Home Refinancing

Today, our federal government acquiesced somewhat to the demands of The Big 5 banks (RBC, TD, Scotiabank, CIBC, and BMO) to make the Canada Mortgage and Housing Corporation (CMHC) a term lending facility. Finance Minister Jim Flaherty announced that CMHC is buying $25 billion worth of pooled mortgages from the banks.

Canadians have approximately $773 billion in total outstanding mortgage debt, so this is only about 3.25% of the total - far less than the banks wanted to sell. The aim of today's move is to free up the banks' money, so they can lend it to Canadian consumers at a reasonable rate of interest.

For two weeks, Canadians have had difficulty refinancing their homes, taking out new mortgages, or obtaining credit at a fair rate of interest because international financiers are reluctant to lend. CMHC already insures the mortgages in this pool. Mr. Flaherty did not reveal how much interest the government will earn on the mortgages.

Today's move is a short-term solution. Tomorrow, Minister Flaherty will meet with finance ministers from France, Germany, Italy, Japan, the United Kingdom, and the United States in Washington, DC to coordinate their monetary policies. They need long-term solutions to remediate the global economic slowdown initiated by U.S. lenders.

For five years, U.S. lenders allowed too many unqualified borrowers with no down payment to take out mortgages they could not hope to repay on properties of inflated value, and then duped investors into assuming the risk by selling them the doomed mortgages as asset-backed securities. Perhaps the ministers should tackle these root problems that created the current financial crisis:

• Stock market transparency - The global crisis could have been averted in August 2007, if Americans selling asset-backed mortgage securities had been required to clearly show who owned what.
• Predatory lending practices - If American home owners had been made to qualify for their mortgages in the same manner that Canadians have always done, this crisis could have been avoided.
• Influencing factors - Home owners seldom default on their mortgages solely because of high mortgage interest rates. Other causes tip home owners over the edge, such as unemployment and exorbitant oil prices that in turn raise food, heating, and transportation prices.

The Canadian Real Estate Association reported yesterday that average house sale prices pulled back 3.6% from the record-levels set in July 2007. This, according to analysts, is likely the inevitable correction to last year's record-setting markets, particularly in Western Canada, that challenged mortgage affordability for new entrants. While new entrants sit on the sidelines, current homeowners are being advised to examine their refinancing options while consolidating existing debt and working to improve their existing home equity position until the current excess of housing works itself out in the medium term. The national housing price retreat was heavily skewed by sharp declines in the formerly white-hot Alberta markets according to the CREA's figures. Overall sales in Calgary were down 13.7% from last July, while average home prices slipped 7.8% year-over-year. In Edmonton, year-over-year house prices fell 5.3%.

The national decline in house prices, led by Alberta, impacted a number of regional markets in centers across the country - although none to the extent felt in the center of the oil boom. Nonetheless, in Saskatchewan, the market chugged along and, despite declining numbers of sales, showed a whopping 19.3% price increase in July. In Ontario, meanwhile, price gains year-over-year were moderated by the high number of houses on the market, despite a reported decline in construction announced recently by the Canadian Mortgage and Housing Corporation. Toronto registered a very modest pricing increase of 1.5%, Ottawa's prices increased 5.6%, while for the first time in this business cycle Vancouver - the most expensive market in the country - slipped into negative territory posting a 1 per cent decline.

"So far, the drop in average home values has mainly radiated from Calgary and Edmonton," reports today's Globe and Mail, "where July prices fell by 7.8 and 5.3 per cent respectively from the first year." In comments to the Globe, CIBC World Markets' senior economist, Benjamin Tal calls for a "slump by as much as 20 per cent in the near term in a correction of markets that got ahead of themselves", particularly in Alberta and Saskatchewan. "Other than people who bought last year thinking prices would keep doubling over breakfast, most people [in Western Canada] should still end ahead," Mr. Tal notes. Of more concern to Mr. Tal is the situation in Ontario, where house prices did not necessarily overshoot targets, but are more likely suffering from a slowdown in Ontario's economy. "While I would expect a more modest drop in prices of about 5 per cent in Ontario and the GTA," says the CIBC economist, "prices have not risen as much here and the decline would be more painful."

"The steady drum-beat of double-digit sales declines this year is beginning to weigh more heavily on prices," writes BMO Nesbitt Burns senior economist, Doug Porter, ("Canadian Housing: Out of the Medals"). The "bottom line", according to Mr. Porter, is that "Canada's housing market is running into some seriously foul weather amid the weakest affordability in nearly two decades."

No markets where year-over-year price increases have outstripped affordability is likely to be immune, says Bryan Jaskolka, vice-president of Canadian Mortgages Inc.. a brokerage company with extensive experience operating in all markets across Canada. " No market is likely to be immune . . . where affordability is low the prices will drop to correct back in line with comparable market rates." "Its time in this cycle for howeowners who already own to hunker down, reinvest and build their existing home equity, and clear up their debt problems," says Mr. Jaskolka."

"Those who hold onto their homes, refinancing wisely and reinvesting in their home equity," Mr. Jaskolka advises, "will find values eventually come back in the medium term." However, he cautions that now is the time to take the initiative in terms of refinancing and financing the home equity (or sweat equity) improvements to solidify gains from past markets. His concern is for those homeowners who determine solely to wait out the market. "For those that start to slip behind and don't act to refinance fast," says Mr. Jaskolka, "they will find even tighter credit and lower LTVs [loan-to-value ratios] being offered in the coming 6 months as the insurance companies pull back to avoid negative equity situations."

Homeowers who are hunkering down and tightening their belts to ride through the storm should be investigating their refinancing options and looking to the medium term solutions that will lock in their home values. Meanwhile, with the markets in most regions having swung clearly from the seller's to buyer's advantage . . . opportunities for value buying will likely be available from motivated sellers in areas and regions where price run ups were not that sustained and where local market strength is persistent.

Canadians seeking to refinance their mortgages may wish to act before July 15th, when the Bank of Canada is scheduled to announce what if any adjustment it will make to its main overnight lending rate. (The Bank of Canada's overnight lending rate is the interest rate at which financial institutions lend and borrow money amongst themselves. The BofC's overnight rate tends to set the rate for that market and is, perhaps, the key tool that the Bank of Canada uses to affect monetary policy and control inflation.)

"A rate hike could be in the offing in Canada," according to a report in today's Financial Post, "but economists say it is unlikely that, Mark Carney, the Bank of Canada's governor, will pull such a trigger when the bank issues its next interest-rate decision on July 17."

However, Governor Carney and other officials at the Bank of Canada have been consistently voicing their concerns about increasing inflation in the Canadian economy that is spurred on by rising gas and commodity prices. On June 10th, the last scheduled date to adjust the Bank of Canada's overnight rate, the BofC Governor defied industry expectations, keeping its main interest rate where it was in order, most feel, to stave off inflation.

With the Bank of Canada again scheduled to announce any change to its main lending rate on July 15th, it would not be surprising to see Governor Carney again defy industry expectations and raise its main rates by perhaps .25%. This would force prime lending rates up and increase borrowing costs for Canadians who need to refinance their mortgages. Better to act prior to the July 15th Bank of Canada rates announcement to ensure that you are not facing higher interest rate costs on your mortgage after that date.

There is a growing consensus that the Bank of Canada's focus has shifted from one of keeping rates low to stimulate the economy to, at least in the short term, an overarching concern with keeping inflation in check. Paul Ferley, assistant chief economist at Royal Bank of Canada, told the Financial Post as much, noting that, "The continuing deterioration in the outlook for inflation is consistent with the recent shift in tone at the Bank of Canada with increased concern being raised about the inflation outlook."

The cost of refinancing a mortgage is likely to go up next year. Or so says the panel of experts polled by the Financial Post in its most recent piece on the state of Canada's economy. The FP reports that, "Most economists expect Bank of Canada Governor Mark Carney to keep interest rates at 3% in 2008 before hiking them in 2009 as inflation becomes more of a concern and the U.S. economy picks up." This is not a unanimous consensus, however, as Scotiabnak senior economist, Adrienne Warren, reportedly forecasts interest rates to drop a half-a-percentage in the first half of 2009 in order to boost economic growth.

"Of course a consensus of the leading economists opinion is just that - a consensus of opinion. And the consensus opinion was wrong, when the Bank of Canada held its interest rate steady at 3.0% to head off inflation instead of dropping it a half-percentage point as consensus opion and the financial markets expected. Given unexpectedly good news trickling out about the state of the manufacturing sector in the recessionary U.S. economy and gas and commodity prices that are still sky high, don't be fooled if Governer Carney and the financial pundits at the Bank of Canada gain buck the consensus opinion and marginally boost lending rates - perhaps a quarter point - out of an abundance of caution over rising inflation.

"What seems clear is that interest rates are bound to rise in response to rising energy costs, and that once the U.S. rebounds from its self-induced housing and credit crisis and begins to re-enervate a sagging auto and manufacturing sector, interest rates north and south of the U.S. Canada border will be on the rise. Canvassing your mortgage broker for the best rates and terms available for refinancing with a fixed-rate mortgage may be a prudent move for homeowners concerned about the possibility of interest rates that seem poised to rise.

Canadians weighing their home refinancing options should be keeping an eye on what the experts are saying about how rising gas prices are pushing Canada's inflation numbers higher. One of the fundamental questions homeowners always face when it comes time to refinance their mortgage is whether to lock in their mortgage rate with a fixed-rate mortgage, or to play the market with a variable rate mortgage.

When mortgage rates are relatively low, as they are now, a variable-rate mortgage will generally carry a lower interest rate. Central banks raise interest rates in order to ward off inflation, forcing banks and lenders to raise the interest rates for loans and mortgages. Going with a variable rate means that you are wagering that interest rates will stay the same or drop - or, at least, they will not go up so significantly that the gains you make by selecting a lower variable-rate mortgage will not be eroded over the term of the mortgage as rates rise. Right now, inflation is a concern for Canadian bankers, the question is how great a concern that is.

Inflation pressures have reasserted themselves, domestically as well as internationally, forcing policy makers to readjust their interest rate sights," notes Scotiabank's Global Economic Research Group.

Canada's central bankers have already raised the red flag, signaled their concern about rising inflation. The Bank of Canada meets again July 15th to set their trend sending overnight lending rate. For Canadians facing the perennial mortgage refinancing question - fixed-rate versus variable rate - making the right decision means guessing how the Bank of Canada views the risks of inflation and whether they will force rates higher. Scotiabank's analysts think not.

"For the most part," Scotiabank's analysts write, "there are few indications that inflation expectations have become rampant." They suggest that "weakening economic growth should eventually curb the run-up in inflation." their prediction is that Federal Reserve in the U.S. and the Bank of Canada "are likely to remain cautious for the foreseeable future, and keep their overnight interest rates steady."

With Canadians still facing sticker price shock at the gas pumps, one wonders how long rates will stay down and, in fact, if rates will begin to drop again in the new year as Scotiabank predicts. Perhaps the best advice for Canadians who are facing a home refinancing decision this summer is to consult a mortgage broker who can give independent advice free from the position taken by the banks' analysts.

Consumers in Canada weighing their mortgage renewal options should be paying close attention to what rookie Bank of Canada Governor, Mark Carney has been saying about the Canadian economy and his concern that energy and commodity prices are putting inflationary pressure on Canada's economy. On June 10^th, Mr. Carney surprised complacent industry analysts by not cutting the BofC's main lending rate lower than its current 3.0% as most analysts had predicted. This surprise came despite Mr. Carney's having publicly raised concerns about inflationary pressures, adding his voice to those of other G7 central bankers who had also expressed their concern about heightening inflation as the result of energy and commodity price hikes.

Yesterday, Mr. Carney gave a detailed address on monetary policy, inflation and the effects of rising energy and commodity prices to Calgary's Halkayne School of Business. It was Mr. Carney's first major appearance since the BofC's June 10^th rates decision that caught most industry analysts by surprise and set them back on their heels.

In this most recent address, Mr. Carney emphasized - and re-emphasized - the fundamental importance of inflation to a central banker's decisions on monetary policy. "At a fundamental level," Mr. Carney remarked, "the primary goal of monetary policy should be to keep inflation low, stable, and predictable. While commodity-price shocks raise complex issues, a relentless focus on inflation clarifies policy decisions, makes communications easier, and maximizes the likelihood that expectations will remain well anchored."

Having caught industry insiders by surprise once, Mr. Carney's well-chosen words seem to be clearly intended to telegraph the message in a manner that not even the most myopic or overly optimistic analyst can misinterpret, that keeping a lid on inflation will be the Bank of Canada's main priority so long as energy and commodity price gains keep pushing inflation to and past the 3% inflationary ceiling the Bank of Canada has modeled for in 2008. Mr. Carney's recent address makes it crystal clear that the inflationary pressure is on, or at least the sensitive skin of Canada's central banker is feeling the flush of its heat. Energy and commodity prices have continued to soar since June 10^th. This makes it seem evermore likely that Mr. Carney will boost the Bank of Canada's main rate on July 15^th when the Bank of Canada reconvenes to price its main lending rate. Look for a moderate increase in the BofC's main rate at that time - perhaps, 0.25%.

Homeowners in Canada pricing their mortgage renewal options would do well to speak a Canadian mortgage broker about their refinancing options before July 15^th.

An article in Thursday's Globe & Mail drew some considerable attention to the state of the Canadian mortgages and real estate markets with its headline stating, "Red-hot housing market loses its heat." The principal observation in the Globe article, written by Lori McLean, one of The Globe's top business reporters, is that buyers remain on the sidelines as a recent bulge in home listings coincides with a dropoff in sales over the same period in 2007 - a period, remember, in which Canadian home sales were at an all-time high.

Wondering what this portends for consumers considering their home purchasing and home refinancing options, I pulled up the press release for the recently issued Canadian Association of Mortgage Professionals Spring 2008 Report which was cited in the .  Interesting reading. . . . More on which will follow once I've had the opportunity to digest the CAAMP's full report which was released on May 14th.

The CAAMP press release notes that, "Canadians overall have not changed their opinions about the housing market.  They are knowledgable, but not influenced by the speculation that the Canadian economy will be negatively affected by the U.S. Economic downturn."  This is a view that is widely held, by federal Finance Minister, Jim Flaherty amongst others. 

Most interesting, in the view of this commentator, are the CAAMP's survey numbers on Canadians knowledge of and attitude towards the housing market problems in the U.S. brought about by the collapse of the American's sub-prime mortgage market.  The CAAMP found that in April only 11% of survey respondents were unaware of the U.S. sup-prime mortrgage mess, down from the nearly 22% of respondents who were unaware of this issue in the Fall of 2007.

The CAAMP's analysis of how savvy we are when it comes to differentiating our analyses of U.S. and Canadian markets is positive.  Mr. Flaherty should find this cautious, Canadian discernment reassuring. Overall, "Canadians are aware of the strength of the economy and remain confident in our housing and mortgage markets," according to the CAAMP.  Canadian mortgage consumers "are educated, informed, and attuned to local market conditions," says CAAMP President and CEO, Jim  Murphy.

This is good news for all Canadians, particularly in light of naysayers and doomsday prognosticators, who have repeatedly said that the moderate loosening of Canadian mortgage markets brought about the CMHC's decision to extend CMHC insurance for mortgages with more than 25 years has been tantamount to creating conditions for a U.S. style housing meltdown. This definetly does not appear to be the case.  According to the CAAMP's Spring 2008 Report numbers (and similar numbers have been bandied about by the banks' best analysts), "Alternative mortgage products, including longer amortization periods, no-down payment mortgages, and interest-only mortgages, continue to grow in popularity in Canada." 

While in Canada 37 percent of recent home purchases have been funded with some variant of extended amortization mortgage product, Canadians - particularly young Canadians, who make up the bulk of first-time homebuyers - continue to have an attitude with respect to amortization and mortgage risk which remains both realistic and conservatively,yet guardedly optimistic. "Younger Canadians looking to become first-time home owners, " the CAAMP reports, "are more interested in alternative mortgage products and while cautious and conservative, they are optimistic about the overall future of these options."

So they should be. . . . Canada is not the U.S., as Mr. Flaherty was at pains to point out in his speech to Toronto's Economic Club. . . .  One very significant statistic the CAAMP points out - and they are not alone - is that "the arrears rate for residential mortgages remains close to the very low levels that have held since mid-decade, about one quarter of a per cent."  Contrast this with the U.S. numbers, where one in ten home mortgages have reportedly been in some stage of foreclosure during the past 12 months. . . . 1-in-250 versus 1-in-10. . . .Thank God, "I am Canadian!" - as Joe Canadian of Molsons' fame would rant.

The Bank of Canada has slashed its main interest rate by .5%. This second rate cut in the last six weeks set the table for the major banks to reduce rates for Canadian mortgages in order to bring the Canadian real estate market to a soft landing. While the major banks, which usually reduce their prime lending rates lockstep with a move in interest rates by the BoC, they were initially reluctant to do so. But by the end of the business day, TD-Canada Trust cut its prime rate and all of the major banks followed suit. What does that tell us for the Canadian mortgage and housing markets?

To answer this, we have to look at the BoC’s reasons for cutting its main rate. The consensus, according to The Globe and Mail is that the Bank of Canada’s rate cut was due to the weakening of the United States’ economy and its ongoing credit liquidity crunch. The downturn in the U.S. economy, particularly, is viewed as likely slowing Canadian growth by reducing the demand for exports to the American market.  Yet, the BoC still forecasts growth of 1.4% in the Canadian economy for 2008 and 2.4% growth in 2009, while the Canadian dollar remains strong against the American greenback despite a likely 3.5% drop in exports to the weakening U.S. market.

Does this mean that the BoC is likely to drop its main rate even further? Perhaps, but any further decreases in borrowing costs are likely to be modest, saiys Doug Porter, BMO Nesbit Burns’ deputy chief economist, as quoted by The Globe and Mail.The BoC has noted that the inflation rate remains below its 2.0% target and is likely to remain low at least until the Canadian economy returns to higher predicted growth rates in 2010. Richard Kally, senior economist at TD-Canada Trust, in analyzing the BoC’s latest rate cut notes that Canada's central bank seems to be concentrating on risk factors that are “looming over the horizon”, despite the latest round of statistics that “have underscored a resurgent strength in Canadian home construction, manufacturing and international trade.”

With larger than normal inventories of resale homes listed in a real estate market that is hesitant in its traditionally heaviest season, and the BoC’s main rate now 3% lower than it was last fall, now could be the time for astute buyers to enter the market.  While the introduction of extended mortgage amortizations of up to 40 years in 2006, rather than the customary 25, has some analysts questioning whether this has not kept the heat under Canada’s housing market. However, so long as prospective mortgage shoppers have their fundamentals in place this could be the time to go house shopping.

The introduction of 40 year mortgages has, of course, introduced a somewhat increased degree of vulnerability into the Canadian market for mortgage lenders, nonetheless more prospective purchasers are now able to enter into the housing market at point significantly earlier in their earning careers. Buying a house has become increasingly accessible,” observes Globe and Mail business reporter, Tavia Grant. The flipside, though, is that more home buyers are now susceptible should the housing or labour markets weaken, or if interest rates change direction.”

While interests rates have moved in the right direction and are likely to stay on that course, albeit with more moderate cuts when the BoC reviews its main rate again in June, prospective first-time buyers will need to be both proactive and cautious when searching out the right house deal.  When deciding whether now is the time to move from the rental market to home ownership, it seems only prudent to advise that first-time home buyers seek out the advice of a trusted and experienced Canadian mortgage broker to assess the timing and the mortgage product that is most appropriate for their current situation.