Home renovation tips

Maintenance and repair renovations protect your investment

Renovations have been a growing trend for Canadian homeowners, considering the transaction costs involved in selling and rebuying real estate! Motivations for renovations vary; homeowners consider renovations for lifestyle reasons. This might involve building a second level on the house to increase the number of rooms.

Renovations are also considered for a retrofit project. Older wartime houses may be in need of improving the mechanical systems to fit today's standards.  Maintenance and repair renovations are probably the most common renovation projects homeowners' tackle. Maintenance and repair renovations protect your investment and involve projects such as hiring a contractor to install a new roof or new energy efficient windows to update your property to today's standards.

Before you get started on your renovation project, you may want to answer the following key questions:

·         Is your renovation practical?

·         Will your investment in renovation costs make sense through savings in heating or will the investment increase the value of your home for future resale? Will your investment payback over time?

·         Will your renovation create long-term usefulness for your family and lifestyle?

·         How can you incorporate Healthy housing principles to maximize environmentally friendly returns to your renovation project?

·         How will you finance the renovation project?

Investing your time by thoroughly planning out a step by step process will pay you dividends through your project.

Before you renovate, follow this simple 8 step by step process.

Step 1 Set your priorities.

Step 2 Know what's possible. Investigate the practicality of the scope of your project.

Step 3 Do the math. Understand the costs, potential roadblocks, time to complete. Make sure you organizing your financing so you have the funds to cover the project.

Step 4 Pick your partners. Research your contractors and trades. Know who you are dealing with and minimize any surprises.

Step 5 Get it in writing. All contracts and estimates should be thoroughly documented.

Step 6 Don't worry about the mess.

Step 7 Inspect as you go.

Step 8 Give the Thumbs Up! Good luck with your project!

With winter housing sales up, fears of meltdown in spring demand

Financial Post:
Melting snow across Canada may have helped heat up the housing market but the new worry is whether there will be any demand left for homes this spring.
Home sales across the country rose 1.4% from January to February on a seasonally adjusted basis while actual sales climbed 8.6% from a year ago, the Canadian Real Estate Association says. In the first two months of the year, 61,772 homes changed hands, a 6.7% increase from a year earlier.
CREA said in particular there has been a jump in demand for low-rise homes, which has put pressure on prices.
“There has been a preference in recent months, in Toronto and other markets, for single-family homes which are typically more expensive. This trend held in February, putting upward pressure on the national average sale price,” the real estate group said.
That demand has helped to keep home values from falling, with the average sale price of a home in February $372,763, a 2% increase from a year earlier.
The strength of the winter market has Don Lawby, chief of Century 21 Canada Ltd., wondering whether we have stolen some of the traditional spring market frenzy.
“Many parts of Canada had no winter. The question is has the market we have been experiencing taken business from the spring market,” Mr. Lawby said as he toured Montreal. “I can look at property and I don’t have to wait for the snow to melt to see what that property looks like. I’ve seen it.”
It doesn’t hurt that interest rates remain at record lows, with the major banks engaging in another round of cuts that have taken the five-year fixed-rate mortgage down to 2.99%, the lowest rate in history, which was already breached once before this year in January.
Ottawa-based CREA, which represents about 100 boards across the country, said about half of local markets recorded an increase in activity, led by major markets in Calgary, Toronto and Montreal.
Consumers have jumped on the change in market conditions with new listings climbing. CREA said that on a seasonally adjusted basis, ne listings were up 1.9% in February from a month ago.
Gerald Soloway, chief executive of Home Capital Group Inc., said the weather was already boosting the housing numbers.
“Canadians historically don’t like to buy houses in three feet of snow. This year with a little less snow, some of the numbers are up,” he said. “That’s been my experience. People get out and look. They might buy a month later, but they get out now and get around looking at new houses and subdivisions because their car doesn’t get stuck. In southern Ontario and the urban areas, there has been very little snow.”
For its part, CREA said the latest numbers are proof the market is on solid footing. “The national rise in both sales activity and the number of newly listed homes beyond the normal seasonal increase provides clear evidence that Canadians are confident in housing market prospects,” said Gary Morse, president of CREA.
Benjamin Tal, deputy chief economist at CIBC World Markets, says you can seasonally adjust statistics but you can’t necessarily take into account the extreme conditions we’ve had this year.
“It’s only adjusted for normal weather, it accounts for winter, but you cannot capture what has happened [this year],” Mr. Tal said. “Some of the activity we are seeing is weather-related.”
As for the idea that we have stolen some of the spring market activity, Mr. Tal contends there is truth to the theory. “I would say yes, absolutely. It’s an early spring, it started already,” he says.
So what will be left over when the spring begins for real? “I don’t think it will be strongest spring ever. I think we will see some [buyer] fatigue,” Mr. Tal said.

Breaking your mortgage: ‘It’s either worth it or it’s not’

Fixed-rate mortgages are at historic lows but if you are locked in to a contract with your bank, those benefits may be yet elusive.

First you have to do the math to see if breaking your contract is worth the penalties you may face.
“There is no grey area,” says Cindy David, a certified financial planner at Dupuis Langen Financial Management Ltd. in Vancouver. “It’s either worth it or it’s not.”
The big five banks are offering four and five year mortgages at just 2.99%.
“We’re even seeing 10-year fixed rate mortgages at 3.99%,” says Ms. David. “Think about that: Interest and principal at 3.99% for 10 years. From a financial planning perspective if any client approached me and said ‘Should I look into breaking my mortgage?’ My answer would be yes.”
Step one comes down to meeting with your financial institution or your Mortgage Broker and doing the math to determine whether or not the cost of breaking your mortgage is worth the anticipated savings from the lower rates. The fact is the penalty for breaking a mortgage can be thousands of dollars depending on when in your term you happen to be and in many cases, the cost and the future savings cancel each other out, in which case you may be wise to wait until your mortgage is up for renewal.

Housing cools as sellers hold back

From Thursday's Globe and Mail
The hot housing market that powered the country's post-recession recovery is slowing to a crawl.
The Canadian Real Estate Association said sales dropped and prices moderated in January, with the weakness spread among more than half of the country's cities. Sales in Vancouver and Toronto slowed to a crawl, with few houses available to would-be buyers.
The low number of listings means there could be a rush of sellers trying to capitalize on the spring market, keeping a lid on the bidding wars that have driven prices sharply higher in some of the country's largest markets.
“There is really a lack of product,” said Phil Soper, president of Brookfield Residential Real Estate Services, which operates Royal LePage. “We expect that to pick up considerably, and by the end of March Break you'll really be able to gauge the Canadian market's health. Or lack of health.”
Canada's sizzling property market has made headlines around the world, and so far defied some predictions that it's a debt-fuelled bubble bound to pop. Forecasts for home prices for the next several years vary wildly – with economists and analysts predicting everything from a 25 per cent drop to modest gains.
The latest figures suggest a levelling off. Home sales across the country were down 4.5 per cent in January from December, the sharpest monthly decline since July, 2010.
Average prices were 2 per cent higher than a year ago at $348,178, the smallest year-over-year increase in the past year.
It's not the first sign that the much-talked-about slowdown may have arrived.
The Teranet-National Bank index, an alternative measure of price gains that lags CREA by several months, showed prices dipped 0.2 per cent in November, marking the first drop since the fall of 2010.
In Toronto, the bidding wars have largely given way to a market where houses sit longer and sell for closer to their asking price, said Richard Silver, president of the Toronto Real Estate Board. But hot neighbourhoods continue to fetch top dollar, especially considering the lack of listings.
Matthew Slutsky, chief executive officer of real estate site BuzzBuzzHome.com, has been trying to buy a house in one downtown neighbourhood for months. Along with his wife Carlie Brand, he's been popping letters in mailboxes imploring their owners to consider a sale.
“I really hope it's the calm before the storm and more listings pop up,” he said. “Right now it feels like we are auditioning for a house, and I don't know if I want to wait and see what happens in the spring.”
There's been a sense of unease surrounding Canada's housing market for more than a year. The federal government tightened its mortgage qualification requirements to try to prevent buyers from taking on too much debt in a low-interest-rate environment, and the Bank of Canada has issued a steady stream of warnings about high levels of household debt.
The fear is that rates will rise as the economy improves, and many people who could afford their house when interest rates were low may find those same houses unaffordable as rates rise. Financial turmoil in Europe also has many market watchers concerned, with any default in Greece expected to have ripple effects around the world.
Lenders such as Gerry Soloway, CEO of Home Capital Corp., have cautiously tightened their lending standards in recent months as the economy wobbled. But he doesn't see prices crashing any time soon, even if things slow down considerably.
“I just don't see the catalyst for a big price drop,” he said.
It's a theory echoed by Ross McCredie, CEO of Sotheby's International Realty Canada, who recently had 16 buyers check out a $2.5-million home in Toronto.
“We are finding if the home is priced right and a quality home, it is moving fairly quick,” he said. “Too many people who are listing are expecting prices well above the market. We are spending a lot of time with our agents to ensure we are only taking on listings at the right price.”

Standardizing Mortgage Penalty Calculations

Rob McLister, CMT
Two years ago, the government pledged to “standardize the calculation and disclosure of mortgage prepayment penalties.”
It addressed the disclosure problem last week (see:New Mortgage Penalty Disclosure), but it has done nothing to standardize the actual calculation itself.
This lack of action irritates some consumer advocates. They feel that lenders’ convoluted and algebraic penalty formulas allow them to overcharge people. (How to define “overcharge” is another question.)
As to why the government chose not to standardize penalty calculations, a Department of Finance (DOF) official told us:
“Mortgages can have a variety of mortgage prepayment calculations. Standardizing the calculation of the mortgage charges could have resulted in changes to lenders’ product offerings and created a disincentive for some lenders to offer discounted rates to the most creditworthy borrowers.”
The DOF concluded that, “This would not have been in consumers’ best interests.”
Instead, the DOF says “The Mortgage Prepayment InformationCode of Conduct focuses on disclosing key mortgage prepayment information that equips consumers to understand and benefit from a choice in mortgages.”
Unsurprisingly, that leaves two camps in the penalty standardization debate: Those for it and those against it.
Pro-Standardization
Some people are outraged at the thought of banks profiting from mortgage penalties. We’ve all heard stories of eye-popping prepayment charges in the tens of thousands of dollars.
There are many people who would therefore like to cap mortgage prepayment fees.
Others would prefer to see a standard penalty formula that is applied consistently regardless of the lender. In this case, breaking a mortgage with a given mortgage amount and interest rate would trigger the same penalty regardless of the lender.
Another idea is to allow lenders flexibility in how much they charge, but to legislate the penalty range and calculation method. In that case, all lenders would calculate the base penalty the same way. They could then charge a simple multiple (e.g., 1X, 2X, etc.) of that penalty at their discretion, subject to:
The base penalty formula being straightforward
The multiple being disclosed up front
The total penalty not exceeding the maximum allowed by law.
The Case Against Standardization
The original intention of mortgage penalties (more accurately called “interest compensation charges”) was to make a lender whole if the borrower backed out of a mortgage contract that he/she voluntarily agreed to.
Without such compensation, the lender would have less ability to cover costs and repay depositors and/or investors who provided the money to lend to the borrower.
Put another way, a mortgage penalty is similar to the compensation we might expect if we bought a 5% GIC and the bank cancelled it when rates dropped to 2%. We’d demand the rate we had been promised, especially if there was no place left to invest at a similar yield.
Most of the time, mortgage compensation charges are not the cash cow people think they are. (There are exceptions of course.) Last quarter, for example, CIBC reported that its prepayment fees collected from customers were actually lower than the true breakage costs to the bank. That appeared to be an industry-wide trend, according to CIBC's earnings release.
In many cases, when a customer breaks his/her contract, penalties only cover the interest a lender loses; lenders incur many more expenses when a mortgage is broken. Lost interest is just one.
Further, many would argue that standardized penalties are self-defeating. Forcing lenders to apply a single penalty formula for early termination would restrict lenders from charging what they deem necessary to become whole.
That one-size-fits-all penalty would likely drive lenders to add a rate premium to every single mortgage to compensate for the lost interest revenue. No one would be further ahead, monetarily anyways.
In a free market where mortgage lenders can generally choose what interest rate and fees to charge, it's difficult to justify legislating a specific calculation method for interest compensation. Lenders have different costs, different mortgage features, different mortgage flexibility, and different profit margins. Being forced to levy the same penalty for a given rate and loan amount makes little business sense.
Mind you, some lenders might be able to tolerate a compromise in which a set method is legislated for calculating a range of penalties. In that case, all lenders would determine the "base penalty" the same way, based on the borrower's contract rate, term remaining and standardcomparison rates. A lender could then charge some multiple of that base penalty, up to a regulated maximum. This system would help borrowers compare lenders’ penalties more easily, while still providing flexibility for lenders to recoup costs as needed.

Different way to use your RRSPs

For those tired of paying mortgage interest to a bank, there is a technique that allows you to use your retirement savings to help buy your home or even finance a cottage or investment property.

The technique is known as a self-directed mortgage and is not widely used. In fact, Rowena Chan, a vice president with discount broker TD Waterhouse, says it’s one of the “least common” investments she deals with. But for those who have a mortgage, are looking for a fixed income investment, and have more than $50,000 sitting in their RRSP, it’s an option they might consider.

This is how it works:

There must be cash in your RRSP that you can borrow in what is called a non-arms length mortgage and the transaction must be made through a bank, bank broker or licensed lender. The lump sum is borrowed and applied to the mortgage and like a regular mortgage, a repayment schedule is set up. Those payments go directly into your RRSP and you keep all the interest. The interest rate must be the same as the posted rate at the bank, but like any other mortgage you can shop around for different rates at different lenders.

Gerry Hogenhout firm Hogenhout & Associates Inc. specializes in these investment vehicles. He says anyone thinking of using this investment needs to clearly understand what’s involved, including the fees.

TD Waterhouse charges $250 to set up the account and has an annual $225 account fee. Regardless of the equity in your home, the entire amount has to be insured by CMHC, which is 0.5 per cent of the entire loan. This is a good thing because you are protecting your retirement savings. Also budget about $1,000 for legal and other professional fees.

So it is worth it?

Suppose you have $50,000 cash sitting in your RRSP and a mortgage on your home. You borrow the $50,000 and pay down your mortgage, repaying your RRSP every two weeks over a five-year term. The interest paid is not a contribution, but is treated the same as a dividend payment from a stock you hold in your RRSP.

The current five-year fixed rate is 5.19 per cent. Your bi-weekly payments are $136 and after five years will have paid more than $12,000 in interest and $6000 towards principal. Your fees, insurance costs and legal charges will total approximately $2,625. That leaves more than $9,500 that you would have paid to the bank that is now in your RRSP.

If you take that same $50,000 inside your RRSP and invest it in a fixed rate GIC at the current 2.75 per cent with Ally Bank your investment will grow to $57,369. Total gain approximately $7,300.

And you will still be paying interest on the $50,000 you owe to the bank.

You can also use your self-directed mortgage to lend money to a third party in what is referred to as an arms length mortgage. There’s more risk involved and for this reason you can charge a higher interest rate. The money is lent to a third party who repays it monthly like a normal mortgage. In this case you are often lending to borrowers looking to expand their business into a new property or buy more real estate and the banks won’t lend them the money.

As with all investing, self directed mortgages are not for everyone. They aren’t for those looking to make quick gains. They also require a long-term commitment, because unlike a stock you can’t sell your self-directed mortgage. They also require the account holder to have a large amount of cash in their portfolio that they are willing to invest for the long term. And always there are risks because home values could fall and your mortgage could be more than the property it is backing.

Always consult a financial planner before committing to any investment method.

Rubina Ahmed Haq is a Toronto freelance writer. Reach her at rubinaahmedhaq@gmail.com

Sharie Marie Mortgage Team wins Big Award

Heather Thomson, Alberni Valley Times

Published: Monday, January 30, 2012

Only a year after starting her business, Sharie Marie Francoeur has been named real estate company of the year.

Francoeur was excited and surprised when she won the Vancouver Island Business Award, handed out by the Business Examiner on Thursday night in Victoria.

"It gives our team some recognition and shows people they can have faith in us," she said.

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"And it makes me feel more confident in growing my team."

In 2011, Francoeur set up Sharie Marie Mortgage Team in Port Alberni. She grew up here, and had been living in Victoria since she graduated from Alberni District Secondary School five years ago. But her love of the city and its community feel brought her back.

Francoeur thinks one of the reasons she won was the speed at which the company grew. She also established the Mortgage Mentoring Program in Ladysmith, which put her up for the entrepreneur of the year award on Thursday night. Through that program, her company has grown rapidly. She now has 10 licenced mortgage brokers and 13 in training. Two are in Port Alberni, and the rest are around Vancouver Island.

"I wanted to help other mort-gage brokers learn, not only what's in the books, but what they will need in the job," she said.

Francoeur was not the only Alberni Valley business to be nominated in these awards. Seven other businesses got the nod, including Van Isle Ford, Kismet Quilts (small business), West Coast SLAM (community leader), Catalyst Paper (forestry/wood products company), NSS Investments (real estate), Trends Design Team and Trends 2 (small business) and Acoustic Wood Ltd. (small business).

"Port Alberni tends to have a really negative image," Francoeur explained. "It is important that business owners in small towns, especially Port, get out there and show what we can really do and start to change that image."

Even being nominated offers advantages. Rosanne Gray, owner of Trends Design Team, said they are grateful for the community support and honoured to be nominated again this year.

"The competition was very tough, and we are very proud to be included in the same category as the other finalists," Gray said. "Trends Design Team will continue to provide professional services to all our customers and look forward to continued success and growth."

HThomson@avtimes.net

CMHC Portfolio Insurance

CMHC Insurance Limits: A Wake-up Call for Lenders

Many have now seen this National Post article.

The gist of it: CMHC is approaching its $600 billion government-imposed limit on issuing mortgage default insurance. That’s happening largely because of lenders’ enormous appetite for something called portfolio insurance (a.k.a., “bulk insurance”).

No one fully grasps the repercussions yet, but our sense is that the news is not great (at least in the short-to-medium term) for mortgage consumers, smaller lenders and brokers.

On the other hand, it may be healthy long-term for the housing market. Here’s why…

What is Portfolio Insurance?

Mortgage default insurance is typically only “required” when someone with less than 20% equity gets a mortgage.

Despite that, almost three-quarters of CMHC’s outstanding mortgage insurance is low-ratio (i.e., 20% equity or more). That’s largely because banks have been buying portfolio insurance in gobs to insure against defaults on low-risk conventional mortgages.

Banks do that because, even though the risk is low, there is still risk. Investors who buy these mortgages like to know that the government is behind them, if borrowers default and the lender can’t pay up. Because of regulatory capital rules, bulk insurance also enables banks to lend more with the precious capital they have.

CMHC summarizes portfolio insurance as follows:

“Portfolio insurance helps lenders manage their capital more efficiently and small lenders to compete on an equal footing with large lenders. It allows more lenders to compete in the mortgage loan insurance market by lowering entry barriers, thus expanding consumer choice.”

Note: Nothing is changing with high-ratio insured mortgages. So if you’re getting a mortgage with less than 20%, this news probably won’t impact you (for a while at least).

CMHC’s Insurance Limit

Despite the above benefits, we’re hearing that CMHC has announced it is slashing the amount of bulk insurance lenders can access. That’s because CMHC is limited by law to writing no more than $600 billion worth of policies.

Normally, every 3-5 years as the mortgage market grows, CMHC has asked for, and received, approval from parliament to raise this limit. It was last raised by $150 billion in 2008.

Now media frenzy has politicians scurrying to offload mortgage risk from the government back to the private sector. (The government guarantees CMHC’s liabilities, so public concern is certainly understandable.)

As a result, many question whether CMHC will get its $600 billion limit raised anytime soon.

Here’s some reaction on that:

• TD Bank economist Sonya Gulati tells CBC that not increasing the limit “may serve to tighten the housing market."
• RBC economist Robert Hogue told Global News that increasing the limit “…would be, policywise, a very delicate balance to strike."
• The Post quoted an unnamed industry source as saying: “...What will the government do, not increase (CMHC’s) limit? This could kill the entire housing market.”

Who Uses Portfolio Insurance?

Portfolio insurance is widely relied on by many smaller lenders who must resell their mortgages (as opposed to fund them from deposits).

More commonly, portfolio insurance is used by the Big 6 Banks. That’s because insured mortgages have virtually a “zero-risk” weighting in regulators’ eyes, allowing banks to lend more, earn higher returns, and keep mortgage rates lower than otherwise possible.

(One fast-growing use of bulk insurance is for guaranteeing covered bonds. Covered bonds are a relatively new source of mortgage funding in Canada. More on that here.)

In any event, spokesperson, Charles Sauriol, says CMHC “has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.” That insurance is using up CMHC’s capacity.

(Incidentally, the biggest bulk insurance customer recently has been Scotiabank, which reportedly had an abnormally large and predominantly insured $17+ billion mortgage-backed securities issuance in December.)

The Risk of Portfolio Insurance

Portfolio insurance can sell like hotcakes indefinitely, and there will never be a problem…unless the unthinkable happens: mass defaults.

The question then becomes: Are insurers taking in enough in premiums to offset potential claims—thus avoiding a federal bailout?

In exploring that question, it’s important to remember that there’s a relatively strong relationship between default risk and loan-to-value (LTV). In other words, the more equity a mortgagor has, the less likely they’ll stop making their payments.

That said, if housing were to crash, insurer claims on portfolio insurance would soar. The premiums they’ve collected from lenders are their first line of defense in that case (unlike high-ratio insurance, lenders usually pay the premiums on portfolio insurance themselves, not the borrower).

According to a very good source, however, there is a problem with these premiums. Major banks have negotiated the premiums down to levels that may not be enough to cover extreme conventional default rates.

(We haven’t found any current data on conventional mortgage default rates, but they’re ostensibly less than the 0.38% for overall arrears—a number which includes higher-risk, high-ratio mortgages.)

CMHC’s Wherewithal

CMHC has continually been accused, in the media, of creating undue risk for Canadian taxpayers. A few weeks ago, we spoke with Pierre Serré, Vice- President, CMHC Insurance Product and Business Development, to try and get a sense for that risk.

He stated: “…We focus on prudent underwriting practices and the adequacy of our capital levels. CMHC is well positioned through its available capital to handle even extremely adverse economic conditions.”

He noted that CMHC has a total of $17.4 billion that could be used to back-up its insurance business and pay claims.

CMHC's actual losses on claims have been much lower. They were $454 million for the first nine months of 2011, for example. That coincides with a 0.42% default rate.

CMHC has 38 times that $454 million in capital and reserves to cover adverse housing shocks. It can handle some pretty devastating housing scenarios, especially given that the average mortgage in its portfolio has equity of 45%.

Net of all claims and expenses, CMHC’s insurance business earned a total of $1.042 billion in Q1-Q3 2011. Moreover, contrary to many critics, CMHC’s core mortgage insurance business has never needed to be bailed out.

“…There has been no reimbursement of funds by the Government of Canada with respect to CMHC’s commercial mortgage insurance operations,” said Serré. “The losses CMHC experienced in the early 1980s (shortfalls totalling $555.6 million) were a result of costs under two specific government programs, the Assisted Homeownership Program (AHOP) and the Assisted Rental Program (ARP).”

“CMHC's mandate for its mortgage insurance business was changed in 1997 to allow it to operate on a commercial basis without having to rely on the Government of Canada for support,” Serré said, “even in less favourable economic times.”

(If you’re interested, see page 99 of this report for CMHC’s estimates of losses given a 100 bps rate increase, adverse unemployment, or slowing home prices.)

In a bad-case scenario (e.g., severe prolonged unemployment or a dramatic spike in rates), you can darn well bet our housing market would get butchered. The harshest critics we’ve spoken with say you could take today’s average loss numbers and multiply them by 15-20.

Well, if you do that, it would be far beyond any insurance losses Canada has ever experienced. Yet, in that scenario, CMHC would still have billions in capital left over before asking for government handouts.

Potential Outcomes

Looking forward, CMHC’s cutback on bulk insurance has numerous potential repercussions. No one has the answers yet because we're still waiting to see how things shake out.

That said, here's our best guess. Barring a CMHC announcement that it's raising its portfolio insurance limits, then:

1. Smaller lenders may be forced to pay more for conventional mortgage funding (for some period of time).
   • This could kill off rate competition from many non-bank lenders in the conventional mortgage market (Banks are probably licking their chops at this prospect.)
2. Bank capital costs could potentially increase.
   • That would impact earnings and/or lift mortgage rates somewhat (to what extent we don’t know.)
3. It would discourage new non-bank lenders from entering the market,
   • Resulting in less choice for mortgage shoppers.
4. It would force lenders to find alternative, uninsured funding sources for conventional mortgages.
   • That’s largely a positive long-term—to the extent it would cut government exposure in the unlikely event of mass conventional mortgage defaults.
5. It may kick-start the uninsured covered bond market.
   • Uninsured covered bonds transfer risk from the government to major financial institutions.
   • “…We believe there is a high probability that Canadian banks will not be permitted to use CMHC-insured mortgages” as collateral for future covered bond issuance, BMO Capital Markets analyst, George Lazarevski, told the Financial Post.
   • So far in Canada, only RBC has issued uninsured covered bonds. Those bonds are rated AAA and mostly consist of 5-year fixed mortgages with a typical LTV near 72%.
   • Unfortunately, most smaller lenders have almost no access to covered bond funding.
   • These developments may very well encourage the government to lift its current bank limit on covered bond issuance (which is 4% of bank assets). If the government doesn’t, and it continues to restrain bulk insurance, lenders tell us it could seriously harm conventional mortgage liquidity.
6. Given their reduced access to portfolio insurance (and thus the reduced potential for low-ratio mortgage business), smaller lenders may now get even more choosy on which conventional borrowers they lend to.
   • This could limit conventional mortgage options somewhat, unless you were a top-qualified borrower
7. Brokers may be increasingly forced to rely on banks for conventional financing.
   • It’s not unthinkable that banks respond with higher pricing on conventional mortgages, given the greater funding costs and demand from brokers.
   • Some industry observers doubt that banks would price quite as high in their retail channels (since they favour those channels).
8. Private insurers may realize benefits from all this for a year or so, as lenders shut out by CMHC turn to Genworth and Canada Guaranty.
   • That could allow private insurers to charge more for bulk insurance
   • Pretty soon the privates themselves could run out of insurance space.

The End Result

Mortgage insurance is a business. By participating in that business, the government takes risk, but it gets paid well for that risk. The government of Canada has earned $14+ billion in profits over the last decade from CMHC alone.

But the past is the past. Today we’re facing new realities (not the least of which is a hyperactive housing market). We're therefore compelled to ask:

• Which is the bigger risk, limiting portfolio insurance or staying our present course?
• Instead of curtailing bulk insurance, should underwriting criteria be tightened more?
• Or should the government simply force insurers to boost premiums (or levy surcharges of some sort), thus padding insurers’ buffers in the event of adverse default scenarios?

These are questions that policymakers have been asking themselves in private for a while now

Rob McLister, CMT

Top 26 Grants and Credits for BC Home Buyers

Check out this article to see if there may be grants or credits you're missing out on!

http://www.rebgv.org/sites/default/files/Top%2026%20Grants%20and%20Rebates%20-%20Updated%20January%2010,%202012.pdf

Canadian Economy

When Bank of Canada governor Mark Carney made his inaugural speech as head of the banking industry's global regulator on November 8 he said the world economy is getting hurt by a slump in liquidity, meaning banks are less willing or less able to lend money. And because global liquidity has fluctuated over the past five years, Carney said that Europe is already in a recession. He used the 2008 collapse of the U.S. investment bank Lehman Brothers as an example. The impact of that was that banks shied away from lending to both companies and consumers. That helped plunge the world economy into a major recession.

Clearly, if banks stop lending, consumers stop spending and businesses stop spending. For an economy to function, money needs to keep moving.

There has been talk recently that Carney might lower the prime interest rate to keep inflation in check. Carney has also said that the Canadian economy won't fully recover until well into 2013. Currently the prime rate is sitting at 1%. Inflation is approximately 2.7% and is predicted to slow to 1% in the second quarter of 2012. The Bank of Canada likes to keep the inflation rate between 1 and 3%. 

So what does that all mean for Canadians?

So far, the credit crunch hasn't hit Canada. While mortgage lending has tightened up a bit, banks are still lending money to businesses. The federal government has been making slight concessions to make sure Canada continues to grow:

• For example, on November 27, Finance Minister Jim Flaherty eliminated $32-million in manufacturing tariffs. This will allow businesses to lower their costs, enhance their ability to compete globally, which will help stimulate growth and job creation.
• On November 23, Mark Carney said he would stay flexible on interest rates. Despite the fact that inflation has been creeping higher, Carney said that although it may take longer to return inflation to target, being flexible with the rates will protect the country from any economic and/or financial shocks.
• The federal government is also moving ahead to change the laws that govern financial institutions, adding more oversight to protect consumers. "Canada has been ranked as having the soundest banks in the world by the World Economic Forum for four consecutive years," said Jim Flaherty, Minister of Finance in a statement released on November 23. "The Financial System Review Act will ensure our financial system continues to be secure for Canadians and a fundamental strength for our economy."

These changes likely won't have a direct impact on most Canadians but the after effects will. They include more jobs, higher profits for all businesses, access to low cost money for home buying and investing, stable housing markets and a strong and healthy banking system. 

All of this makes Canada a growing, stable economy that can weather short term fluctuations for a strong and prosperous future.