 2011 insurance in force at $204 billion. That’s quite the botched estimate for an insurer that's expected to know its exposure. At least it tried to be conservative by overestimating, versus underestimating. On a positive business note, this leaves it and Canada Guaranty with a combined $150 billion of insurance they can write (and still fit under the federal cap), versus CMHC’s $34 billion.

• “Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs...”
• “The Bank expects…the debt-to-income ratio [to stabilize] near current levels.”
• “…Residential investment is expected to decline further from historically high levels.”
• “With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.”

“Given the recent spat of weak economic data, below target range inflation and the presumably widening output gap, the market's ruling out of interest rate cuts makes little sense.”

"This could be considered a con for clients who want flexibility to have the choice of transferring out (to another lender).”

a) have a high likelihood of refinancing before maturity, and

b) the lender approves you for those additional funds (a big caveat).

• Since they’re often registered for more than the mortgage amount, collateral charges can sometimes prevent you from obtaining a second mortgage or a secured line of credit elsewhere (unless you pay any penalties and fees required to leave the collateral mortgage lender, or unless that first lender reduces the mortgage amount it has registered and permits secondary financing).
• Title insurance premiums can sometimes be higher for a collateral mortgage than for a regular mortgage.
• In some cases, defaulting on another debt owed to a collateral mortgage lender can put your house at risk. That’s because that lender can theoretically seize your home equity if you don’t pay that other debt. (This is called “offsetting” in legal parlance.)

• Cliff relief: The U.S. dodged a full-scale swan dive off the “fiscal cliff.” As a result, relieved traders have been selling “safe” bonds and rotating into riskier assets. There may be more of that to come, especially if debt ceiling talks progress better than expected.
• Spring Market: Bond and real estate seasonality are sometimes underestimated. As the prime homebuying season approaches, fixed-rate mortgage demand could help support yields.

• A U.S. Econoflop: Congress’s new tax increases are growth and job killers. And, the wasted opportunity to cut spending means future U.S. “austerity” measures could be more severe.
• Debt Ceiling: In a few months, Congress will face its next big decision: raise the debt ceiling for the 41st time in 30 years, or let the U.S. default. The latter isn’t likely but the thought of it could perpetuate the safe-haven trade (i.e. keep people from dumping bonds and driving up yields).
• Euro-risk: Europe’s three years of debt turmoil has been upstaged, but not eliminated. European central bank liquidity is a Band-Aid solution and Spain and Greece are in depression.

• Rating agencies: The New Year’s fiscal cliff compromise cut just $12 billion in U.S. spending, while adding $4 trillion of new debt. Credit rating agencies must be shaking their heads. Without budgetary tightening by spring, another downgrade is not unthinkable. Losing another AAA rating would either seriously damage the Treasury’s “risk free” reputation and spike yields, or compel investors to buy U.S. Treasuries in knee-jerk fashion (like in August 2011).
• U.S. and/or Canadian Outperformance: Most traders expect low rates to stick around. But if employment improves significantly and traders sense that the Fed is abandoning its commitment to hold down rates, all bets are off. The historic Treasuries rally will unwind and yields will lift-off.