VIEWS ON BANK of MONTREAL'S 5 YEAR RATE

A good explainatory article by Robert McLister of Canadian Mortgage Trends explaining the pros and cons of Bank of Montreal's just announced 5 year 2.99% rate: BMO Cranks Up the Heat Again BMO is dead-set on winning mind share among consumers. It's coming back to the market with two new deep-discount rate promos: A 5-year fixed at 2.99% (which starts Thursday, March 8, 2012) A 10-year fixed at 3.99% (which starts Sunday, March 11, 2012) Both of these specials are low-frills, meaning: A Lower Maximum Amortization: 25 years versus 30-40 years elsewhere Less Lump-sum Pre-payment Ability: 10% maximum per year (i.e., 1/2 of the 20% that BMO normally allows) A Smaller Payment Increase Option: Up to 10%, once per year (again, 1/2 of the 20% that BMO normally allows) A Locked Term: The Low-rate Mortgage is fully closed unless you sell the property, refinance (with BMO only), or early renew into another BMO mortgage. In other words, unless you sell, you're not leaving BMO for 5 years, like it or not. Both the 5-year and 10-year promos run for 3 weeks, until March 28, 2012. We've heard talk that TD and RBC will not match BMO's pricing on the 5-year term. We'll see. The last time BMO ran this special, its competitors quickly responded with 4-year rates of 2.99%. Despite the one less year, those competing offers came with all the normal bells and whistles. Unfortunately for competitors, a 2.99% five-year rate makes more headlines than a four-year promo at the same price, and BMO knows it. This deal has garnered almost a dozen major media stories already, and the press release only came out four hours ago. As for BMO's 10-year deal, it is 146 basis points below the nearest Big 6 bank competitors' advertised rates. It is BMO's lowest 10-year rate ever, and it matches ING's current 3.99% offer. (ING was the first bank in Canada to advertise 10-year rates below 4.00%.) With these rates, BMO is starting to make other big banks look increasingly silly. CIBC, National Bank, RBC, and TD are currently promoting 5-year "special offer" rates of 4.04%. That's 105 basis points above BMO (albeit with more flexibility). Those rates border on ridiculous, and they insult the intelligence of increasingly savvy consumers who know that well-qualified borrowers rarely pay anything close to those rates. Yes, we say that knowing that BMO's Low-rate mortgage is highly restrictive and not suitable for most. It is, however, suitable for some. The target market includes many: First-time buyers Rental property owners Owners of 2nd homes The customer should have no foreseeable need to break, increase or aggressively prepay his/her mortgage for five years. In posting more transparent rates than its peers, BMO is taking a page from brokers and smaller rivals. In doing so, it's building credibility with consumers at its competitors' expense. Frank Techar, BMO's Canadian banking head, tells Bloomberg: "The reaction to our January offer was fantastic." With a mortgage market that BMO CEO William Downe admits is "slowing," 2.99% is a big fat worm on a hook. It is bait that gets BMO's phones ringing. It also gives BMO's sales force a chance to upsell people into higher margin mortgages without all the restrictions of BMO's Low-rate product. (There's a lot of that going on, according to the BMO mortgage specialists we've talked to.) With this rate sale, BMO is certain to take flak for fuelling consumer borrowing at a time when high debt levels are worrying policymakers. To that end, Techar maintains that BMO is not fuelling the fire. He tells the Financial Post that these rates "are consistent with the debate around the need to reduce consumer debt levels." In an interview with Reuters, he said: "People are not going to stretch to get the largest mortgage they can with a 25-year amortization product. Because the monthly payments are higher, they...will go to a 30-year amortization product." (He's right.) Downe recently said this to analysts about BMO's Low-rate Mortgage: "We think that's a product that is good for Canadians; it's good for Canada; it's good for our customers, and we intend to continue to promote it in this environment. It's a product that we believe addresses all of the risks that are currently being debated, whether or not the consumer debt levels that are too high in Canada and a possible fallout from economic slowdown and rising interest rates. It helps our customers pay less interest. It mitigates their interest rate risk for five years. It helps them retire debt free by paying off their balance faster, and it works against market price appreciation. In fact, it helps with...house price appreciation, because the shorter amortization reduces the maximum purchase price people can afford." Being a 5-year fixed, this product does mitigate some risk. A 200 basis point rate increase by 2017 would only lift payments $133/month on the average Canadian mortgage of $151,000. As for rumours that policymakers are ticked off by BMO's pricing, the last time anyone looked, it's still a free market. BMO can price as it sees fit within regulations. As long as underwriting standards remain high, God bless it for bringing down rates industry-wide. Even if rates like 2.99% do spur more interest in mortgages, it doesn't mean lenders will approve high-risk borrowers. BMO's average loan-to-value (LTV) is just 60%. More notably, BMO's residential mortgage portfolio has a long-run loss rate of less than 2 basis points (i.e., exceptionally low). Barring a run-up in bond yields, we could now start seeing competitors (like mortgage brokers) respond with full-frills 5-year offers that are just a pittance above BMO's rate. Some might even match or beat it. We'd strongly encourage most folks to consider paying a bit more to avoid the low-rate mortgage restrictions—especially if the premium is small (0.05%-0.10%) and especially if you can benefit from the service and extras that come with a standard mortgage. Side Note: Here are a few more details about BMO's Low-rate Mortgage: Rate Hold: Up to 90 days Pre-Approvals?: Yes BMO Mortgage Cash Account: Not available with the Low-Rate mortgage BMO Skip-a-Payment: Not available with the Low-Rate mortgage BMO ReadiLine: Not available with the Low-Rate mortgage Rentals Allowed? Yes 2nd Homes Allowed? Yes

GOVERNMENT INTRODUCES NEW RULES FOR MORTGAGE LENDERS

Code of Conduct for Federally Regulated Financial Institutions Mortgage Prepayment Information Purpose The purpose of the Code is to ensure that federally regulated financial institutions ("lenders") provide enhanced information in respect of credit agreements secured by mortgages where a prepayment charge could apply ("mortgages") to assist borrowers in making decisions about prepayment of their mortgage. Lenders currently provide substantial amounts of information relevant to mortgage prepayments to consumers in accordance with the requirements in the applicable federal regulations, including but not limited to federal cost of borrowing disclosure regulations and credit business practices regulations. The information that will be provided under this Code is in addition to existing information provided by lenders to borrowers. Application and Implementation Lenders will implement the policy elements of the Code with respect to new mortgages no later than six (6) months from date of adoption of the Code for Element 3 and Element 4; and no later than twelve (12) months from adoption of the Code for Element 1, Element 2 and Element 5. Lenders will apply the Code to existing mortgages where it is feasible to do so. The Code does not apply to mortgages that are entered into for business purposes or to mortgages entered into by borrowers who are not natural persons. Compliance with the Code The Financial Consumer Agency of Canada will monitor and report on compliance with the Code. Manner of Presenting Information Lenders will provide the information in language, and present it in a manner, that is clear, simple and not misleading. Policy Elements 1. Information Provided Annually Lenders will provide the following mortgage prepayment information to borrowers annually: Prepayment privileges that the borrower can use to pay off their mortgage faster without having to pay a prepayment charge. Examples include making lump-sum prepayments, increasing the regular payment amount, and increasing the frequency of the payment to weekly or bi-weekly. The dollar amount of the prepayment that the borrower can make on a yearly basis under the terms of their mortgage without having to pay a prepayment charge. Explanation of how the lender calculates the prepayment charge for the borrower's mortgage (for example, a certain number of months' interest or the Interest Rate Differential (IRD). Description of the factors that could cause prepayment charges to change over time. Customized information about the mortgage, valid as of the date the information is produced, for the purposes of the borrower estimating the prepayment charge. The customized information will include, depending on the type of mortgage product held by the borrower: The amount of the loan that the borrower has not yet repaid The interest rate of the mortgage and other factors (for example, rate discount or posted interest rate) that the lender uses to calculate the prepayment charge The remaining term or maturity date of the borrower's mortgage For mortgages where the prepayment charge may be based on the IRD: How the lender determines the comparison rate to use to calculate the IRD Where the borrower can find the comparison rate (for example, on the lender's website) Where the borrower can find the lender's financial calculators that the borrower can use, along with the information above, to estimate the prepayment charge. Any other amounts the borrower must pay to the lender if the borrower prepays their mortgage and how the amounts are calculated. How the borrower can speak with a staff member of their lender who is knowledgeable about mortgage prepayments. For example, borrowers may contact a staff member through a toll-free number as described in section 5. 2. Information Provided When the Borrower Is Paying a Prepayment Charge If a prepayment charge applies and the borrower confirms to the lender that the borrower is prepaying the full or a specified partial amount owing on their mortgage, the lender will provide the following information in a written statement to the borrower: The applicable prepayment charge. Description of how the lender calculated the prepayment charge (for example, whether the lender used a certain number of months' interest or the IRD). If the lender used the IRD to calculate the prepayment charge, the lender will inform the borrower of : the outstanding amount on the mortgage the annual interest rate on the mortgage the comparison rate that was used for the calculation the term remaining on the mortgage that was used for the calculation The period of time, if any, for which the prepayment charge is valid. Description of the factors that could cause the prepayment charge to change over time. Any other amounts the borrower must pay to the lender when they prepay their mortgage and how the amounts are calculated. 3. Enhancing Borrower Awareness To assist borrowers in better understanding the consequences of prepaying a mortgage, lenders will make available to consumers information on the following topics: Differences between: Fixed-rate mortgages and variable-rate mortgages Open mortgages and closed mortgages Long-term mortgages and short-term mortgages Ways in which a borrower can pay off a mortgage faster without having to pay a prepayment charge. Examples include making lump-sum prepayments, increasing the regular payment amount, and increasing the frequency of the payment to weekly or bi-weekly. Ways to avoid prepayment charges (for example, by porting a mortgage). How prepayment charges are calculated, with examples of the prepayment charges that would apply in specific circumstances. Actions by a borrower that may result in the borrower having to pay a prepayment charge, such as the following actions: partially prepaying amounts higher than allowed by the borrower's mortgage refinancing their mortgage transferring their mortgage to another lender Lenders may make this information available on their publicly accessible Canadian website where products or services are offered and upon request by consumers at the lender's places of business in Canada, including when consumers are pre-approved for a mortgage. Â In addition, each lender will provide on its publicly accessible Canadian website links to information on mortgages provided on the website of the Financial Consumer Agency of Canada. 4. Financial Calculators Each lender will post calculators on its publicly accessible website for borrowers, and provide guidance to borrowers on how to use the calculators to obtain the mortgage prepayment information they want. Borrowers will be able to enter information about their mortgage into the calculator to get an estimate of the current prepayment charge. Borrowers will also be able to change the information they enter, such as the amount of the mortgage that has not yet been repaid or the remaining term, so that they can see how the payment choices they make affect the prepayment charge. 5. Borrower Access to Actual Prepayment Charge Each lender will make available a toll-free telephone line through which borrowers can access staff members who are knowledgeable about mortgage prepayments. These staff members will be able to orally provide a borrower with the actual prepayment charge that would apply to the borrower's mortgage at that point in time. These staff members will also be able to provide to a borrower, on request, a written statement of their prepayment charge, accurate as at the time the statement is produced. A lender will not proceed to take steps to pay out a mortgage until the borrower has confirmed that the borrower's intention is to pay out the mortgage.

GOOD DEBT vs BAD DEBT

Not all debt is created equal – and not all debt is bad. In fact, you need some debt to establish a good credit rating. Being a responsible borrower means knowing which types of debt can help you reach your financial goals and which types leave you further behind. Good debt includes any investment or purchase that helps improve your overall financial position. Mortgage loans are considered good debt because they offer low rates on property that appreciates in value over the long term. You also build equity as you pay down your mortgage. Borrowing to invest is also considered good debt. Often, the interest expense on money borrowed for investments is tax deductible. And when borrowing to maximize your RRSP, you're investing in your future and benefiting from tax sheltered investment growth. Bad debt involves purchases where the value becomes lower than the original cost, and which can carry a high rate of interest, making them harder to pay off. Types of bad debt include high-interest credit card debt, car loans, deferred purchases, and cash advances. If you're unsure about your debt situation, set up a meeting with your mortgage broker. He or she can take you through your finances and advise how you can use your home equity to trade bad debt for smart debt, and give you some financial breathing room. The right refinancing package can help put an end to the monthly squeeze of too much credit card debt or too many loans, and help you get back into your financial comfort zone.

BANK of CANADA WARNING

The Bank of Canada is warning of an impending housing price correction, putting Canadian mortgage holders at risk. In a four-part series of papers, economists at the bank said a drop in home prices could also impact overall consumption and the Canadian economy. In one of the reports, authored by Brian Peterson and Yi Zheng, the bank cautioned that the risk for fluctuations in house prices has “increased markedly.” The authors noted that house prices have risen sharply in most parts of the country over the past decade, with house prices reaching a historically high level in relation to income. The percentage of household debt to income has risen from 110% in 1999 to 153% currently. “These facts (rising debt and house prices) are interrelated, since rising house prices can facilitate the accumulation of debt,” said guest editor Graydon Paulin, introducing the four papers. “Households could therefore experience a significant shock if house prices were to reverse.” The bank also suggested at 10% drop in home prices in the near future could result in a 1% drop in consumption, negatively impacting the overall economy. A “significant” share of borrowed funds from home-equity extraction in the past decade was used to finance consumption and home renovation, notes the report. “Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in housing prices,” one paper states. While rising population and income gains over the past 30 years have mostly related to the rising house prices, other factors were taking more prominence in the past decade, such as lowered interest rates, higher expectations for house prices and the liquidity of the housing market.

Good article from the Globe and Mail: Canada’s housing market has two good years ahead of it yet, Canada Mortgage and Housing Corp. said Monday, with low interest rates and a “moderately” expanding economy keeping price corrections at bay. The Crown corporation – which insures Canadian mortgages – has had a consistently rosier view of the market than many private sector forecasters. Canadian banks have recently issued reports probing the consequences of cheap money, and trying to predict whether there is a bubble in prices that will eventually pop and cause prices to crash. They are particularly concerned about Vancouver and Toronto, where some have predicted price corrections of up to 10 per cent because of overbuilding in the condo market. But CMHC said Monday Canadian markets would “remain steady in 2012 and 2013. “With the Canadian economy set to expand at a moderate pace and mortgage rates expected to remain low, activity levels in 2012 in both new home construction and sales of existing homes will stay close to levels seen in 2011,” said Mathieu Laberge, deputy chief economist. Also in the forecast: “Housing starts will be in the range of 164,000 to 212,700 units in 2012, with a point forecast of 190,000 units. In 2013, housing starts will be in the range of 168,900 to 219,300 units, with a point forecast of 193,800 units. Existing home sales will be in the range of 406,000 to 504,500 units in 2012, with a point forecast of 457,300 units. In 2013, MLS sales are expected to move up in the range of 417,600 to 517,400 units, with a point forecast of 468,200 units. The average MLS price is forecast to be between $330,000 and $410,000 in 2012 and between $335,000 and $430,000 in 2013. CMHC’s point forecast for the average MLS price is $368,900 for 2012 and $379,000 for 2013. The moderate increases in the average MLS price are consistent with the balanced market conditions that occurred in 2011, and that are expected to continue in 2012 and 2013.”

CAAMP'S VIEW ON TODAY's MORTGAGE ISSUES

BASED ON OUR RESEARCH AND KNOWLEDGE OF THE SECTOR, WE SEE NO REASON TO TIGHTEN OR RESTRICT ACCESS TO RESIDENTIAL MORTGAGES AT THIS TIME 1. CURRENT ENVIRONMENT Canada has a well-earned reputation for exercising economic prudence. As a result, we have managed to avoid a mortgage or housing market meltdown. Our banks are stable and our economy, while impacted by the general global economic slowdown, remains healthier than most. CAAMP’s extensive industry research indicates that the Canadian mortgage industry is healthy. We must continue to “stress test” our own financial sector to determine how it would withstand potential weakening of the economy. The more educated we are about the debt we incur (mortgages, credit cards, lines of credit), the better off we will be 2. FEDERAL GOVERNMENT ACTIONS TAKEN The federal government responded promptly when it was determined changes were needed in the mortgage market. There have been three significant sets of changes in the past 36 months: - Amortization periods shortened to 30 years from 35 and 40 years - Minimum down payment increased to 5 per cent of purchase price. No 100% LTV mortgages - Homeowners refinancing their mortgage may borrow up to 85 per cent of the equity in their home; down from 90% and 95% - These changes have impacted the mortgage market; re-financings have decreased dramatically and mortgage credit growth has slowed Based on our extensive research and knowledge of the sector, we see no reason to further tighten or restrict access to mortgages at this time 3. REASONS FOR CURRENT CONCERN 1) Housing Market Prolonged low interest rates are making it more attractive to purchase a home Research shows that the vast majority of homeowners can accommodate rate increases (84 per cent surveyed in CAAMP’s fall 2011 research said they could handle a $200/month increase) CAAMP’s fall 2011 survey indicates mortgage borrowers are prudent, increasing their lump sum payments and paying down their mortgage faster than required Supply and demand drive housing prices – provinces and municipalities should be more aware of their land-use policies and how they impact housing supply 2) Media Focus on Insurance Ceiling - Changes in Some Banks’ Lending Practices It is a fact that CMHC is approaching its $600 billion government-imposed limit on mortgage default insurance. Private insurers have a $300 billion limit. This has nothing to do with mortgage insurers being responsible for an increasing number of higher risk mortgages Lenders are buying portfolio insurance against defaults on low risk mortgages - cases where homeowners have more than 20 per cent equity in their homes. These are not high risk mortgages. CMHC is approaching its limit because the number of mortgage holders has grown, the population and housing units have increased and lenders have been insuring low risk mortgages, leveraging the government’s triple A credit rating for other bank business Residential mortgage credit in Canada continues to expand. During the past five years, outstanding residential mortgage credit has expanded by 53%, or an average rate of 8.9% per year. The growth rate is slowing The volume of outstanding residential mortgage credit passed the $1 trillion threshold in July 2010, and as of August 2011, it reached $1.079 trillion Increased homeownership results in an increase in mortgage default insurance However, mortgage defaults are rare. CMHC reported it paid out $454 million in the first nine months of 2011 which represents a 0.42 per cent default rate Overall mortgage arrears rates in Canada are declining and never approached the level of the early 1990s. The housing market in Canada is growing organically and safely There is no parallel in Canada to the subprime default problems that plagued the US market 3. FURTHER RESTRICTIONS ON ACCESS TO MORTGAGES Who will be affected? Self-employed borrowers who represent a growing portion of our labour force (currently 2.67 million people, or 15% of employment in Canada) New Canadians who can afford a down payment but have yet to build credit and employment history First time homebuyers who want to enter the homeownership market and build equity These are not the people who fall in to a sub-prime loan category like we saw in the US; yet these changes will impact them The housing industry is an engine of growth in Canada. If we impede its growth, we will add to unemployment and depress the economy If fewer mortgage lenders are able to insure their loans simply because the insurance program has not kept pace with the growth in the mortgage market, then consumers will have less choice when it comes to negotiating a mortgage. Less choice, or less competition, will inevitably lead to higher borrowing costs for the Canadian consumer Likewise, if mortgage brokers are restricted in the mortgage products they can offer, consumer choice will be diminished and costs will increase This reduced access to capital will make it more difficult for people who can legitimately afford to buy a home 4)What are the Risks of Further Restricting Access to Mortgages? CAAMP has one of the most comprehensive collections of research on the mortgage industry. It includes original data on borrowers and the characteristics of mortgage loans. This research has revealed repeatedly that borrowers and lenders in Canada have been prudent, and only a very small share of borrowers would have trouble affording future rises in mortgage rates. There are risks, but most are related to the broader economy through two channels: Unemployment The broader economic data suggests that the Canadian economy is slowing. If that results in job losses, the housing market would be negatively affected, and there would be impacts on mortgages held by people who lose jobs and then struggle to make payments. Declining Housing Prices Housing prices could decline in a weaker market. In a recession, there is the threat of a downward spiral: a weak economy harming the housing market which negatively affects the broader economy. We believe and trust that the federal government will act to mitigate such a negative scenario. These risks have nothing to do with mortgage products themselves. Risks to the Canadian mortgage market are dependent on the performance of the broader economy. In that light, the best means to control mortgage market risk is through strong economic management. In particular, care must be taken not to take any measures in the mortgage market that unnecessarily reduce housing activity that would be damaging to the economy.

More Down Payment May Cost You More Money

The search for conventional mortgage financing just got tougher -- and may get tougher still -- with several Canadian lenders moving to cut their rental programs because of tighter access to bulk insurance.
FirstLine, the CIBC-owned broker channel lender, kicked off the latest round of downsizing, last week announcing it would impose a $750,000 cap on rental property loans up to an 80 per cent loan-to-value. That’s $250K less than what owner-occupieds can qualify for.

Street Capital announced a similar decision last week, axing its rental program altogether. And while it will consider exceptions on a case-by-case basis, that’s only where clients are willing to pay default insurance they technically do not need.

Under Canadian mortgage rules, borrowers opting to go conventional by putting down a minimum 20 per cent are exempt from that requirement.

But increasingly lenders have opted to insure those loans themselves through bulk insurance offered by the CMHC. The practice allows them to then securitize those mortgages for sale on equities markets. It also clears up space on their balance sheets to write more loans.

Last week, CMHC warned that lender access to its $600 billion insurance fund would likely be rationed as the Crown corp. approaches the limit of that funding. Government hasn’t yet agreed to raise that ceiling.

Lenders are now taking a look at their books and deciding where to cut their conventional lending business rather than keep some loans uninsured and, therefore, on their books.

Rental programs – along with business-for-self lending – is most vulnerable to that downsizing, say analysts, suggesting property investors will find it increasingly difficult to win financing for acquisitions.

That has already begun to happen, with another high-profile lender -- Merix Financial -- deciding to pass on mortgage insurance costs to conventional mortgage borrowers asking for LTVs between 65% and 80%.

“It was important to Merix to continue to offer those products – BFS and Rental -- so originators can continue to offer them to their clients,” said Jason Kay, VP of sales. “While some clients are having to pay more, from a cash flow perspective, it is relatively neutral compared to costs before the changes.”:

(from Canadian Real Estate Wealth)