The Fed Brings Out The Big Guns

In a remarkable show of force, the US Federal Reserve jumped the gun on its regularly scheduled meeting on March 18 and cut the target overnight fed funds rate by a full 50 basis points (bps) to 1%-to-1.25%. This now stands well below the Bank of Canada’s target rate of 1.75% and may well force the Bank’s hand to cut rates when it meets tomorrow, possibly even by 50 bps.

The Fed has not cut rates outside of its normal cycle of meetings since October 8, 2008, as the collapse of Lehman Brothers roiled financial markets. Such moves are rare, but not unprecedented.

The BoC is conflicted, in that such a dramatic rate cut would fuel household borrowing and the housing market, which the Bank considers to be robust enough.

The Federal Open Market Committee (FOMC, the Fed’s policymaking group) released the following statement: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

In an 11 AM (ET) news conference, Chairman Powell said the broader spread of the virus poses an evolving risk to the economy that required immediate action. The FOMC judged the risk to the economy had worsened. The Fed acted unilaterally, in contrast to the coordinated central bank move taken during the financial crisis in 2008.

However, the Fed is in active discussion with other central banks around the world, and the European Central Bank indicated earlier today that they would take any necessary actions. Central banks in the euro-area and Japan have less scope to follow with rates already in negative territory.

Governor Carney said earlier today that the Bank of England would take steps needed to battle the virus shock. Carney hinted at the complexity of dealing with the trauma for central banks in assessing whether the impact falls on demand — which they have more capacity to address — or supply — which is harder to for central banks to treat.

G-7 finance chiefs and central bankers are scheduled to have a rare conference call today.

With election tensions running strong in the US–after all, today is Super Tuesday–it’s easy to imagine that this move by the Fed is as much political as economic. It comes amid public pressure for a rate cut by President Trump. Moreover, following today’s dramatic move, the president called for more, demanding in a tweet that the Fed “must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA.”  

Politicizing the Fed is dangerous and reduces the global credibility of the US central bank.

Stock markets around the world reversed some of today’s earlier losses on the news. The US stock markets opened today with a significant selloff following a rally yesterday. Bond yields continued to decline on the news.

Bottom Line for Canada: The key government of Canada 5-year bond yield has fallen sharply today to 0.925% and falling at the time of this writing. The 5-year yield was 1.04% before the Fed’s announcement. The Bank of Canada will likely cut overnight rates tomorrow for the first time since October 2018–but by how much? I would guess by 25 bps given Poloz’s concern about household debt.

Dr. Sherry Cooper, Chief Economist Dominion Lending

On March 19, the Federal Government announced the official 2019 budget.  One major topic on the discussion table (and one we were all holding our breath for) was the discussion of affordable housing in Canada.  So just what happened on “Budget Day”?  Here are the highlights of the 2019 Budget:

CMHC First Time Home Buyers Incentive Plan

-This would give first time home buyers the ability to share the cost of buying a home with CMHC
-For existing homes – the incentive would provide up to 5% (funding/equity sharing) of the PURCHASE PRICE
-For newly constructed homes the incentive would provide up to 10% (funding/equity sharing) of the PURCHASE PRICE
-Funding/Equity sharing means that CMHC would cover a percentage of the purchase price.

We are awaiting clear details of how repayment would take place.

Example:

• 400K purchase price, 5% down payment (20K), AND 5% CHMC shared equity mortgage (20K), the size of the insured mortgage would be reduced from 380K down to 360K, which would lower the monthly payment amount for the first time home buyer

To qualify for the program:

• 120K max household income
• Cannot borrow more than 4x their annual household income – making max purchase price approx. 505K
• 100k household income would mean max 400K mortgage in order to use this program.

Also, mortgage applicants under this plan still have to qualify under the federal stress test, which ensures that borrowers will be able to keep up with the payments even if interest rates rise by roughly two full percentage. The incentive, however, would lower the bar for test takers, as applicants would have to qualify for a lower mortgage.

The predicted start time is Fall 2019 for these guidelines.

Home Buyers Plan RRSP Increase

An increase of the previous $25,000 for RRSP withdrawal amount through the Home Buyers Plan to $35,000

These were the two mortgage related key changes that came out of the Federal Budget.

by Geoff Lee

Canada’s financial regulator is facing growing pressure to tweak its mortgage stress test, and no longer just from the mortgage industry.

On Monday, Calgary city councillor George Chahal filed a motion asking for the mayor to call on the federal government to amend the stress test implemented by OSFI (the Office of the Superintendent of Financial Institutions) on January 1, 2018.

Chahal argues the stress test is designed for the Greater Vancouver and Toronto markets, where prices have soared in recent years, and that slower-growth cities, such as Calgary right now, are suffering the wide-ranging consequences. One of those, which he addressed in his motion, is that many borrowers who don’t pass the stress test are being forced to turn to private, unregulated lenders that typically charge higher rates.

“I think we need to have a made-in-Alberta solution based on local economic indicators and which reflects the needs of Calgary and our local economy,” he told The Calgary Star.

Alberta Conservative Party Leader Jason Kenney also spoke out against the stress test last week, vowing to fight it should he be elected premier.

“If you elect a United Conservative government, we are going to go to bat for [those]…who are being pushed away from home ownership because of the prejudicial, regional, unfair stress test imposed by the Canada Mortgage and Housing Corp.,” he said in a speech to Calgary real estate agents.

In January, Mortgage Professionals Canada released its annual report, which addressed the negative effects of the stress test and reiterated calls for changes. Key among them being that any stress test be based on a “relevant” interest rate and factor in income growth and principal repayment; stop subjecting renewals to the stress test; and making it easier for borrowers at alternative lenders to transfer to more liquid and lower-cost lenders.

Canada’s big banks too, which at one time welcomed the stress test, are now voicing their own concerns in the face of a 17-year low in mortgage growth.

“The damage caused by the central bank’s premature bullishness was reversed quickly [with a pause in interest hikes]. What hasn’t been reversed yet is the damage to the housing market due to OSFI’s B-20 rules,” CIBC Deputy Chief Economist Benjamin Tal wrote in a research note, adding that he does not view the introduction of the 200-bps stress test as an error. “Some Canadians needed to be saved from themselves. But given where we are in the cycle, and with policy rates up by 75 basis points since the introduction of the new measures, is 200 basis points still the right number? Not taking a position here… just asking.”

In an interview with the Huffington Post, he added: “It’s not something that has to be set in stone. It should be more dynamic,” he said of any stress test. “You have to assess the damage to the housing market, whether that damage is too severe, and what other forces in the market are leading to slower growth.”

OSFI Not Expected to Cave to Pressure…Yet

Despite the increasing pressure to tweak the stress test, OSFI has no plans to make any modifications just yet, according to sources cited by Reuters.

That was more or less confirmed by Carolyn Rogers, Assistant Superintendent of OSFI, during a speech Tuesday.

“OSFI monitors the environment on a continual basis and when we determine that adjustments to our standards and guidelines are warranted, we make them,” she said.

She noted that the stress tests were introduced due to a “shift in risks” in the financial system and that the situation can continue to change.

“Should that margin of safety be monitored, and should changes be considered if conditions in the environment change? Of course they should,” she said.

Ron Butler of Butler Mortgage told CMT that as the real estate “apocalypse” continues in Vancouver, those in government and the mortgage industry are justifiably worried.

“Banks are here to make money for shareholders, and if they see something adversely affecting that goal, such as a slowdown in lending, they will definitely have an opinion,” he said.

Butler notes that he sees both sides of the stress test argument, saying he sees the human toll it takes on those caught in the middle, but also the need for it given that “soaring real estate prices pose a certain degree of danger to our economy and society.”

He argues that any modification should do away with requiring mortgage renewals at a new lender to be subject to the stress test. “Applying the stress test to consumers seeking to get a better deal at the point of renewal of their mortgage is ridiculous,” he said. “If a family is prevented from shopping for the best interest rate at the point of renewal when their incumbent lender is not required to use the test, then it is an anti-consumer policy that enriches the incumbent lender and harms the consumer.”

By: Steve Huebl

With the importance of real estate in Canada, it is vital to understand how the various professionals in the sector operate when buying a home.

Sooooooo… what is the difference between a Mortgage Specialist & a Mortgage Broker? At the surface, they sound the same
• They both arrange mortgages
• They both can offer advice and help you select a mortgage, right?

WRONG!!! There are many differences… Let’s check some of them out!

• A Mortgage Broker works for you! Their role is to act as a link between you and the lenders so that you do not have to spend your valuable time learning about mortgages and shopping around for the perfect mortgage. Mortgage brokers do the legwork and negotiate on your behalf for lenders. They are your point of contact for everything related to your financing your home.
o Bank specialists are employed and paid by the bank and work on the bank’s behalf.

• A Mortgage Broker can work with many different lenders across Canada, rather than working for one financial institution. Therefore, Mortgage Brokers can offer you more choices with competitive rates and terms including; Big banks, Credit Unions, Trust Companies, Monoline Lenders (broker only banks) and private lenders.
o Usually, Mortgage Specialists only have access to their lender’s products. In a typical situation, homeowners could end up with a higher interest rate than other institutions. This occurs because the homeowner must negotiate for themselves and Mortgage Specialists are usually paid according to the rate they sell you.

• A Broker must successfully complete a Provincially regulated Mortgage Broker course and exam. They continue to maintain their good status to keep that license by taking professional development education courses.
o Bank specialists are not licensed and require no formal training. There are no standards for educational requirements (although most Lenders do provide some in-house training).

• Because Mortgage Brokers don’t work for a specific lender, you get impartial advice about a variety of lenders
o A bank specialist can only offer their own institutions products, good or bad.
o Specialists don’t have access to other lenders, so they won’t recommend another lender’s product offerings.

• Mortgage Brokers use their knowledge and experience to negotiate the best possible terms and rates for you from a variety of lenders, based on the best fit for your situation.
o When you see a bank specialist, the mortgage negotiating is typically left up to you.
o Will the bank specialist negotiate on your behalf or the banks?

• For conventional financing, the services of a mortgage broker are generally FREE to you. If there is a cost, you will be advised of those costs up front. Brokers get a finder’s fee from the lender once they place your mortgage. Therefore, brokers are motivated to get the best terms and rates for their clients.
o Bank specialists are paid by the bank
o Some banks offer bonuses if the specialist gets their client to pay higher interest rates or sign up for other bank services.

• Mortgage Brokers work on a referral basis and are self-employed. Most of their business is done through word of mouth referrals, therefore a Mortgage Broker is motivated to ensure their clients are extremely happy and satisfied to keep their business growing.

o A bank specialist is generally an employee of the bank, generating business through the bank’s existing customers.

• Most Mortgage Brokers are available for appointments outside banking hours (nights, weekends) at their client’s convenience.
o Bank specialists are generally only available during regular banking hours.

• Mortgage Brokers are focused on your mortgage
o Specialists are trained and rewarded on cross selling. Some will push you to consolidate all your banking services with them when getting a mortgage (credit cards, insurance, RRSP, lines of credit, etc.)

Would you ask Tim Hortons who makes the best coffee and expect them to say Starbucks? Not likely…  So why would you ask a Mortgage Specialist who works for a bank, to tell you which Lender has the best mortgage product for your situation.  (article by Kelly Hudson)

Government restrictions on refinance guidelines have reduced the equity homeowners can access for renovations. High ratio buyers especially, in a flat market, may wait years before the house has appreciated enough that an 80% LTV refinance provides any money. If home buyers want to do upgrades, the time of purchase may be the only opportunity, for years they can add the cost of the renovations to the mortgage.

Use the Purchase plus Improvements to:

• Add a new or updated kitchen
• Develop the basement for more living space or visiting friends & relatives
• Update or replace the carpeting or maybe adding hardwood
• Add a garage or workroom
• Add a media room or “man cave”
• A new additional bathroom with maybe a jetted tub
• A new roof
• A more efficient central air or furnace system
• Add new siding, eaves or fascia
• Replace or updating doors and windows
• Add major landscaping

If the property isn’t exactly what they want: renovate, add, or upgrade it!

There are specific requirements for the purchase plus improvements program, please call to learn the details. Exceptions to the generally understood parameters are available.  Renovating up front may be your buyers best option.

HOW MANY ACRES ARE YOU PURCHASING? 

For conventional mortgages,  lenders will finance a certain number of acres, a house & a garage. The number of acres that they will consider can vary based on the property location and the norm for that area. The minimum down payment can also vary based on the size and location of the land.  For example, a property that is close to a major urban area and under 10 acres would most likely be approved with 20% down payment. If it is a larger acreage 30+ acres and not within an hour of a major urban area, the minimum down payment will likely increase.

For high-ratio / CMHC insured mortgages with a minimum of 5% down,  they will approve and insure the value of the house, garage and the `residential component` of the land. If the norm / average acreage size for the area is 20 acres, this is what they will approve in land value. If it is 160k – then this is what they will approve. However, if you purchases a 160 acre acreage and all of the acreages surrounding it are only 20 acres – CMHC will likely only give value to the first 20 acres of land and the buyers will have to pay out of pocket for the value of the remaining land as determined by an appraisal.

It is typically easier to secure financing on CMHC insured Mortgages and it is not uncommon for lenders to require the mortgage is insured even if the buyers have a 20% down payment based on the purchase price. If it is a large acreage, has outbuildings of major value or is a mobile or modular home – these are all things that could result in either a larger down payment requirement and / or mortgage default insurance.

If there is no home on the property a mortgage is not available and one would require a land loan. Land loans typically start at a minimum of 25% down payment and go up from there based on the location, size and value of the property, they also often come at slightly higher interest rates.

WHAT ABOUT No mortgage unless there is good water! Potability reports are needed for all well water and flow rate, this will be requested either upfront with the lender approval or at the lawyers before closing. Some insurers will also request a copy of the Septic Inspection report.POTABILITY? 

WHAT ABOUT ZONING? Country residential is the easiest to finance. However, if the land is zoned Agricultural, but used as residential (no farming or commercial component) the lenders and insurers will consider this as well. Agricultural & Farmland that derives income is more difficult to finance. Lenders are wary as it is difficult to foreclose on agricultural land and if the Agricultural land has a farming component or income lender options become much more limited and down payment requirements increase.

WHAT IF THE PROPERTY HAS OUT BUILDINGS? Mortgages are for a house, garage and land – and that’s all. If the property has an outbuilding of value the effective value of the property will often be reduced by the lender or insurer, and this will affect the down payment requirements.

For example, if a client is purchasing a small acreage for 800k , and there are a brand new large heated shop, horse corrals and an arena on the property that the appraiser values in total at $ 160k, this would be deducted from the purchase price in the lenders eyes bringing the effective value down to 640k (800k-160k). The buyer would then need to have a minimum 6.1% down payment based on the 640k effective value ($39k) PLUS 160k to make up the difference (value of outbuildings) for a total of $ 199,000. Even though the buyer is technically putting more than 20% down based on the contract purchase price, the lender and insurer would consider this to be financed at 94% of the value of the home, garage and land and a CMHC premium would apply.

OTHER FINANCING FACTORS TO CONSIDER: You may need to allow extra time for conditions to be removed on acreage purchases as  CMHC appraisals and well water testing can cause delays.

As always with mortgage financing, the buyer plays an important role. For strong clients, the lender may make an exception to their policies. 

Article was written by Corey Lewis, Jencor Mortgagee