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Tuesday, January 31, 2012

CMHC CUTTING BACK ON INSURED MORTGAGES

(From the Financial Post)

Canada Mortgage and Housing Corp. is cutting back on mortgages it insures as the Crown corporation edges closer to a $600-billion cap imposed on it by the federal government, the Financial Post has learned.

A CMHC spokesman confirmed that it had approached a number of lenders at the end of 2011 about reducing its “bulk or portfolio insurance” after third-quarter results showed the agency had committed to back $541-billion in mortgages. CMHC, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government and needs approval to go over the $600-billion limit — something that would create greater risk for taxpayers should the housing market collapse.

“CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.” said Charles Sauriol, a spokesman for the Crown corporation, in an email.

“To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established which has caused some delays. Portfolio insurance provides lenders with the ability to purchase insurance on pools of previously uninsured low ratio mortgages and does not impact CMHC’s transactional business.”

Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

“One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

“I think as a taxpayer you should care. The policy question is why should the Canadian taxpayer take that type of meltdown risk within CMHC,” the source said.

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The risk to the taxpayer would be a collapse in the market leading to a defaults like the U.S. saw. If CMHC couldn’t cover those defaults, Ottawa is on the hook for 100% of any shortfall.

On the surface, insuring conventional loans may not appear as risky as traditional mortgage default insurance because it comes with more equity. The banks have been demanding ultra low fees on the conventional mortgages, arguing the equity position makes them a lower risk. However, lenders are skimming their portfolio to load up mortgages that are 70% to 80% debt to equity and may also have other problems, said a source.

With mortgage defaults well below 1%, some might argue the risk to CMHC is negligible. “If you look at what is backing [CMHC’s] guarantee, it should be more than enough to cover any downturn in the market,” said one banking source, who asked not to be identified, about CMHC’s cash reserves. “Besides, what will the government do, not increase their limit? This could kill the entire housing market.”

CMHC gave no indication it would seek an increase in its limit.

“CMHC’s mortgage loan insurance limit in force is $600-billion. CMHC manages its mortgage loan insurance business in accordance with this limit,” said Mr. Sauriol.

The Crown corporation would be going to the government looking for an increase in its limit at a time when both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have been casting a wary eye at the housing market.

“We watch the housing market carefully and we are prepared to intervene if necessary. Having said that, we’re not about to intervene in the housing market now,” said Mr. Flaherty this month. For his part, Mr. Carney said “we see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there.”

Sources have indicated the government is already considering tough new measures for calculating how the self-employed qualify for loans and tightening regulations for condominium buyers, so there is probably little appetite for backstopping even more debt from CMHC. In addition to CMHC, the government has a $300-billion limit for private mortgage default insurers.

Thursday, January 26, 2012

MORTGAGES FOR NEW IMMIGRANTS

A Home of Their Own – New Immigrants Face Hurdles

New Canadians are making their numbers felt in the housing market, as they get settled and make the transition from renter to owner, purchasing their first homes in this country.

Over 280,000 new immigrants arrived in Canada in 2010, the highest amount in
50 years according to the Department of Citizenship and Immigration. Immigrants
are expected to play a large role in the housing market in the coming decades.
Between now and 2031, the foreign-born population of Canada could increase approximately four times faster than the rest of the population. For these new Canadians, first-time home ownership may prove harder than anticipated, as they face some unforeseen obstacles, but there are definite opportunities.

Lack of Credit History The biggest challenge for new immigrants is establishing credit because they do not have a financial history in Canada.
Without a credit history, it can be a struggle to get mortgage financing. It is important to start establishing credit soon after arrival in Canada. New
immigrants are encouraged to bring credit and bank references (preferably in
English) with them from their home country to help with developing a Canadian
credit profile.

Large Down Payments Another home ownership hurdle
immigrants have faced is that many financial institutions traditionally have
insisted that new immigrants provide a down payment of at least 25 to 35 per
cent. A large down payment may be difficult for some because they are self-employed and working to establish their own business or unable to access funds from their home country.The good news is that things are changing. More and more lenders in Canada are offering mortgages tailored to the needs of new immigrants, including those with non-landed status. In many cases,immigrants can get a mortgage with a down payment of as little as five per cent of the value of the property, as long as it comes from their own resources.

To start preparing to apply for a mortgage, the following materials should be
assembled: • Copies of your work permit/landed status papers or passport
• Social insurance number
• Employment letter(s)
• Credit reference(s)
• Documentation of the down payment money source
• Bank statements showing 90 days of account activity

The great news is that mortgage brokers can streamline the mortgage process
for new immigrants, from counseling on credit in Canada, to obtaining credit
references from foreign banks, to confirming foreign income; a broker can work
with new immigrant clients to present their financial history to the satisfaction of the lender.

Monday, January 23, 2012

LOOKING BEHIND THE 5 YEAR RATE SPECIAL

A peek behind deeply discounted 5-year rates.

A major bank has offered a record low 5 year interest rate. However it is a 2 week special only.

Is it as good as it appears to be on first glance. Let’s look a little deeper.

When considering a deeply discounted 5-year rate, keep in mind that cheapest isn’t always best.
Strangely, we know that’s true when we’re shopping for anything else - but we still tend to believe that lowest rate is the one and only factor in choosing a mortgage. But, that low-rate mortgage could actually cost you more in the long run.

An amazing cut-rate mortgage could have you locked in to a very rigid contract filled with financial “trip lines” that could work against you down the road. That’s why it’s important to
check the fine print. For instance, is the mortgage fully closed? That means you’re not leaving the lender unless you sell your house, so your options are limited and you have no negotiating power if your needs change in the next 5 years. Low or no prepayments: means you have no or limited ability to chip away at your principal to reduce your overall cost. Maximum 25-year amortization can take away flexibility you may need later. Many prudent homeowners take a 30-year amortization but set their payments higher using a 25-year or lower amortization. This gives them the option to reduce their payments should an emergency arise or a special need like maternity leave. For first-time buyers too, a 25-year amortization means higher payments
than a 30-year amortization and could limit their entry into the market.

Spot a deeply discounted 5-year rate? Talk to me first. I’ll always help you find the right combination of low rate with the options you need to achieve your goals for homeownership and the financial future you want.

Thursday, January 19, 2012

BMO's 5 year 2.99% Mortgage Offering

On first glance this looks like a great deal. 2.99% for a 5 year mortgage- the lowest 5 year rate ever.
However a closer analysis offers some of the points to be aware of.

Consider:

This is a two-week promo (at the moment) valid until JANUARY 25TH.

There are conditions to their offer. The main terms of BMO's special are as follows:

Maximum Amortization: 25 years
Rate Hold: Up to 90 days
Pre-Approvals: Allowed
Lump-sum Pre-payments: 10% maximum per year (1/2 of the 20% that BMO normally allows)
Optional Payment increase: 10% maximum per year (again, 1/2 of the 20% that BMO normally allows)
Term: Fully closed unless you sell the property, refinance (with BMO only), or early renew into another BMO mortgage.
BMO Mortgage Cash Account: Not available with the Low-Rate
BMO Skip-a-Payment: Not available with the Low-Rate
BMO ReadiLine: Not available with the Low-Rate
Other Details: Not applicable to non-owner occupied rental properties

Most importantly, the client is tied to BMO for the entire 5 year term of their mortgage, even if they want to break it and pay a penalty, they are forced to stay with BMO at whatever rate BMO offers. Client loses negotiating power.

This rate and mortgage is great if you plan to live in the house for many years and will not need to refinace during the term.