Mortgages in Canada

Another day, another point of view about Finance Minister Jim Flaherty's warning that the government is considering making changes to mortgage lending rules to avoid a housing bubble. Recently, I wrote about a mortgage broker who thought that tightening mortgage requirements would have a negative impact on home buyers and thus the overall housing market, which would in turn impact the economy.

While some buyers might feel "punished" by the tightened requirements, the other side of the coin is that Flaherty and the government might be saving a lot of people from future personal debt crises, which again, would impact the economy.

So what to do?

Obviously, low interest rates are a boon for those in the market for a mortgage, but it's important to remember that the current market is a temporary thing. If you’re in doubt, a mortgage broker can help you figure out how much you can comfortably afford to borrow.

With low mortgages rates pushing up housing prices, Finance Minister Jim Flaherty's recent public comments have sparked a debate about whether or not the government should step in to keep the housing boom from becoming a housing bubble. As has been done in the past, the mortgage requirements - notably down payment size and amortization period - needed to secure a high-ratio mortgage would be tightened.

Meanwhile, Joe Santos, President of the Mortgage Brokers of British Columbia, thinks that the market is going to self-correct, partially because housing prices have escalated to the point of no longer being affordable. Santos strongly feels that tightening the mortgage requirements would be more damaging than helpful and would create an unnecessary depression in the market.

According to Finance Minister Jim Flaherty, the federal government is prepared to further reduce the conditions under which the Canada Mortgage Housing Corporation backs high-ratio mortgages in order to ensure that the housing boom doesn't become a housing bubble.

In 2008, when the sub-prime mortgage crisis hit the United States the Finance Department made new rules for high-ratio mortgages that made it more difficult for prospective home owners to receive government backed mortgage insurance from the CMHC. The Finance Department shortened the amortization period allowed from 40 years to 35 and required a down payment of at least 5% of the value of the property.

Flaherty has said that if necessary he would again limit both the amortization period and require higher down payments. However, Bay Street economist David Rosenberg estimates that housing prices are already overvalued by 15% to 35% and that we're already in bubble territory.

Like most housing bubbles, we'll have to wait and see how this situation plays itself out.

The actual cost of buying a home can only be calculated when you include all the added fees as well, which include taxes, insurance, and inspections, among other things.

The taxes associated with purchasing a home include property and land transfer taxes, which will be a percentage of the purchase price.

The insurance you will need includes property insurance, and possibly title insurance. Property insurance will cover the cost of repairs in case of damage, and title insurance will protect you in case of ownership disputes.

Most homebuyers incur appraisal and home inspection fees. Mortgage appraisal fees apply when the value of the property has to be assessed, and a home inspection fee will cover an assessment of the home's condition.

The final fees that homebuyers almost invariably acquire are legal ones, to cover the cost of any lawyers needed during the purchasing process and transferring the ownership.

First-time homebuyers can find it difficult to save for a home's down payment. Typically, lending institutions require 5-20% before they will approve a mortgage. But there are mortgages that provide 95% financing, meaning the lender supplies the borrower with the entire amount necessary to purchase the home.

In such cases, you do not have any equity in the home until you begin to pay off the mortgage principal, which makes it riskier for borrowers. Also, these types of loans have significantly higher interest rates than loans where a down payment is provided.

And while most properties appreciate over time, should the property you purchase depreciate, you will end up owing even more money, because the market value of the home will not cover the loan amount. Consequently, this type of loan is best suited for people who plan to stay in their home for many years.

Although many Canadians may be suffering from the recession, this country has managed to avoid the very difficult situation currently faced by the U.S. housing market.

Recent reports noted that the U.S. economy did not shrink as much as had been anticipated in the second quarter of 2009. While that is definitely good news, the outlook on the housing front is considerably less rosy.

Bloomberg News reported earlier in the spring that nearly 22% of American homeowners owe more on their homes than their homes are worth. The term they use is "underwater". Sadly, that number is likely going to increase. A report on the Business Insider offers a clear, albeit troubling, summary of how debt problems and reduced housing values are affecting Americans.

It seems that housing values in the U.S. have not yet bottomed out. In fact, the prediction is that they will drop by another $3 trillion to $15 trillion, down from about $25 trillion only a few years ago. Of course a drop in value does not mean a drop in money owed. Americans still hold large mortgages, with a a debt-to-value ratio of 80% being common. With loans at that level, all it takes is a 20% drop in value to put a homeowner underwater. With housing values already down 30% and forecast to drop by another 10%, the picture is not a pretty one.

In Canada, on the other hand, house prices are stable and homeowners hold a lot more equity in their homes. The Canadian Association of Accredited Mortgage Professionals (CAAMP) reported in April of this year that the value of Canadian owner-occupied housing stands at around $2.67 trillion, with some 72% if that total being homeowner's equity.

There is no joy in the U.S. situation, and no cause for smugness or gloating here. But Canadians can be genuinely grateful that the terrible situation that continues to plague U.S. homeowners has not taken root here, nor is it likely to.

The Canadian Imperial Bank of Commerce (CIBC) is the Canadian bank that suffered the most as a result of the U.S. subprime mortgage fiasco, because it not only lent to subprime applicants, but also got involved in toxic derivatives and poor bond insurance. CIBC has had to write down $6.8 billion so far this year. Consequently, it had to raise $2.9 billion in capital this year to stay afloat.

However, the bank's CEO, Gerry McCaughey, has been able to keep CIBC's performance well within regulatory guidelines. Today, CIBC and Cerberus Capital Management, a private U.S. equity company, struck a $1.05 billion deal to prevent problems with CIBC's subprime mortgages. The subprime mortgages total $1.075 billion. CIBC does not want to sell off these weak mortgages, as the consensus is they could still be profitable in the not-too-distant future.

The Cerberus deal is one example of how Canadian banks have anticipated the American mortgage downturn and taken the initiative to prevent a similar crisis here. The Toronto Stock Exchange seems to like Mr. McCaughey's forethought: This morning, CIBC's stock rose $2.08 per share, to $59.90. If you hold your mortgage through CIBC, you can breathe a sigh of relief this afternoon.

"Theresa McCuaig"

Recent reports from Statistics Canada and the Canada Mortgage and Housing Corporation (CMHC) point to some bright spots in residential construction.

Stats Can reported a 1.8% increase in building permits nationwide, with the residential sector growing 2.7% to $3.7 billion. An increase in industrial permits easily offset the slight decline in commercial and institutional permits.

CMHC reported yesterday that August housing starts also rose across the country. Compared to July of this year, housing starts increased from 186,500 to 211,000 units. Experts give credit for the increase to the fast-growing condominium market in Ontario. Housing starts in other regions of the country were down, but have still not experienced drops anywhere near those seen in the US. 

Speaking of the US, house prices there experienced an increase in July - the second month in a row that prices went up. Overall the market is still down from 2007, but increases in several regions across the country are a positive sign.

 

There is some good news emerging from the recent US government takeover of mortgage firms Fannie Mae and Freddie Mac. BMO, Royal Bank of Canada (RBC) and TD all praised the move.Speaking to The Globe and Mail, BMO CEO Bill Downe stated that the move is good for global capital markets.

He believes that the takeover may help clear the "...storm cloud hanging over global markets."RBC economist Paul Ferley told the Canadian Press that he believes the rescue of Fannie and Freddie will help free up mortgage funds and "ease some of the downside risks to growth in that economy."

With troubles in the US economy being the main threat to Canadian growth, the move to strengthen the two mortgage lenders will have a positive impact on the US economy and, in turn, the Canadian export market.TD economist Eric Lascelles agreed with Ferley that there will be some small positives to the Canadian economy.

He cites both the tangible benefits felt in export markets like lumber, and intangibles, like the positive psychological impact the intervention is likely to have on consumers.

Among all the negative news about the economy, there is a bright spot for GTA home buyers. Even though people are tightening their belts, there are still segments of the real estate market experiencing growth. In a report released yesterday, RE/MAX Ontario-Atlantic Canada showed that in 30% of the GTA districts examined, condominium sales in the first half of 2008 increased over 2007.

What's more, the average price went up in nearly 87% of those districts. RE/MAX Ontario-Atlantic Canada Executive Vice-President and Regional Director Michael Polzler credits the low entry-level prices of condos for these strong numbers.The appeal of condo lofts, apartments and townhouses is broad, with singles, empty nesters and even young families taking advantage of their affordability to jump into the real estate market with a manageable mortgage. There were also price increases for detached homes in nearly all of the communities studied, but again, the growth was experienced in the lower price ranges.

The bottom line? People are not dropping out of the GTA housing market. They are simply changing their focus and putting affordability first, all of which ensures a strong market throughout the remainder of the year.

Most of us know that increased home sales mean a healthy mortgage industry. What many of us may not know is how the number of real estate transactions affects the wider economy.

This week the British Columbia Real Estate Association (BCREA) released a report that shows just how important home sales are to the economy. The report estimates that every 100 real estate transactions in 2007 added $2 million to the provincial economy and supported 28 full-time jobs, affecting everyone from mortgage brokers to real estate agents to furniture salespeople and contractors. Taxes collected on these 100 sales added $1 billion to federal, provincial and municipal treasuries.

The B.C. real estate market has been hot and prices have been high. Even so, if we take numbers from that province and apply them to the entire country, we can see how valuable the real estate sector is to our economy as a whole. A downturn in the housing market can spin off in many different directions and have a huge impact on employment, tax revenue and GDP. Fortunately, forecasts are good, with many experts expressing confidence that the Canadian economy is strong enough to withstand downward pressure in the housing market, and avoid the real estate busts currently taking place elsewhere.

Mortgages in Canada with 40 year amortization periods are still available. Yet, after new rules for federal backing of mortgage insurance come into effect on October 15th, it is most likely that 40-year mortgages and zero-down payment mortgages will no longer be commercially available. Already a number of the major banks and other financial institutions have stopped pre-approving 40-year amortizations in anticipation of changes to the federal Finance Department's new mortgage insurance requirements that will take effect in the Fall.

AIG United Guaranty Canada, one of a handful of private mortgage insurance firms that are approved to insure high-ratio Canadian mortgages, recently announced that it will no longer write policies for mortgages with 40-year extended amortizations after October 15th. The Canadian Mortgage and Housing Corporation, a federal Crown corporation and Genworth Financial a private insurer have already announced they will bring their insurance standards in line with the new federal regulations when they take effect. This leaves PMI Mortgage Insurance Company Canada as the only mortgage insurer that has left the door open to insuring 40-year and zero-down mortgages after the October 15th cut-off date. PMI is apparently scheduled to meet with Department of Finance officials at the end of the month to discuss the new restrictions and potential alternatives such as federal backing of 95% of a zero-down mortgage and private backing of a 5% second mortgage.

Nonetheless, despite PMI's reluctance so far to publicly announce the end of insuring 40-year and zero-down mortgages, it seems highly probable that this avenue will also be closed to home buyers after October 15th. With a narrowing window of opportunity, and a diminishing pool of lenders willing to approve extended amortization mortgages, purchasers who wish to take out a 40-year mortgage or proceed with zero-down financing prior to the October 15th cutoff date would be well advised to consult with their mortgage broker to shop for the best deal from the lenders that are still offering these options.

(Under the Bank Act mortgage insurance is required for mortgages written by Canadian banks and other federally regulated financial institutions where the down payment made is less than 20% of the purchased property's value. Last year, approximately 40% of new mortgages had a 40 year amortization. When the federal Finance Department's new rules for guaranteeing policies written by the CMHC and the other approved private mortgage insurers come into effect, the maximum amortization period allowed to qualify for federally backed mortgage insurance will be reduced to 35 years and purchasers will be required to have a 5% down payment and meet more rigid credit requirements.)

There was reassuring news on the wire today for Canadian mortgages and real estate markets.  Canada's housing market appears to be rebounding from a rocky start to the year according to the latest numbers released June 18th by Statistics Canada, in its Leading Indicators, May 2008 report.

"The housing index jumped 1.9% after seven straight declines," according to Statistics Canada. Significantly, StatsCan reports that, "Housing starts strengthened in May, while existing home sales rebounded form a weak start to the year, which partly was due to poor weather."

The Statistics Canada report on Canada's leading economic indicators confirms the housing forecast released on May 6th by the Canadian Real Estate Association, which forecast that home sale activities would "remain strong in 2008 despite trending lower from record-level activity last year." Overall, the CREA forecast price gains setting new records across the country, although it forecast that “price gains will be smaller than in recent years."

The numbers released today by Statistics Canada, showing strengthening housing starts and rebounding home sales, confirm the view that the markets for Canadian mortgages, housing and real estate are much, much healthier than those of the U.S. due to more conservative Canadian lending practices and tighter regulation of our financial institutions.