Rates are up...but this isn't so bad

No saying "the sky is falling"! Rates have gone up 50bps to 60 bps since Monday, with most lenders already making the move. 4.39% is the new mark (but some, like Home Trust, have a rate special of 4.29%) for 5 years. But this is still a great rate. As I have said before, the average interest rate for 5 years in Canada since 1951 is 9.04%. We are at less than half that rate. Keep your clients thinking positively and we will surge through the spring market with little ill effects.

Rates are going up...

According to Mark Carney's speak yesterday, the Bank of Canada governor stated that the overnight rate might go up quicker and higher than first thought. This move would be to combat inflation. Here is the article from the Globe and Mail:

Mark Carney mindful of hotter inflation
Kevin Carmichael, The Globe and Mail
March 24, 2010


Bank of Canada Governor Mark Carney acknowledged Wednesday that inflation is running hotter than he had predicted, and emphasized the central bank's commitment to containing price increases, a combination of fact and nuance that increases the odds of an interest rate increase within the next few months.
The measure of inflation the central bank uses as a guide to where overall prices are headed touched 2.1 percent in February, a pace the Bank of Canada was not expecting until at least the second half of 2011.

"Core inflation has been slightly firmer than projected," Carney said in the text of his speech to the Ottawa Economics Association.

Some economists have dismissed the stronger core rate as the result of temporary factors, such as a surge in hotel costs related to the Vancouver Olympics. Carney agreed that some of the increase is the result of "transitory factors," but also said that a "higher level of economic activity" is also playing a role, suggesting policy makers are taking the jump in the core rate seriously.

Carney's musings about inflation are important because he and his senior advisers on the Governing Council are grappling with when to raise the central bank's benchmark overnight lending target from it current record low of 0.25 percent.

The decision is a delicate one, which explains why Carney avoided using his speech to draw conclusions about the economy based on recent indicators that suggest Canada's recovery is well entrenched. He said economic activity "has surprised slightly on the upside," yet "persistent strength" in the dollar and weak demand from the United States could yet impede the rebound.

A higher overnight target will cause consumer and business borrowing rates to rise and could put further upward pressure on the dollar, potential impediments to a recovery that most policy makers, including Carney, still consider fragile because it is reliant on heavy government spending and rock-bottom borrowing costs.

Almost a year ago, Carney dropped the overnight target to 0.25 percent and pledged to leave it there until at least the end of June of this year, provided there was no risk that the central bank would fail to fulfill its mandate of keeping annual inflation advancing at a pace of about 2 percent.

At the time, policy makers were struggling to stoke declining prices back to the target. Now, the greater risk appears to be overshooting 2 percent.

Carney emphasized that his commitment to keep the benchmark rate at 0.25 percent is "expressly" conditional on the outlook for inflation, a new phrase that will give pause to the many economists and investors that have based strategies and forecasts on the assumption that the Bank of Canada always intended on leaving borrowing costs unchanged until at least the end of the second quarter, if not longer.

The Bank of Canada will update its outlook for inflation in its next quarterly economic report, scheduled for release on April 22, Carney said. The central bank's next interest rate decisions are scheduled for April 20, June 1 and July 20.

"The Bank of Canada has an unwavering commitment to price stability," Carney said. "The single, most direct contribution that monetary policy can make to sound economic performance is to provide Canadians with confidence that their money will retain its purchasing power. That means keeping inflation low, stable and predictable."

NS is affordable, but housing costs will go up

According to a recent article from an RBC economist, housing in Nova Scotia remains affordable, but not for long according to a second article. Since NS didn't experience the boom that other areas experienced in real estate, we are also not subject to the bust caused by the projected "housing bubble". Links to both articles are below.

Housing a deal in Atlantic Canada
http://thechronicleherald.ca/Business/1172396.html

Homeownership more costly
http://thechronicleherald.ca/Business/1172478.html

The Qualifying Rate Link to Bank of Canada...

The race is on...

The new "rules" are upon us and one of the biggest changes is the Qualifying Rate Rule.

To clarify, if your client is taking a 5 year fixed rate (today at 3.89%) then they qualify based on that rate. If they want a fixed term shorter than 5 years or a VRM of any term, they will have to qualify at the Bank of Canada posted 5 year rate available weekly at this link: http://www.bankofcanada.ca/en/rates/interest-look.html and check V121764 (5 year Conventional Mortgage rate) then scroll up and click "Get Rates"

This is a great bookmark to have going forward to ensure that your client qualifies for the term they want.

Upcoming CMHC / Home Trust event

WHEN: March 30th 8:30am - 10:00am
WHO: Home Trust and CMHC
WHAT: Breakfast Meeting featuring Guest Speaker
Jeremie Leblanc, CMHC Account Manager
WHY: To explain and discuss the new Federal Government and
CMHC rules coming into effect
WHERE: Halifax (not downtown), location details to follow, once your RSVP is received.
BONUS: Earn 1 AMP Credit for Attending
RSVP: Please RSVP below!


PLUS! Continental Breakfast and Door Prizes!


EMAIL Michelle at address listed below to RSVP:

Michelle.Johnstone@hometrust.ca

New Rules from CMHC

Along with the new mortgage rules that the federal government has put in place, CMHC has made some changes too. Most notibly is the change to the program formerly known as Simplified BFS. Here is the breakdown, straight from CMHC:

Recently, the Government of Canada announced new parameters regarding the application of the government guarantee supporting the Canadian mortgage insurance industry. CMHC will be aligning its 1 to 4 unit product offering to reflect the new Government Guarantee Parameters. CMHC is also making Policy changes to its Self Employed & Second Home Products

Consistent with the parameters, these changes are effective April 19, 2010:

Qualifying Interest Rates:

· For loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate and the contract interest rate.

· CMHC defines the benchmark rate as the Chartered Bank - Conventional Mortgage 5-year rate that is the most recent interest rate published by the Bank of Canada.

· For loans with a fixed rate term of 5 years or more, the qualifying interest rate is the contract interest rate.

· For mortgages with Multiple Interest Rates (e.g. Multi-Component Mortgages) each component must be qualified using the applicable criteria defined above.

CMHC Refinance

· The maximum amount Canadians can withdraw in refinancing their mortgages is reduced to 90 per cent from 95 per cent of the value of their homes.

CMHC Income Property

· A 20 per cent downpayment is required for small (i.e. 1- to 4-unit) non-owner occupied residential rental properties. Mortgage Loan Insurance covering large rental properties, of 5 or more units, is not impacted.

TDS Formula

· CMHC will also be implementing changes to the calculation of a borrower’s Total Debt Service Ratio where rental income is included in the calculation of household gross annual income.

· Effective April 19, 2010, under the revised calculation, fifty percent of the gross rental income from the subject property may be included into the borrower’s gross annual income for the purposes of calculating the borrower’s Total Debt Service Ratio.

· Previously 80% of the gross rental income was deducted from the total household debt service cost to calculate the Total Debt Service Ratio.

· Rental income from all other rental properties will be treated the same as other non-salaried income.

CMHC Second Home

· CMHC Second Home product will only be available for 1 unit owner occupied properties.

CMHC Self Employed

· CMHC is reducing the maximum LTV for the Self-Employed Product Without Traditional Third Party Validation of Income.

· For purchase and portability transactions, the maximum LTV is being reduced from 95% to 90%; and for refinance transactions, the maximum LTV is being reduced from 90% to 85%.

· Effective April 9, 2010, self-employed borrowers who have been self-employed in the same business for more than 3 years will not be eligible under CMHC’s Self-Employed Product Without Traditional Third Party Validation of Income.

· Since commissioned income can be relatively easily substantiated, borrowers who earn income through commission will no longer be eligible for the CMHC Self-Employed Product Without Traditional Third Party Validation of Income.

New look

I have changed the look of my blog, but not the contents. Just wanted to make it "pop" a little more.

Random thoughts for a Friday

Still no clarification to rules
I met with CMHC on Wednesday to go over the new federal guidelines set for April 19th. CMHC, like everyone in the industry, is waiting for clarification on the rules for qualifing rate. Are they using 5 year posted or discounted rates. I get the feeling that they will use discounted and here is why...the banks do have both posted and discounted rates, but most of the broker lenders don't have posted rates (at least not published). So to keep the playing field level, I think they will use discounted rates. We were expecting an answer on this last week, but with the budget coming out yesterday, there was a delay in this. Cross our fingers for the discounted option.

Where are rates headed
We are getting lots of mixed signals on where fixed rates are headed. BMO just dropped their 5 year to 3.75% (not that this makes a difference in the broker world). But on Wednesday the bond yield spread went down again, enough that a rate hike was warranted. I think for the time being, rates will be dictated by market share desired by the lenders, not by spreads and bond yields.

Is being a bank the new way to fund B business
After the August 2007 collaspe of the ABCP (asset backed commercial paper) market, we have seen most of the B lenders disappear. Only my company, Home Trust, survied in Atlantic Canada as a B lender (and expanded into the A world too) and there are only a couple other regional lenders in the rest of the country who survived. So what we have seen is a move by lenders to become banks (or trust companies, which are under the bank act). This move might also make good sense for the insured lenders out there to raise funds to lend on the A side too. Who knows how long the CMB pool will be supported by the federal government. In fact there was speculation that there would be changes to the CMB pool in yesterday's budget. Is being a bank the right move? Time will tell.

Boc Rate Stays Put...for now

The BoC rate stayed at 0.25% with the announcement yesterday, but it is likely to rise in June. What does that mean for you? First, if prime rate go up even 1% to 3.25%, clients will still get a rate of 2.95% on their current 5 year term (we are offering Prime minus 0.30% on 5 year VRM). Not a bad deal. Here is the technical stuff. Broker lenders usually set their prime rate based on the Bankers Acceptance (BA) rate, which is the rate that banks lend to other banks (right now it is at about 0.30%). They also want to set a "spread" above that BA rate that will pay costs and make some profit. This is reflected in how much below prime the banks set their Variable Rate mortgage (VRM) rates. As prime rate goes up, that spread will go up too, but not at the same pace. In other words, if prime goes to 3.25%, the BA rate micht only have gone up to 0.60% and so the banks can offer VRMs at maybe Prime minus 0.60%.

This won't happen right away, it will take a while. That is why my suggestion for a VRM term is the 3 year. Why? If the scenario above plays out, the increment below prime in 3 years will be well below Prime minus 0.30% so that when the client renews that mortgage in 3 years they could be getting that lower increment. Prime floats, so it is not a variable in this equation, only the amount below prime is a variable. And the data tends to say that we will see larger amounts below prime. Think back to 2 years ago and the VRMs were at Prime minus 0.60% or more. But prime was also around 4%.

CMP Award Nominations

The annual CMP Awards (http://www.mortgagebrokernews.ca/) will be held on April 19th and yours truly has been nominated as a finalist in the BDM of the Year category. Like the oscars, it is an honour just to be nominated. But your votes will help too. Once the nominations are posted on their website, you can vote on the nominees. It would be great to see a winner coming from this region.

Thanks again for your support!

Interest rates will jump soon

I got this article from Halifax's Chronicle Herald today. It points out that rates will rise based on the stronger than expected economy.
Economy rides a big surge
Interest-rate hikes could follow rapid growth in GDP
By JOHN WARD The Canadian Press
Tue. Mar 2 - 4:53 AM
OTTAWA — The Canadian economy boomed back in the fourth quarter of last year, pushing well past expectations and raising the likelihood that the Bank of Canada will start to raise interest rates this summer.

Real gross domestic product grew at an annual rate of five per cent, a full point above what analysts had expected and the largest quarterly increase in nearly a decade, Statistics Canada reported Monday.

The economy was up 1.2 per cent from the third quarter of 2009, the largest such jump since the third quarter of 2000, the agency said. Real GDP, a closely watched inflation-adjusted measure of economic performance, increased 0.6 per cent in December alone, a fourth straight monthly advance.

"Between the structure of the strong fourth-quarter advance . . . and the robust monthly results, this report shouts strength," Bank of Montreal economist Douglas Porter said in a note to clients.

Porter said the data shows that Canada has made a clean break from the recession that began to sink its teeth into the economy in October 2008 and raises the odds that the Bank of Canada will begin to hike interest rates in July — and stay on that path.

The five per cent jump far outstripped a Bank of Canada forecast for 3.3 per cent growth on an annual basis and marked a major shift from the "devastating seven per cent decline in the first quarter of last year," Porter added.

The central bank has its next scheduled announcement on key lending rates today but observers expect its overnight rate will remain where it is for now, at an all-time low of 0.25 per cent.

Peter Buchanan, a senior economist at CIBC World Markets, said while the central bank is unlikely to change rates before June, it will probably tone down its wording slightly today about the negative effects of a rising Canadian dollar and the need for stimulus.

"(But) they’re not really under pressure to make major changes in the wording just yet," he said. "And a change in the actual policy is even less likely at this point."

Buchanan predicted the bank will begin tightening interest rates in the third quarter of 2010, when Canadians can expect a rise in the key lending rate to one per cent.

The Bank of Canada and other central banks, particularly the U.S. Federal Reserve, have kept their key lending rates at, or near, the lowest levels possible in order to reduce the cost of borrowing and stimulate spending.

The central bank had all but declared the recession over last summer — a stance that was hotly debated in the months that followed, particularly because unemployment remained high and GDP increased only minimally.

But the fourth-quarter 2009 numbers are solid evidence that the economy did pull out of recession starting in the third quarter of last year, said Paul Ferley, assistant chief economist at Royal Bank.

"The strong rise at the end of the fourth quarter suggests strong momentum going into the first quarter of 2010."

In addition to the fourth-quarter gains, Statistics Canada also revised its tally for third-quarter 2009 growth to 0.9 per cent from an initial reading of 0.4 per cent.

Ferley said the central bank will likely want to see further evidence of sustained strength, but predicted rates will rise in the second half of the year and hit 1.25 per cent by year end, up a full point.

The quarterly increase was below the 5.9 per cent growth recorded in the U.S. economy, but the Canadian strength was more broadly based — American growth has relied heavily on restocking inventories.

For a third straight quarter, growth in final domestic demand was led by increases in personal expenditures, government expenditures, and investment in residential structures.

Export and import volumes both rose for a second straight quarter, with growth in exports outpacing that of imports in the fourth quarter.

Goods-producing industries rose 2.1 per cent in the fourth quarter, the first quarterly gain since the second quarter of 2007.

Final domestic demand advanced 1.1 per cent as consumer spending continued to grow.

Buchanan said Canada’s performance, especially in the housing sector, was much better that the 4.2 per cent growth economists had expected, adding that he is optimistic about the 3.6 per cent increase in consumer spending.

"I think the other thing that was a surprise was the continued strength of household spending and that’s clearly a positive sign for the economy going forward and I think it shows that Canadian consumers . . . are in a bit better shape than their U.S. counterparts," he said.

Are the new mortgage rules all that bad?

The new mortgage rules are coming April 19th and the industry is a buzz about the changes and how they will affect business. Let's look at the changes:
1) refinances to 90% max - if we are to assume that there is a possible housing bubble, then this change is not a bad thing. It will keep the folks who are financing their lifestyle with the equity in their homes from continuing to rack up credit and refinance it to the detriment of the equity in their homes.
2) using the 5 year rate to qualify Variable Rate Mortgages - again, not a bad thing. Prime rate is expected to rise this year, that is almost guaranteed. If clients are not prepared for this, we will see lots of foreclosures. This is good protection for clients. The question remains, will it be discounted or posted rates used in the qualification calculation?
3) rentals, max 80% LTV - this is the most questionable of the three changes. There is lots of debate on this one. This may go too far, but, once again, if we are assuming that there is a housing bubble in Canada, the last thing we need is speculation on rental properties driving that bubble to burst.

Only time will tell if these changes will do what they are intended to do. And of course, hindsight will be 20/20!

Home Trust is my new Home - again

I wanted to give a quick update that I started back at Home Trust in Halifax as a BDM in Feb./10. After a 4 year absense, I have come back to my Home and where I started as a BDM.

I am looking forward to once again representing Home Trust here in Atlantic.