Will CMHC Max Out ?!?!?

As CMHC inches closer and closer to their Government imposed cap limit of $600 billion, there is a growing concern that they will stop insuring mortgages once they get there.  Here is a great article written by Rob McLister of CanadianMortgageTrends.com that summarizes the situation.

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February 02, 2012

“Risk-Off” in the Canadian Mortgage Market

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…

• The 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:
  1. 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])
  2. adversely impact major banks that use portfolio insurance for capital relief.
  3. adversely impact consumers by way of fewer product options and higher rates on low-ratio mortgages
• Ron 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.
• FirstLine, 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.

On the lead time CMHC gave to lenders…

• CMHC seems to have been caught by surprise by the demand spike for bulk insurance. Lenders were reportedly given barely a month’s notice that they would be subject to rationing of this insurance.
• Some had no idea how much less portfolio insurance they’d be permitted to buy until this week. It turned out to be drastically less, and it could materially impact their business models, especially for smaller lenders who rely on this insurance for securitization.
• One lender exec said that CMHC should have provided at least 90 days notice so lenders could plan contingencies. That individual summarized the new default insurance allocation process with two words: “Bad execution.”

On who wins in all this…

• B Lenders
  • With the government and prime lenders in risk-off mode, uninsured non-prime lenders could win a bigger piece of the equity and alt-A pie.
  • Names include but are not limited to:
    • Home Trust (TSX: HCG)
    • Equitable Trust (TSX: ETC)
    • Equity Financial Trust (TSX: EQI)
    • etc…
• The Big 6 Banks
  • On one hand, they lose due to higher capital costs—as CMHC tightens the tap on bulk insurance.
  • They could gain however in terms of market share on conventional mortgages. That depends, of course, on how widely available CMHC portfolio insurance is going forward.
• Mortgage insurers Genworth (TSX: MIC) and Canada Guaranty
  • Demand for private insurance may increase, for at least the remainder of 2012 anyway.

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It bears noting that the situation is relatively fluid at the moment. Things may change and nothing is written in stone. Perhaps we’ll see CMHC make a statement soon that reassures the market. In any case, we’ll know more as the next week unfolds.

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Rob McLister, CMT

New Year’s Resolutions: Tips to Pay Down Debt and Grow Your Savings

It's that time of year when many of us rack up credit card balances and then work on paying them off over the next few months.   Here is a great article I just read from RateSupermarket.ca on tip to pay down your debt and grow your savings.   Enjoy!!

The Summerside Mortgages Planning Team

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RateSupermarket.ca challenges Canadians to get financially fit in 2012

TORONTO, December 29, 2011…Millions of people commit to getting in shape for their New Year’s Resolution, but RateSupermarket.ca is challenging Canadians to get financially fit as well. Canada’s rate comparison website for personal finance products urges consumers to tackle their personal debt and grow their savings in 2012.

“Getting healthy and starting a new hobby are all great resolutions for the New Year,” says Kelvin Managroo, President of RateSupermarket.ca. “But given the current global economic situation and forecast for low growth over the next few years, the best thing Canadians can do in 2012 is pay down debt and grow savings.”

Here are RateSupermarket.ca’s top tips to get you started in the New Year:

1) Get Real About Your Debt

First things first, how much debt are we talking about here? With automated payments coming out of your account, it’s easy to lose track of the total amount you owe. Start by making a list of all your debts and their respective interest rate charges. This includes balances owing on your credit cards (don’t forget the store cards), your student loan, line of credit, car loan and your mortgage.

2) Pay off Your Highest Interest Debt First

Sort your list of debts from highest to lowest in terms of interest rates. Tackle the debt with the highest interest first. This is likely to be your credit card debt which can have interest rates of 19-22 per cent.

In order to start paying this off you need to do 2 things: 1) STOP racking up more debt and 2) Make a BUDGET and stick to it. Allocate a minimum of 10% of your after tax income to paying off your debt.

3) Build Equity in Your Home

By building equity in your home, not only are you paying off your mortgage faster, but you end up saving a ton of money in interest fees. It’s also a great way to reduce your risk exposure when interest rates eventually increase.

Start by switching your monthly mortgage payments to bi-weekly rapid payments. When you pay every 2 weeks instead of every month, you can save over $13,000 in interest over the life of your mortgage (assuming a $200,000 mortgage amortized over 25 years). Then try to shave a year or two off of your amortization period when it’s time to renew or refinance, especially with today’s low mortgage rates. Finally, take advantage of lump sum payment privileges and make an annual payment against your mortgage principal.

4) Be a Smart Shopper

Savvy shoppers save money. Compare the market and take advantage of offers that can help you pay off debt faster or grow your savings more quickly.

If you have an outstanding credit card balance that you can’t get on top off, consider moving it to a low interest balance transfer credit card. There are cards out there offering 0 per cent interest on balance transfers for up to 10 months, which enables you to pay down the balance rather than paying interest.

If you’re looking to build your savings, go with a provider that doesn’t charge fees, and always make sure that the interest rate, on products like high interest savings accounts, are competitive. Take advantage of government incentives and top up your RRSPs and open a TFSA.

5) Get Some Expert Advice

If you feel like you’re in over your head and that no amount of budgeting can help you pay off your debts, then speak to a credit counsellor. There are many not-for-profit agencies that can help you put a plan in place to get you back on the right track.

“With a little bit of planning and a whole lot of discipline, we can all become more financially fit in 2012.” says Mangaroo.

About RateSupermarket.ca (http://www.ratesupermarket.ca/)

  

Mortgage Due For Renewal?? Why You Should Get a Second Opinion

I just read an article where Manulife Bank surveyed 1000 respondents and nearly 65% stated they did not check out their mortgage options when their mortgage was up for renewal.  Can you believe that is 2/3 of the population??  A mortgage is probably  the biggest debt you will have in your lifetime, so why would any of us be so cavalier about just accepting the renewal offered by the current lender without checking out the options.  

I am amazed that this percentage is so high.  It is a common known fact that lenders will typically send out renewal letters at posted rates because they know consumers are too busy to investigate their mortgage options.  The banks want (and expect) that many homeowners will just pick a new 5 year term, sign the renewal letter and mail it back to them.  Thereby locking themselves into a new and MUCH HIGHER interest rate.

As mortgage agents  with access to over 32 lenders, our job is to ensure our clients get the best deal on their mortgage.  This would include a great rate and other terms and conditions of the mortgage.

In most cases it is important to consider all your options, not just the interest rate.  A lot of times people renew without completely reviewing the fact that they may want to renovate in a year or two.  Planning now for the future will help you determine what mortgage product will best suit your future needs.

For example: perhaps your children will be going off to college in a few years and a home equity line of credit may be a better decision at this time.

Maybe you're looking at renovating your basement or putting a pool in your backyard.....renewing into a 5 year term and doing these changes a year later are not necessarily an effective  use of your time and money.   It makes sense to sit down with your mortgage broker at renewal time.  Take an hour to review your overall situation and then decide what is the best financial choice for you.

Remember, the goal is to be mortgage free in the same amount of time as your original amortization, but to avoid penalties and higher interest rates getting there.

Thank you for reading.

The Mortgage Centre - Summerside Mortgages Planning team

Penalty Calculations - The Missing Pieces

Courtesy of Canadian Mortgage Trends.

When a Certified Financial Planner (CFP) can’t figure out how to calculate his mortgage penalty, it’s got to be really tough for Joe Borrower.

Globe & Mail columnist Ted Rechtshaffen, a CFP, recently wrote about this very topic. He says: “My mortgage breakage cost truly is a mystery…I have read my mortgage contract…It can’t be found in the fine print.”

Like many banks, his (TD Bank) explains how to calculate its penalty, but people have to deduce the numbers to plug into the formula themselves.

Those numbers include:

1. The contracted interest rate (easy enough)
2. The posted rate at origination (not as easy)
3. The months left on the term (easy)
4. The relevant comparison rate (not as easy)
5. The current mortgage balance

To confirm these numbers, the borrower generally has to call his or her lender.

Wouldn’t it be nice, however, if you could log into your lender’s website and get this information with one click? It would, but lenders would much rather you call them for it. That way they can try to sell you a new mortgage.

A key point Rechtshaffen makes is that some lenders go out of their way to muddy the waters with respect to mortgage penalty calculations. They do that by:

• Not including certain inputs for calculating your penalty in their mortgage contracts (like the posted rate); and/or,
• Not telling you where to get the inputs on your own; and/or,
• Not clearly explaining (with examples) which term to use when determining your comparison rate; and/or,
• Writing penalty explanations in language that almost requires a law degree.

Penalty calculation shouldn’t be this cryptic. CAAMP says that 47% of people who refinance before maturity have to pay penalties. (It’s actually more than that if you include refis with blended rates [which have penalties built in].) So it’s not like this is some infrequent obscure need that borrowers have.

Lenders who believe they have their customers’ best interest at heart should provide a web page that clients can log into. It should provide an instant penalty quote, with a comprehensible explanation of how that penalty was calculated, showing the math.

RBC has a semi-workable solution with its penalty calculator. Unfortunately, you have to fill in the blanks yourself and few people will know what to enter for things like the “Discount off posted rate.”

In any event, one of the nice benefits of not getting a big bank mortgage is that your penalty is often based on discounted rates instead of posted rates. That often saves people hundreds or thousands of dollars. It’s even more meaningful given that most people break their five-year fixed terms in 3.5 to four years on average.

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Sidebar: Be aware that some smaller lenders (like Industrial Alliance, Bridgewater Bank, etc.) have more complicated penalties, sometimes based on bond yields.

At times, those penalties can be even more painful than a big bank penalty.

This all goes to show the importance of discussing penalty policies with your mortgage planner…before settling on a lender.

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Rob McLister, CMT

Why Use a Mortgage Broker?

This article was writen by Andre Mayer at www.Bankrate.com.  It is a good overview and summary of the benefits of using a Mortgage Broker.   We hope you enjoy the article.

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Should you use a mortgage broker?
By Andre Mayer • Bankrate.com

A mortgage is likely the most onerous burden you'll ever carry. It's a loan of monstrous proportions, but for anyone who isn't a rock star or Bill Gates, it's the only way you'll own a house.

Clearly, the goal is to find the most competitive interest rate on that whopping sum, but not everyone knows how to go about it. According to stats culled by the Canada Mortgage and Housing Corporation, more than 50 percent of Canadian homebuyers accept the first rate their bank offers.

Not only does that mean most of them are settling for the first quote, but that the majority aren't using a mortgage broker.

A mortgage broker is a certified professional who seeks the best mortgage terms for you by accessing a network of lenders that includes major banks, trust companies, credit unions and finance companies. (Brokers may also draw on local lenders that aren't part of a network.) This stable of lenders provides brokers with interest rates on a near-daily basis.

While she has relationships with the country's biggest lenders, a mortgage broker is not beholden to any of them. A broker is beholden only to you, the client. She will sift through her posted rates to find you the best one.

Mortgage expertise can save you money
The most basic advantage of a mortgage broker is that she saves you from approaching the various lending institutions yourself, a laborious and sometimes undignified task. You fill out an application stating your assets and earnings, and based on your financial details, she will scout the market for the best mortgage.

What makes a certain mortgage company attractive isn't necessarily the lowest rate. Say you want a mortgage of $250,000. One lender might get you a competitive rate of 4.5 percent on a five-year term, but may only be willing to give you $225,000. Many first-time homebuyers will sacrifice the best rate for a company that will lend them more money.

"You're trying to get a client the best rate and you're trying to get them the best service, so whichever institution fits those bills, that's what gets the deal," says Wayne McConnell, president and owner of A+ Financial Services in Winnipeg.

Brokers are paid by lenders, not by you
Colin Dreyer, president of the Canadian Institute of Mortgage Brokers and Lenders, says that years ago there was a stigma attached to mortgage brokers. They dealt primarily with the downtrodden and people whom the major banks deemed high credit risks, or so the logic went.

The other misconception -- which still exists today -- is that brokers exact an up-front fee from clients. Brokers do not charge clients a fee, either before or after they've secured them a mortgage. So how do brokers get paid?

They earn a commission from the lender. Commissions are fairly standard, ranging from 0.5 percent to 1.25 percent of the mortgage amount, depending on the length of the term. (A client that locks in for five years will bring a higher commission than one that opts for a variable rate.)

In the last decade, mortgage brokers have enjoyed a tremendous surge in business. Ten years ago, Dreyer says brokers comprised less than 10 percent of the mortgage market; today, they occupy between 25 and 30 percent.

"There has been a real shift in how the consumer looks at doing business," says Dreyer. "They're realizing that [mortgage brokers] research the market for you, and they're only going to get paid when they're successful in providing the service."

Brokers can be more flexible than banks
Two years ago, Jeff Piotrowski and his partner, Rebecca, decided they'd had it with renting and wanted to graduate to ownership. Figuring they could only manage the minimum down payment on a home -- five percent for first-time buyers -- their first instinct was to approach their own financial institution.

Unfortunately, their 20-year loyalty to the bank counted for zilch -- their mortgage application was rejected. So they visited a mortgage broker, who found another lender willing to provide the sum they needed to purchase the home they coveted in Tottenham, 100 kilometres north of Toronto.

"The whole point of it was we just wanted to put five percent down," says Piotrowski. "We just wanted to get into a house, but the bank was saying, 'Look, you put more down or we're not approving you,' and this other [lender] said, 'We'll approve you, sure, no problem.'"

It never hurts to shop around
While mortgage brokers have much to recommend them, it's not given that they can arrange the best mortgage terms. A broker can comb his lending network and extract what seems like the best available rate, but as a client, you are not obligated to accept it.

Many homebuyers take a broker's quote and submit it to their own bank in the hopes they might beat it. They often do, as was the case with Ottawa resident Julie McCann.

In the market for their first home, McCann and her partner, David, met with a mortgage broker, who pre-approved them for a significant sum and a competitive interest rate. When they found their idyll in Ottawa's east end, the home's sale price was significantly less than the amount they'd been approved for.

The house did, however, require some immediate upgrades, which got them thinking that it would be advantageous to have a line of credit in addition to the mortgage.

With the broker's pre-approved quote in hand, McCann went back to her own financial institution to see if they could outdo it. Not only did the bank trump the broker's best rate by four basis points, but they were able to offer the young couple competitive terms on a line of credit for their intended renovations.

"Our account manager kept pitching to us all the weeks that we were looking for a house," says McCann. "She beat [the mortgage broker's rate], and she got us a line of credit at a great rate. So there was no competition -- we had to switch."

Even so, McCann doesn't question the usefulness of engaging a mortgage broker. "For other people it may work out," she says. "For us, it didn't."

The biggest advantage to having a mortgage broker, says Piotrowski, is the personalized service. With the bank, he and Rebecca had to endure long, stressful and ultimately fruitless meetings in a daunting institutional environment. The mortgage broker put them more at ease.

"He came right to our house and he sat down with us, told us our options and all that kind of stuff, and the next day he called and said, 'Yeah, you're pre-approved for this amount of money.'"

Andre Mayer is a freelance writer in Toronto.