Posts Tagged ‘bond’

The U.S. government and the country’s mortgage sector on Tuesday announced plans to help homeowners behind on their house loans.

Roughly four million U.S. homeowners were behind on their mortgage payments or in foreclosure in June, according to data from the Mortgage Bankers Association. 

To qualify, homeowners will have to be at least three months behind on their payments, and owe more than 90 per cent of the value of their house.  Anyone who does not occupy their home would not qualify for the aid, nor would borrowers who have gone into bankruptcy.

The government’s plan would see interest rates cut so that borrowers would wind up not spending more than 38 per cent of their income on house payments. Another option is for loans to be extended from 30 years to 40 years, or for some of the loan principal to be deferred.

“Foreclosures hurt families, their neighbours, whole communities and the overall housing market,” said James Lockhart, director of the U.S. Federal Housing Finance Agency. “We need to stop this downward spiral.”

Lockhart’s agency seized control of two mortgage finance companies, Fannie Mae and Freddie Mac, in September. Together, Fannie Mae and Freddie Mac own or guarantee almost 31 million U.S. mortgages, or about 60 per cent of all outstanding mortgages.  The new plan is hoped to be in place by Dec. 15.

So How does the US Mortgage Market compare with the Canadian Market?

Despite this past month’s financial sector turbulence and the heightened concerns over the US economy, Harper said the Canadian Financial Institution remains in “very good shape.”  All information provided to Harper’s government has indicated that while there are banks that have had significant write-downs, none near the extremity of AIG, the balance sheets of the financial sector remain strong.

Harper is further supporting Economists’ suggestions that the troubles in the US should not “spill over into Canada.” Canada has strong economic fundamentals and a government that has been prudent and pro-active.  The Canadian government anticipated the US bubble would burst over a year ago and the crisis this week was not surprising, nor unexpected.  It is however, not expected to affect Canada to anywhere near the extent it has affected the US. 

There is no direct tie between the US housing market and the Canadian housing market and Canada’s strong economy and dearth of high-risk mortgage lending should help the real estate sector withstand the volatility that has been buffering the equity markets.   Ultimately, the Canadian market should be relatively unscathed by the turbulence experienced in the US.

MBN Mortgage

CBCNews.ca

November 11, 2008

In the midst of the worst financial crisis since the Great Depression, Canada has joined the ranks of governments that in recent weeks stepped up to help banks cope with more fallout from bad U.S. subprime mortgages. In Canada’s case, however, the reason for the assistance is a little different from some of its G-7 partners. Unlike banks in the U.S., Britain and Germany, which needed to be bailed out with hundreds of billions of dollars in new capital, Canada’s major banks are solid and solvent. They don’t need any help to work through their subprime exposure.

So why did Ottawa agree to insure the money they routinely borrow from other banks, a practice that keeps their credit operations liquid? Ironically, the troubled non-Canadian institutions that received capital injections and loan guarantees in other countries now carry a government seal of approval that tilts the playing field in their favor when it comes to borrowing. That leaves Canada’s big banks, including Scotiabank, TD Bank Financial Group, RBC Royal Bank and CIBC, at a competitive disadvantage. So the government acted to level the field, not to aid troubled banks.

Why has Canada withstood the subprime tornado better than other countries, and should the Canadian banking system be a model for G-7 and G-20 leaders when they gather in Washington on Nov. 15? Consider that the Geneva-based World Economic Forum, an influential think tank whose annual conference attracts the likes of Bill Gates and Tony Blair, earlier this month ranked Canada’s banking system as the soundest in the world. The U.S. came in at No. 40, and Germany and Britain ranked 39 and 44, respectively. (Switzerland was No. 16, just ahead of Namibia.) “For Canadian banks, having higher capital ratios than anyone else in the world is a source of pride,” says analyst Mario Mendonca with Toronto-based investment bank Genuity Capital Markets.

The average capital reserves for Canada’s Big Six banks — defined as Tier 1 capital (common shares, retained earnings and non-cumulative preferred shares) to risk-adjusted assets — is 9.8%, several percentage points above the 7% required by Canada’s federal bank regulator. That’s a little better than major U.S. commercial banks like Bank of America, but significantly higher than an average capital ratio of about 4% for U.S. investment banks and 3.3% for European commercial banks.

Another factor that helped make Canada the new gold standard in banking was Ottawa’s decision in the late 1980s to allow commercials banks to acquire investment dealers on Toronto’s Bay Street, the country’s financial hub. As a result, these institutions are subject to the same strict rules as commercial banks, while U.S. investment dealers are subject to only light supervision from the Securities and Exchange Commission. Morgan Stanley and Goldman Sachs, of course, will now be under the U.S. Federal Reserve’s supervision since they have been chartered as bank-holding companies.

Canada’s banks make bad investments on occasion. When Toronto-based CIBC, Canada’s most aggressive big bank, took $3.5 billion in charges against the U.S. subprime debacle, federal regulators quickly arrived on the scene. But here’s the difference: CIBC ended up selling $2.94 billion worth of its own shares in the first quarter of this year to shore up capital reserves. “The relationship between government and banks is a positive one,” says Minister of Finance Jim Flaherty. “We have a lot of discussions and regular meetings. The common goal is a sound financial system.”

There is, of course, a flip side to Canada’s regulatory system. When the global economy was flying high, Canadian banks complained about not being allowed to merge to become more significant international players. “In hindsight, that decision may have saved Canada from having a Royal Bank of Scotland on its hands,” says Lawrence Booth, a finance specialist at the University of Toronto’s Rotman School of Management, referring to the overly ambitious bank’s bailout earlier this month by the British government.

Says FFlaherty: “The credit crisis we’re facing is the result of unbridled greed. We need to bridle greed.” Perhaps when world leaders sit down in Washington to forge a 21st-century New Deal for the global financial system, it may have more than a smattering of Canadian banking know-how.

MBN Mortgage

TIME

Monday November 10, 2008

There is a new normal in the Canadian Mortgage Market.  The old normal was discounted Prime Rates on variable mortgages, and fixed rates more representative of the bond yield. 

Welcome to the “now” …

Last week, CIBC Senior Economist Benjamin Tal said “it will be a while before we see a variable rate discount again…the new normal will be Prime or Prime minus 0.25%”.  This is our reality.

What are rates going to look like in the future?  It’s a question we as Mortgage Specialists are being asked frequently.  All anyone can provide is an educated guess because the mortgage market is changing daily as is the consumer reaction to this news, and ultimately, the government’s reaction.

Most analysts believe that rates should be decreasing, for the short term, some of their commentary being:

“Mortgage rates are expected to be relatively stable throughout the last quarter of this year, remaining within 25-50 basis points of their current levels. Posted mortgage rates will decrease slightly in the first half of 2009 as the cost of credit to financial institutions eases. Rising bond yields, however, will nudge mortgage rates marginally higher in the latter half of 2009.”  CMHC

“Some further monetary stimulus (i.e. rate cuts) will likely be required to achieve the 2% inflation target over the medium term.” Bank of Canada

“Credit market traders are pricing in a 100% chance of a 1/4% cut and a 53% chance of a 1/2% cut by year-end. “  CEP

Why are rates coming down?  One reason, according to TD economist Pascal Gauthier, is because the U.S. economy may “record its worst performance in decades, retreating by around 3% in Q4, with the Canadian economy mirroring this performance with a 2.5-3.0% decline, the worst since 1991.”  Moreover, the Bank of Canada’s worst enemy, inflation, is currently no longer a clear and present danger to our economy.

What does this mean for you as a home-buyer? 

If you currently have a variable rate mortgage at Prime Minus, then your monthly mortgage payment amounts should have decreased dramatically due to the large lowering of Prime Rate.  You are in great shape.

If you are a in the process of purchasing a home now, variable rates are typically at Prime Plus One, which is on the high side compared with what we have seen in the past 6 months or so.  Depending on your preference, a variable rate mortgage still offers a lower rate than the current fixed rates being offered.

If you’re in the market for a new mortgage, contact your Calgary and Southern Alberta MBN Mortgage Specialist and we can help you examine your options and arrive at a strategy best suited to your needs.  Good advice in markets like these is imperative when making a choice on rate, term, type of mortgage, and amortization.

MBN Mortgage

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