Condos at a ‘boiling point’ as supply to eclipse demand?
Michael Babad
Globe and Mail Update
Published Friday, May. 11, 2012 5:46PM EDT
Last updated Friday, May. 11, 2012 7:16PM EDT
As The Globe and Mail's Bertrand Marotte, Jacqueline Nelson and Richard Blackwell reported, the construction industry continued to make gains in April as housing starts climbed to an annual pace of 244,900. Driving the increase, Canada Mortgage and Housing Corp. reported, was construction of multiple units, such as condominiums.
In Quebec and Ontario, starts surged 56.5 per cent and 12.2 per cent, respectively, largely because of those multiple units.
Looking at those numbers, economist Robert Kavcic declared that condo construction has now reached the "boiling point," and that the housing market threatens to overheat in some segments and some regions.
"The bubble-mongering that has been going on seemed overplayed for some time, given that housing starts were running only slightly above household formation (about 180,000), on average, for the past three years," Mr. Kavcic said.
"But that is no longer true with starts now moving well above underlying demand, and accelerating in recent months," he warned in a report about the CMHC numbers.
"It’s important to note that the heated building activity is very much contained to the multi-unit segment in a handful of cities. While single-unit starts edged up just 0.6 per cent in April, multis surged 27.4 per cent to the second highest level since 1978 - the trend away from building detached homes in favour of condos continues unabated, particularly in Toronto, Vancouver and Montreal."
David Rosenberg, the chief economist at Gluskin Sheff + Associates, agreed that construction is "far outpacing" natural demographic demand.
"No doubt the Canadian economic backdrop is solid overall and mortgage rates are at low levels," he said. "But at some point, the Bank of Canada will no longer be playing the role as the boy who called wolf, and mortgage guidelines are already being tightened up."
Some economists do see just softer times ahead for the overall market, however.
"Given that April’s surge was driven largely by the multi-unit segment, we suspect that this level of home starts is not sustainable," said Dina Cover of Toronto-Dominion Bank.
"Moreover, unseasonably warm weather in many parts of the country surely brought some new home starts forward. As such, we expect to see some give-back in the coming months."
http://www.theglobeandmail.com/report-on-business/top-business-stories/condos-at-a-boiling-point-as-supply-to-eclipse-demand/article2426188/
Canadian economic recovery will be ‘lumpy’, says Flaherty
OTTAWA — A recent Canadian jobs report was promising but the country’s economic recovery is set to be uneven, Finance Minister Jim Flaherty said on Tuesday.
Canada added 58,200 new jobs in April after a big gain of 82,300 in March, according to Statistics Canada.
“The job numbers are encouraging. I’m always cautious about monthly job numbers. It’s been two good months but we know that we’re likely to have a lumpy recovery,” Flaherty told the Canadian Senate’s banking committee.
http://business.financialpost.com/2012/05/15/canadian-economic-recovery-will-be-lumpy-says-flaherty/
Canadian banks not immune to housing bubble: OSFI official
Andrew Mayeda, Bloomberg News May 15, 2012 – 10:50 AM ET | Last Updated: May 15, 2012 11:32 AM ET
Peter J. Thompson/National Post files
Canada’s banks, ranked the soundest on the planet by the World Economic Forum, aren’t immune to collapses triggered by falling housing prices, according to the government official implementing new mortgage rules.
Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again, Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions, wrote in documents obtained by Bloomberg News under freedom-of-information law. The last failure in Canada was in 1996.
“Canada is not immune,” Melessanakis wrote March 21 in internal notes responding to a posting on a mortgage-industry website. “Just because nothing happened in Canada in 2008 (a U.S.-centered crisis), does not mean that Canada is not vulnerable to a housing correction now.”
The comments underscore tension between policy makers and mortgage lenders as a booming housing market helps drive profits at banks. Finance Minister Jim Flaherty has tightened mortgage rules three times and put the federal housing agency’s books under regulator oversight, while Bank of Canada Governor Mark Carney has repeatedly warned household debt is the economy’s biggest domestic risk.
Participants at Bloomberg’s Canada Economic Summit in Toronto last week, including the head of the country’s biggest bank, downplayed talk of a housing bubble even after Canadian housing starts rose to the highest since September 2007 last month.
Pockets of Vulnerability
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” Gordon Nixon, chief executive officer of Royal Bank of Canada, said May 8. “Frankly, I’d like to see the rhetoric come down a little bit.”
Melessanakis wrote his comments to colleagues in response to a posting on a mortgage-industry website, Canadian Mortgage Trends, that criticized proposed standards published by Canada’s top banking regulator on March 19.
Ottawa-based OSFI suggested requiring lenders to take “reasonable steps” to verify borrower incomes, establish standards for measuring borrowers’ ability to pay their debts, and limit the size of loans secured by the equity in people’s homes. The draft guidelines are based on mortgage-lending principles set by the Financial Stability Board, a Basel-based group that coordinates global financial rules.
Unsound Fundamentals
“How many new lending ‘guidelines’ can the market bear before it breaks?” wrote Robert McLister, a mortgage planner who edits the website.
“The market may break because the fundamentals are not sound (i.e. overvaluation of homes), not because of OSFI guidance,” Melessanakis wrote in response.
Tyler Anderson/National Post files
A sold sign in front of a house in Toronto.
A spokesman for the regulator said Melessanakis’s remarks don’t reflect the regulator’s official position. While they were shared with the agency’s communications and consultation division, they were not sent to superintendent Julie Dickson, spokesman Brock Kruger said in an e-mail.
There’s “no question” the proposed OSFI guidelines will curb demand and hurt housing prices, McLister said in an interview. “OSFI had good intentions here, but some of this policy is certainly misguided,” he said, when asked to react to Melessanakis’ comments.
Canadian existing home sales rose 0.8% in April from the previous month and 11.5% from a year earlier, the Canadian Real Estate Association said in a statement Wednesday. The average home price rose 0.9% from April 2011, the group said in a statement.
Strongest Banks
Melessanakis referred a request for comment to OSFI’s communications staff.
Four Canadian banks were among the world’s six strongest in Bloomberg’s second annual rankings. Canadian Imperial Bank of Commerce was No. 3, followed by Toronto-Dominion Bank (No. 4), National Bank of Canada (No. 5) and Royal Bank (No. 6).
Lenders have been increasingly skeptical of the need for new rules to cool the housing market. The government should hit the “pause” button and take stock of regulations introduced since the financial crisis, Terry Campbell, president of the Canadian Bankers Association, said in an April 3 speech.
In January last year, Flaherty reduced the amortization period on mortgages backed by the government to 30 years from 35, the third time since 2008 he has tightened rules for home loans.
Strengthening Oversight
Flaherty introduced legislation April 26 that includes measures to strengthen oversight of Canada Mortgage & Housing Corp., a government-owned mortgage insurer. The law allows OSFI to review CMHC’s books at least once a year, and prohibits banks from using insured mortgages to back covered bonds, which lenders have been issuing to fund their home-lending business.
OSFI’s Dickson said in a May 9 speech that Canadian banks should not be “lulled into a false sense of security” by steps policy makers are taking to prevent another financial crisis.
McLister pointed to banks’ low arrears rates on mortgages as evidence more rules aren’t needed. Melessanakis wasn’t convinced.
“This can change fast,” he wrote in his notes. “Are the banks equipped to handle a 40% drop (what occurred in Toronto market in early 1990’s)? Need to stress test to find out.”
McLister called the idea of a 40% decline in housing prices across the country “farcical.” Such a decline is “not going to happen, period. But in some places like Vancouver, maybe Toronto, obviously you’re going to have greater risk there of price volatility,” he said by telephone.
HELOC Rules
OSFI’s guidelines suggest lenders limit home-equity lines of credit to 65% of the property’s value. The regulator also recommends that HELOCs be paid off over a specific amortization period, like conventional mortgages.
While McLister wrote that those rules “portend a big slowdown in HELOCs,” Melessanakis responded that the loans have “contributed significantly to growing overall household debt.”
“This is not sustainable,” he wrote. “If (or when) housing prices drop, households will be vulnerable,” echoing comments made by Flaherty and Carney.
Melessanakis also disputed McLister’s point that many of OSFI’s recommendations are already employed by “scores of lenders.” “Not all, and not on a consistent basis,” the OSFI official said. “There are some enhancements in lending practices that are needed.”
Last Failure
Melessanakis doesn’t name specific lenders in his comments. OSFI regulates 151 deposit-taking institutions, including 77 banks as well as trusts, loan companies and credit unions.
The last financial institution failure in Canada occurred in 1996, when Security Home Mortgage Corp. collapsed, according to the Canada Deposit Insurance Corp., a government agency that insures deposits. Security Home Mortgage had assets of $65-million the year before it failed.
Eighteen financial institutions failed in the 1990s, including Confederation Life Insurance Co., which had $19.2-billion in assets at the end of 1993. There were 23 failures in the 1980s, including Northland Bank, which had $1-billion in assets.
Bloomberg News
http://business.financialpost.com/category/news/fp-street/features-fp-street/
Jason Heath May 5, 2012 – 7:00 AM ET | Last Updated: May 7, 2012 9:49 AM ET
Is a vacation property affordable without stretching yourself too thin and sacrificing other financial goals?
May marks a time of change for those who own or who wish to own a vacation property. The snowbirds are returning from the sunny south and the Victoria Day holiday has historically been “opening weekend” for many cottagers. It is also a time of year that sees a lot of turnover of vacation properties — whether north or south — which might make you wonder how you can achieve your dream of owning a vacation property.
Most people opt for cottages over homes or condos in the southern states simply because of proximity. The Royal LePage Recreational Property Report says standard waterfront recreational properties can range from the mid-$150s on the East Coast to approaching $1-million in Cranbrook or Vernon, B.C., the Muskoka region of Ontario or the Eastern Townships of Quebec.
For argument’s sake, assume the purchase of a $200,000 cottage. Not everybody has a couple of hundred thousand dollars waiting to find a home (pun intended), so most cottage purchases will be financed. It’s important to know ahead of time that mortgages for recreational properties may be subject to different lending requirements and higher interest rates than your home. Banks tend to look more favourably upon cottages that have year-round access and are winterized when determining acceptable loan-to-value ratios and discounts off of posted mortgage interest rates, so don’t count on standard mortgage terms for an uninsulated log home on an island.
If someone qualifies for an 80% mortgage on their notional $200,000 cottage, that requires a down payment of $40,000. It’s possible (though may or may not be advisable) to borrow against your principal residence for this down payment. Assuming a 4% rate and a 25-year amortization on the $160,000 mortgage, the monthly payments would be $842, which is about $10,000 a year. Property taxes, insurance, utilities and maintenance might conservatively add another $5,000 a year, meaning a total annual cost of $15,000 (7.5% of the cottage purchase price). Assuming the entire down payment came from a secured line of credit on your home, add another $2,000 in interest-only payments at a minimum at today’s rates. Remember, though, in addition, cottages need new roofs and experience other expensive and unexpected maintenance requirements just like a home. And interest rates have nowhere to go but up.
It wouldn’t be unreasonable for a family of four to spend $5,000 to go on a one-week vacation, but that’s a long way from the $15,000 carrying costs for the cottage. That said, in this example, nearly $4,000 a year would be going to mortgage principle repayments and if the cottage rises in value at a modest 3% a year, there’s another $6,000 in net equity — $10,000 in total — over the course of the year. If we knock $10,000 off the carrying costs, a family might be looking at only a $5,000 annual net “cost,” which is getting a bit more reasonable when you look at it this way.
There is still a valid argument that the average family who might only take a couple weeks of vacation per year might do better to rent a cottage or visit an all-inclusive resort and spread out their vacation spending. A $5,000 vacation budget could go a long way and for those who like diversity, it might not be very rewarding to spend it all in one place at the cottage. But likewise, some would gladly add this to their budget to have a second home to call their own.
For those who like diversity, it might not be very rewarding to spend it all in one place at the cottage
One consideration when purchasing a cottage property is the potential to rent it out. It’s much easier to rent a cottage on your own these days on Kijiji or other online directories, by creating your own website or simply by word of mouth. But there are also property managers who will find tenants and provide various levels of management — typically for 10% to 20% of the rent collected. This can certainly help pay for some of the carrying costs and can be a good option for families who can’t spend much time at their cottage. It also makes some of the carrying costs tax-deductible (though the rent received is also taxable). Renting any property, cottage or otherwise, can present many unpleasant challenges for landlords, so renting is not without potential headaches.
More and more Canadians are looking south of the border for vacation properties. Florida, Arizona and California tend to be hot spots. With the decline in U.S. home prices, coupled with the increase in the Canadian dollar vis-à-vis the U.S. in recent years, home prices are very affordable in the U.S. on a relative basis compared to many places here in Canada.
Average home prices in Florida peaked around $271,985 in 2006 and have since stabilized around $159,900. This compares to the average home price in Canada of about $369,677.
If financing is required for a U.S. property, U.S. banks may lend 50% to 75% of the purchase price to a Canadian depending on the state. Lenders may also require the deposit of up to 12 months of mortgage payments, property taxes and insurance premiums into a U.S. bank account. Some people use a mortgage or line of credit on their Canadian home to provide the funds to purchase a U.S. property to keep things simple.
Canadians with a high net worth need to be cognizant of U.S. estate taxes, which could become payable on death for those owning U.S. assets. There is a lot of short-term uncertainty around U.S. estate tax rules, so be sure to consult a professional.
A Canadian who rents out a U.S. property will be required to file a U.S. tax return, although in most cases, little or no tax results and the filing is simply administrative.
Is a cottage or U.S. recreational property a good investment? That depends in part on what happens with real estate prices. Some have called for the bursting of a real estate bubble in Canada, suggesting caution for Canadian cottage buyers. Historically, Canadian homes have averaged about 3.5 times household income — currently, they stand at 4.75 times, which is quite a jump from the long-term trend. Meanwhile, the U.S. housing market, although it seems to have found a floor, has not shown much of an improvement to suggest positive returns in the near term.
Prices aside, because future real estate trends are just speculation, one needs to examine more tangible factors. Is a vacation property affordable without stretching yourself too thin and sacrificing other financial goals? Is diverting money otherwise spent on vacations to a fixed address a good trade-off? And finally, where do you and your family want to be — sitting on the dock this summer or baking on a beach next winter? Both sound good, but take the time to determine what’s right for you from both a financial and lifestyle perspective.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto. http://business.financialpost.com/2012/05/05/cottage-or-second-property-weigh-the-costs-vs-rewards/
Time is running out to buy your dream home in the U.S., economist warns
Pamela Heaven Apr 24, 2012 – 2:51 PM ET | If you’re thinking of buying property in the United States, buy now because prices won’t stay in the basement much longer, says a BMO economist.
“While there’s little urgency, now is likely a good time to buy U.S. real estate in regions with relatively low foreclosure rates, as conditions should improve enough to put a floor under prices this year,” said Sal Guatieri, senior economist, BMO Capital Markets.
Almost two in 10 (16%) Canadians would consider buying a home in America, according to a BMO survey. Just under half (44%) of these potential buyers cite affordability as the attraction, while one third see the property as a long-term investment.
Mr. Guatieri says that while the U.S. housing market remains soft, prices are likely to stabilize in 2013.
Single-family homes sales, while up 6% in the past year to the first quarter, remain 8% below their 20-year average. But Mr. Guatieri predicts that U.S. demand will improve on firmer job growth, improved affordability and easier lending standards.
“With mortgage rates at record lows and resale prices down 34% from the peak, only 12% of gross median family income is needed to finance the purchase of a typical house – nearly half the long-term norm,” he said. “In fact, it’s cheaper to own than rent in many regions.”
While Canadians with their eye on a select location in the States should act now, extreme bargain hunters can afford to wait, says Mr. Guatieri.
In the 15 states with a foreclosure rate above 4% — such as Florida, New Jersey, Illinois and Nevada — prices fell 3.5% in 2011. A one percentage point rise in foreclosure rates is associated with one-half percent decline in home values.
Mr. Guatieri said the flood of foreclosures is far from over as banks process the backlog of delinquent mortgages stemming from allegations of improper foreclosure documentation. Some estimate this so-called “shadow inventory” could be as many as 3 million homes, more than the total of houses on the market now.
Last Updated: Apr 24, 2012 2:56 PM ET http://business.financialpost.com/2012/04/24/time-running-out-to-buy-your-dream-home-in-u-s-economist-warns/
Why smaller down payments can lead to better mortgage rates
Garry Marr May 1, 2012 – 10:03 PM ET | Last Updated: May 1, 2012 10:24 PM ETNorm Betts/Bloomberg
Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank.
It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.
Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.
Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporation
Canada Mortgage and Housing Corp.
“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.
The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to the Financial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages — loans with more than 20% down — because it was easier to securitize them.
However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.
“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”
It all depends on the lender. For now, the Big Six banks have kept consistent pricing between low-ratio and high-ratio mortgages.
“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, says competition among the Big Six banks is keeping rates down and stopping any of them from raising rates for conventional mortgages.
“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.
“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”
But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.
Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.
While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.
It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.
It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?
Posted in: Mortgages Tags: Canada Mortgage and Housing Corp., cmhc, housing market, Jim FlahertyGARRY
MARRgmarr@nationalpost.com
Avoid these 5 costly mortgage mistakes
By Carola Vyhnak | Wed Apr 25 2012
With several mortgages behind him, you’d think Kelly Walters would know a thing or two about the process. He does
That’s why, when he went to the bank recently for his purchase of a new family home, he had all his financial ducks in a row and everything the lender would need in a “nice neat package.”
“I know what the banks want to see,” says the steamfitter, who poses a lending challenge because his contract work doesn’t generate a regular paycheque.
The 34-year-old father of two young boys learned by trial and error after buying several investment properties in the past 10 years.
“I’m getting pretty good now,” he says after finding a lender who would give him “high appraisal value” for the 90-hectare farm northeast of Cobourg where his family is moving this month. His advice? Do your homework and do it early!
Related: Our $18,000 home-closing shock
The experts concur. First-timers, experienced buyers and home owners renewing their mortgage can all avoid making mistakes through preparation and informed advice, they say.
Mortgage specialists have identified the top bloopers people make again and again.
What you don’t know can hurt you: Above all, educate yourself, advises CaroleAnn Bryant, a mortgage professional at Cobourg’s mortgagesthatwork.ca, who worked on Walters’ financing.
Mortgages are complex and you don’t want to just take whatever product or term the bank is pushing, she warns.
With all the information online and specialists who work for you, boning up before you buy isn’t difficult, she says. “Understand the product and what you’re getting into!”
Will the real reality check please stand up? The terms pre-qualification and pre-approval are often confused even within the industry. But whatever you call it, a casual run-through of your finances — what Toronto mortgage broker Joe Walsh calls “number-crunching spat out by a computer” — is no guarantee that you actually qualify for the loan you’re seeking.
It’s a good idea, he urges, to go through the full process to get the “real deal” on what you can afford based on your circumstances.
You should actually apply for a loan before you buy a home, by submitting tax returns, pay stubs and other data, adds Jaspal Cheema, a Brampton realtor and licensed mortgage specialist. The lender verifies the information, checks your credit and if all goes well, “agrees, in writing, to make the loan,” he says, adding that that certainty gives you more negotiating clout with the seller.
It’s not just the rate: Getting hooked on a mortgage based just on the lowest interest rate could lead to regret, says Walsh, who urges borrowers to look at other factors, such as pre-payment options and penalties, if you want to pay it off early.
“When you decide on the basis of pricing alone, it might not be the best product for you,” he says.
When you do find the rate you want, get the company to guarantee in writing how long they’ll hold it, suggests Cheema, who includes that advice in a list of 11 “big” mortgage mistakes on his website, http://www.jaspalcheema.com/.
Budget and plan: Without a budget and a plan, homebuyers won’t have a clear picture of their financial needs, cautions CaroleAnn Bryant. Maybe you can afford a house now when interest rates are low, but beware the future, she says.
Today’s five-year mortgage for 3.29 per cent could be 5.29 per cent at renewal time, Bryant says.
“You have to assume (rates) are going up and you don’t want to be in a position where you can’t afford your mortgage payments.”
She advises drawing up a budget that allows for home repairs and maintenance, and writing a long-term plan that covers such things as starting a family or putting older kids through school.
Shop around: When renewal time rolls around, it’s tempting to sign up for your current lender’s first offer, says Bryant. But “chances are,” you could save anywhere from a quarter to a full percentage point by shopping around. On a $200,000 mortgage with a 20-year amortization, a rate that’s 0.25 per cent higher would cost $4,000 more in interest over five years, she points out.
Check out interest rates online or negotiate with your bank, Bryant advises. If you decide to switch to another lender, make sure you don’t have a collateral mortgage that carries a transfer fee, she adds.
Remember, adds Cheema, “The banks are not going to save you a single penny, because your saving is their loss.”
Dos and don’ts
The professionals offer dos and don’ts that could save you money and stress:
• Do get your credit report and score months before you apply for a mortgage so you can fix anything that might affect your loan approval!
• Don’t put any big-ticket items on your credit cards between acceptance of your home purchase offer and closing because it could affect your final mortgage approval!
• Do set aside enough cash for closing — at least 2 per cent of the price of the home — and for costs after you move!
• Don’t extend your amortization to 25 years or 30 years to lower your payments! In the long run, it will cost you more than a 20-year amortization.
• Do opt for bi-weekly, not monthly, payments to accelerate the pace of paying down your mortgage!
http://www.moneyville.ca/article/1167756--5-costly-mortgage-mistakes
Banks got $114B from governments during recession
Support for banks 'more substantial than Canadians were led to believe': CCPA report
CBC News
Posted: Apr 30, 2012 9:55 AM ET
Last Updated: Apr 30, 2012 7:55 PM ET
Canada's biggest banks accepted tens of billions in government funds during the recession, according to a report released today by the Canadian Centre for Policy Alternatives.
Canada's banking system is often lauded for being one of the world's safest. But an analysis by CCPA senior economist David Macdonald concluded that Canada's major lenders were in a far worse position during the downturn than previously believed.
Macdonald examined data provided by the Canada Mortgage and Housing Corporation, the Office of the Superintendent of Financial Institutions and the big banks themselves for his report published Monday.
It says support for Canadian banks from various agencies reached $114 billion at its peak. That works out to $3,400 for every man, woman and child in Canada, and also to seven per cent of Canada's gross domestic product in 2009.
The figure is also 10 times the amount Canadian taxpayers spent on the auto industry in 2009.
"At some point during the crisis, three of Canada's banks — CIBC, BMO, and Scotiabank — were completely under water, with government support exceeding the market value of the company," Macdonald said.
"Without government supports to fall back on, Canadian banks would have been in serious trouble."
During October 2008 and June 2010, the banks combined to report $27 billion in profits on their balance sheets.
CMHC mortgage program aided banks
One of the most well-known ways in which policymakers helped the banks during the crisis is through a $69-billion CMHC program whereby the housing agency took mortgages off the balance sheets of big Canadian banks. In contrast with other support facilities, all of the funds granted by the CMHC were through selling assets (in this case mortgages) to the housing agency. They were not funds that had to be paid back.
The CMHC has provided the aggregate total of how much was given out, but has yet to release specifics on which banks sold how much to them, and when, the CCPA says.
When asked for comment in reaction to the CCPA report, the Canadian Bankers Association noted that the $69 billion that Canada's big banks sold into the CMHC program is in fact only 55 per cent of what was allocated for the program.
"Many of the mortgages were already insured and therefore, created no additional risk for the government," the CBA noted in an email to CBC News. The CMHC estimates that by the time the program is wound up, it will have generated $2.5 billion in profit as those mortgages are paid off, the bankers' group noted.
Calling the CCPA report "completely baseless," Department of Finance spokesperson Chisholm Pothier noted that the mortgage program has already generated more than $1.2 billion in net revenues for the CMHC's coffers.
But Canadian lenders also dipped into a program set up by the U.S. Federal Reserve aimed at providing cash to keep American banks afloat. CIBC and BMO took almost $3 billion each out of the fund, RBC and TD took out $8 billion and Scotiabank drew down almost $12 billion, the CCPA report found.
'These funding measures were not put in place because banks were in financial difficulty.'—Canadian Bankers' Association
That data came from the U.S. Federal Reserve, which released it publicly. But Macdonald's analysis found that Canadian banks got a comparable amount — $41 billion — from Bank of Canada facilities, an agency that has been far less transparent in sharing information.
"Despite Access to Information requests for the data, the Bank of Canada refuses to release it," the CCPA report states.
"The federal government claims it was offering the banks 'liquidity support,' but it looks an awful lot like a bailout to me," says Macdonald. "Whatever you call it, Canadian government aid for the country's biggest banks was far more indispensable than the official line would suggest.
"The support for Canadian banks was much more substantial than Canadians were led to believe," Macdonald said.
The Canadian Bankers Association disputes the notion that the funds in question were any sort of bailout, arguing they were routine transactions aimed at keeping the financial system liquid.
"These funding measures were put in place to ensure that credit was available to lend to businesses and consumers to help the economy through the recession," the CBA said. "These funding measures were not put in place because banks were in financial difficulty."
Since the start of the recession, the CBA notes 436 U.S. banks have failed. No Canadian financial institution went under, but Canada's banking sector was hit by an overall crisis of confidence in the banking sector that caused some of the banks' normal lending sources to dry up, the CBA says.
Canadian banks get about two-thirds of their funding from consumer and business deposits, but the other third comes from credit markets.
"It was these markets that were seizing up. Funding was less available," the CBA says. "Canadian banks continued to lend and increased their lending after some non-bank lenders pulled out of the Canadian market."
While some of the funding came from government sources such as the Bank of Canada, the bankers' association points out that the central bank itself says Canadian banks needed less official central bank liquidity support than their foreign counterparts.
"The credit was extended at competitive interest rates to protect taxpayers," Pothier said. "Financial institutions accepting this credit paid interest on the loans."
To show the scale of the funding, the CCPA report contrasted the total value of the support Canadian banks took against the bank's total value at the time. Under that comparison, CIBC received $21 billion in support — almost 1.5 times the value of the company at the time. BMO maxed out at $17 billion or 118 per cent, Scotiabank peaked at $25 billion or 100 per cent of its value, while TD and RBC maxed out at $26 billion and $25 billion — good enough for 69 and 63 per cent, respectively, of the total value of those companies at the time.
"It would have been cheaper to buy every single share in these companies," Macdonald said.
But the CBA disputes those numbers too, saying comparing a bank's value to the level with which it participated in a liquidity program aimed at boosting confidence in the market is "an apples to oranges comparison as the two factors are not at all related."
"The Oxford dictionary defines bailout as 'financial assistance to a failing business or economy to save it from collapse," the Canadian Bankers Association noted.
"That definitely was not the case here: not one bank in Canada was in danger of going bankrupt or required the government to buy an equity stake under taxpayer-funded bailouts."
http://www.cbc.ca/news/canada/ottawa/story/2012/04/30/bank-bailout-ccpa.html
Garry Marr Apr 27, 2012 – 6:33 PM ET | Last Updated: Apr 27, 2012 7:33 PM ET
Finance Minister Jim Flaherty would consider taking Canada Mortgage Housing Corp. out of the mortgage default insurance business he told the National Post’s editorial board.
‘I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada’
“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.”
He offered no timetable on when the government could get out of mortgage default insurance business, just offering it up as a possibility. “We have a list of Crowns, Crown agencies that are being reviewed,” said Mr. Flaherty.
In a wide-ranging discussion on the housing market, he said he has no plans to increase CMHC’s current $600-billion loan limit, ruled out any possibility of regulating foreign real estate investment and made it clear his focus is on the governance of Crown corp. which controls about 75% of the mortgage default insurance business in the country.
“For some time now I’ve had concerns about the large commercial role that CMHC now plays. CMHC has become a significant Canadian financial institution. As you know, historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that.”
The finance minister moved this week to tighten control of CMHC, placing it under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions. Previously, it fell under the watch of the Department of Human Resources and Skills Development.
The shift comes with CMHC closing in on the $600-billion limit the government has for how much of its portfolio will be backstopped by the taxpayer. Three years ago it was $450-billion.
By law, consumers must buy mortgage default insurance if they have less than a 20% down payment on a home and are borrowing from a federally regulated financial institution.
But CMHC has not been insuring just those loans, it has agreed to step in and insure loans — with the premiums paid by financial institutions — for lower-ratio mortgages, or what is called “portfolio” or “bulk insurance.”
He said the head of OFSI will now have the power to look at the books of CMHC the way she looks at the books of other private financial institutions in Canada. Already, the government has placed the deputy minister of finance on the board of CMHC.
“We have quite a bit of information about what the banks do and don’t do. [Superintendent] Julie Dickson had to go to some of them in the last year and say ‘you must ensure that your board policies on residential lending mortgages are carried through,” he said. “She’s quite a strict supervisor which is good for our country.”
OSFI has already been looking into CMHC and established one of the key issues for the organization is governance. “OFSI are certainly of the view there are necessary governance improvements we can do,” said Mr. Flaherty.
He made it clear there are no plans to extend CMHC’s $600-billion limit. “For a while,” said Mr. Flaherty, about how long the Crown corporation would have to exist under that limit. It was at $541-billion at the end of the third quarter of last year but business has slowed as the agency culled its portfolio business.
Mr. Flaherty’s own opinion on the housing market is that has been fuelled by low interest rates which he says he does not control. “Cheap money,” he said, noting he did talk to the banks about being unhappy about their mortgage rate wars earlier this year which had reduced the rate on a five-year closed mortgage to below 3% — an all-time low.
As to whether the market has been in part fueled by foreign buyers, as many in the real estate industry have suggested, Mr. Flaherty said his government will not get involved in that aspect of the market. “No,” he said, pausing to emphasize the point. “I don’t think there is [a role]. They key in housing from my point of view is to get the best information on housing.”
Posted in: News Tags: cmhc, Jim Flaherty
http://business.financialpost.com/2012/04/27/cmhc-could-be-pulled-out-of-mortgage-insurance-business-flaherty-says/
April 11, 2012
HELOC LTVs Could Drop From 80% to 65%
65-percent-ltvThere's a good chance we might see new restrictions on HELOCs, possibly within the year.
Last week, Canada’s top banking regulator Julie Dickson explained why to BNN:
"We started to see [HELOCs] being used as a substitute for a mortgage. Instead of having a mortgage on a house, you had a HELOC only, and that is not what these HELOCs were designed for originally. That's why we suggested in the guideline strongly that there be a loan-to-value ratio of a maximum of 65%."
Julie-Dickson-OSFI"We want the (underwriting) practices at the banks buttoned down," Dickson added, saying that some financial institutions were not following underwriting policies “to a T."
As with OSFI’s other pending mortgage guidelines, the new 65% LTV HELOC change is up for public comment until May 1.
The Downside...
If OSFI were to impose this 65% LTV limit on all borrowers (regardless of qualifications), some would view it as one of the most over-reaching consumer lending rules OSFI has enacted; painting all borrowers—strong and weak, responsible and overleveraged—with the same brush. Hopefully exceptions will be made for strong borrowers.
It’s vital to note that HELOCs support a host of valid uses. Many people rely on them for investing purposes, educational borrowing, contingency funds, value-added renovations, etc. Moreover, unlike high-ratio mortgages, HELOCs present no taxpayer risk because they’re not backed by the government. They also impose minimal insolvency risk to banks, to the extent that borrowers are well-qualified and maintain 20%+ equity.
On a related note, OSFI's draft guidelines suggest it might also require federally regulated institutions to limit interest-only periods on HELOCs to five years. This would be a senseless restriction for people who use HELOCs for retirement planning. In such strategies (e.g., the Smith Manoeuvre), interest-only payments and 80% LTVs are sometimes essential. In these cases, HELOC borrowing is generally offset by the income-generating assets purchased with those funds.
Other Comments...
Regarding the recent 2.99% mortgage “sales,” Dickson said it is "very important" to make sure consumers "can not only pay a 2.99% (rate) but can actually pay the 5-year Bank of Canada posted rate." It’s not a coincidence then that OSFI’s proposed guidelines talk about using the 5-year posted rate to qualify a much broader range of borrowers.
Dickson refused to answer questions on whether a reduction in CMHC portfolio insurance would create challenges for banks.
BNN interviewer Howard Green also tried to get her to comment on whether bankers might be afraid to speak out against over-regulation because of retribution from regulators and examiners. Dickson dismissed that as being a material issue in Canada. Some in the industry, however, would certainly differ with her on that point.
Rob McLister, CMT
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/04/heloc-ltvs-could-drop-from-80-to-65.html