Latest in Mortgage News: Economic Slowdown Hitting Alternative Lenders Hard

The COVID pandemic has taken a toll on many aspects of Canada’s mortgage industry, but none more so than private lenders, which have seen a 26% decline in Ontario mortgage registrations.

According to Teranet, the province’s electronic land registry system, that decline follows a 45% drop in May and a 29% decline in April.

“The tide is going out right now” Dustin Van Der Hout, investment adviser with Richardson GMP Ltd., told the Globe and Mail. “We’ll see very quickly who was naked this whole time in the private mortgage world.”

Less severe declines were reported for other sectors, such as banks, credit unions, trusts and insurance companies.

For the country’s banks, mortgage registrations were down 3% in June compared to a year earlier.

Alternative lenders include mortgage investment corporations (MICs), which pool investor funds to fund mortgages. When home prices were soaring years ago and the government began introducing stricter mortgage qualifying rules, alternative lenders saw unprecedented growth as those who could no longer apply turned to alternative sources.

Other findings from the Teranet-National Bank Home Price Index (which tracks movement in resale homes) include:

• The index reported its smallest decline in 17 years (and was negative when seasonally adjusted)
• Toronto recorded an increase of 9.1% (year-over-year)
• Vancouver saw an increase of 1.1%
• Montreal saw an increase of 10.3%
• Winnipeg saw a rise of 5.1%

AMF New Regulatory Body for Quebec Brokers

Quebec’s mortgage brokers are now officially regulated by the province’s Autorité des marchés financiers (AMF), which took over the role in May.

The province’s mortgage brokers were previously under the jurisdiction of the Organisme d’autoréglementation du courtage immobilier du Québec (OACIQ), which also regulates real estate agents.

“The AMF welcomes this new mandate from the government,” AMF president and CEO Louis Morisset said in a statement. “…we have been in constant contact with the various stakeholders in the mortgage brokerage sector and have developed a robust and effective framework aligned with the one previously established for other sectors involved in the distribution of financial products and services.”

The Quebec chapter of Mortgage Professionals Canada made a proposal to the provincial Finance Minister requesting separate laws and a separate regulator for mortgage brokers back in 2015.

“MPC was supportive of the transition to the AMF for several reasons,” noted Mortgage Professionals Canada President and CEO Paul Taylor. “The transition followed the implementation of Bill 141, and the changes provide a clear delineation between the regulation of mortgage brokers and realtors. This delineation provides a much easier structure to ensure consumer protections are enforced, enabling better consumer outcomes and financing practices in the province.”

As Claude Girard, Quebec Director for MPC told CMT, the association expects to see benefits from the change.

“We expect regulation to be different and stronger than with the OACIQ, and this, of course, is for the well-being of mortgage consumers and our profession,” he said.

More Cases of Mortgage Fraud

Two Ontario mortgage brokers are now facing fraud charges, with one being accused of collecting more than $8 million in investments.

In the first case, a Guelph, ON, broker was arrested and charged with four counts of fraud over $5,000, four counts of using forged documents, 22 counts of uttering a forged document and one count of mischief to data.

The accused allegedly ran mortgage brokerages under various names and collected the $8 million in investments between 1995 and 2014. He is said to have repaid just $1 million in interest to the investors over that time.

In another case, a Brampton mortgage broker was arrested defrauding clients of $35,000 in investments between 2017 and 2019. It is alleged the broker promised to process mortgage applications for the victims, who were encouraged to pay in cash.

–Steve Huebl

Bank of Canada Hints at No Interest Rate Hikes Until 2023

Prospective homebuyers were reassured today that interest rates will remain near historic lows “for a long time,” according to Bank of Canada Governor Tiff Macklem.

The BoC chief made the comments during a conference call following the Bank’s interest rate meeting, where it left the overnight lending rate unchanged at 0.25%, at its “effective lower bound.”

“Interest rates are very low and they are going to be there for a long time,” Macklem said. “Canadians and Canadian businesses are facing an unusual amount of uncertainty, so we have been unusually clear about the future path for interest rates.”

In the Governing Council’s official statement, it said it would “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”

Observers say that implies the Bank has no plans to start raising rates until at least 2023.

“Based on the Bank’s new forecasts, this implies it has no intention of raising policy rates for several years,” wrote Capital Economics economist Stephen Brown.

“While the Bank may eventually raise its central scenario forecasts for growth and inflation, our forecasts are still consistent with the broad message in today’s policy statement,” he added. “That is, despite the huge stimulus, there is little chance that a surge in inflation will justify raising interest rates within the next few years.”

The BoC also confirm that its bond purchases, which have helped to inject liquidity into the lending market and help keep mortgage rates lower than where they otherwise may be, will continue until the economic recovery is “well underway.”

“We continue to think asset purchases will continue at least through the first quarter of 2021, and likely well into next year,” wrote Josh Nye of RBC Economics.

Some of the BoC’s updated forecasts include:

• GDP growth of -7.8% in 2020, +5.1% in 2021 and +3.7% in 2022
• Inflation to remain below 2%, at 0.6% in 2020, 1.2% in 2021 and 1.7% in 2022
• The worst impacts of the COVID-19 pandemic should subside by mid-2022

What does that mean for homebuyers?

It’s rare to have such a clear roadmap for future interest rates confirmed by the Bank of Canada itself. So, what would another couple of years of rock-bottom interest rates mean for homebuyers and how might that affect mortgage decisions today?

Rates have already been falling significantly over the last couple of months, with many mortgage rates—including insured 5-year fixeds—now available for under 2.00%. Remember that those shopping for insured 5-year fixed rates in January were looking at rates at around 2.50% (or close to 3.00% for uninsured 5-year fixeds).

The biggest question is whether you choose to lock in these low rates at a longer term, say 5 or 7 years, or opt for a shorter fixed term or variable rate.

While existing variable-rate mortgage holders have enjoyed significant savings thanks to the drop in prime rate from 2.95% in January to 2.45% today (numerous mortgage holders at the time were able to snatch rates of prime – 1.00%), new variable-rate discounts aren’t quite as competitive.

“Unless you’re able to find a variable rate at least a half-point under the best 5-year fixed rates from fair-penalty lenders, the risk-reward of floating your rate isn’t overly attractive,” wrote Rob McLister, founder of RateSpy.com.

“Barring that sort of discount, if the BoC were to hike rates 100 bps in 2023, for example, you’d pay less in a 5-year fixed—assuming you didn’t break the mortgage early.”

Fixed rates have been trending downward largely thanks to falling bond yields and the Bank of Canada’s quantitative easing programs, which have injected billions of dollars in liquidity into the market, which in turn has reduced much of the risk for mortgage lenders.

“If the BoC’s forecast pans out, the next few years entail little risk of significant increases to bond yields (relevant for fixed mortgage rates) and the overnight rate (relevant for variable mortgage rates),” McLister added.

Canadian Real Estate Defies COVID, Sales up 63% in June

National home sales shot up in June, with prices also climbing steadily, according to June data released today by the Canadian Real Estate Association (CREA).

Transactions were up about 15.2%, while the average property price was up 6.5% from June 2019 to $539,000. Excluding the country’s most expensive markets, Toronto and Vancouver, the average price falls to $432,000.

“While June’s housing numbers were mostly back at normal levels, we are obviously not back to normal at this point,” said Shaun Cathcart, CREA’s senior economist. “I guess the bigger picture is one of cautious optimism. The market has recovered much faster than many would have thought, but what happens later this year remains a big question mark. That said, daily tracking suggests that July, at least, will be even stronger.”

But it’s the month-over-month data that is truly staggering: property sales are not only 150% above where they were in April, but sales rose 83.8% in the Greater Toronto Area , 75.1% in Montreal and 60.3% in Greater Vancouver.

“Pent-up demand (supported by the fact that would-be house hunters have likely suffered lesser job declines) fuelled a surge in home sales during June. The gain brought sales levels nearly back to where they were in February,” noted TD economist Rishi Sondhi. He added that average prices have almost entirely erased pandemic-related losses, with prices down only 0.5% compared to February.

And with such a frenzy of homebuying activity, it’s no wonder that national inventory levels are at a 16-year low with just 3.6 months of housing supply left, should sales continue at the current rate. With such limited housing stock, buyers are forced to compete fiercely for properties.

Another metric that shows sellers with the upper hand in most markets is the sales-to-new listing ratio, which is at 63.7%. A balanced ratio is between 40-60% and anything below 40% is considered a buyers market.

Homebuyers Growing More Confident

As the demand for homeownership is clearly still strong, with or without COVID, prices are likely to continue moving upward for the time being barring something drastic that would force homeowners to start listing their properties en masse. Some speculate the forthcoming end of the government’s income-assistance programs and mortgage payment deferrals that were offered by most lenders may be that “drastic” something.

“While third-quarter sales growth is likely to be very strong, what takes place in the few quarters thereafter is a major risk point, as mortgage deferral programs and the CERB are set to conclude in the fourth quarter,” Sondhi noted. “In our view, as long as unemployment is elevated, population growth slows, and CMHC measures remain in place, growth in home sales and prices is likely to be subdued after this initial burst.

On the other hand, homebuyers may be assured by the prospect of lower interest rates for potentially years to come, as was confirmed today by Bank of Canada Governor Tiff Macklem.

“The message to Canadians is that interest rates are very low and they’re going to be there for a long time,” Macklem said during a press conference following the Bank’s interest rate decision, in which it left the overnight lending rate at 0.25%. “We recognize that Canadians and Canadian businesses are facing an unusual amount of uncertainty, so we have been unusually clear about the future path for interest rates.”

–Danielle Tenenbaum

CANADIAN HOME SALES UP AGAIN IN JUNE

Housing Market Continued Its Rebound in June and Early July

BANK OF CANADA HOLDS RATES STEADY AND CONTINUES QE PROGRAM

Bank of Canada Holds Target Rate Steady
Until Inflation Sustainably Hits 2%

STRONG JUNE JOBS REPORT IN CANADA

Robust Jobs Report in June, Much Better Than Expected

FISCAL SNAPSHOT: MUCH LARGER DEFICIT AND DEBT THAN EXPECTED

Astonishing Fiscal Red Ink Announced Today

9 Ways to Keep Your Credit Score as High as Possible (Part II)

In our previous post, we spoke about the fact that there are so many credit score providers out there, all providing different results, and chances are none of those results are the credit score lenders see when you apply for a loan product such as a mortgage, credit card or car loan.

How are you supposed to optimize your credit score when you don’t even know what it is? The answer is by focusing more on your overall “credit hygiene” rather than on any one particular score.

Dental hygiene is preventative maintenance to ensure your teeth and gums are the best they can be at all times. Having a similar routine for your personal credit history can be equally important to avoid problems when you least need them—like when buying or refinancing a home.

If you are always employing best practices, then you are optimizing your credit score and your overall credit profile, regardless of who is checking, when they are checking and what is being counted and reported.

Unfortunately, more credit in the wrong hands can lead to abuse. Some people rely on credit to supplement their income and end up in an untenable situation. These credit hygiene tips are intended for people who are responsible with credit.

Never Go Over Limits – Leave Some Room

When you have a credit card or line of credit hovering around its limit, you are at risk of going over, which is not a good thing for your credit score. And it might happen innocently—you started out under the limit, but with interest charges and possible over-limit penalties, you are now in the Badlands.

Even when you deploy a balance transfer promotion or some form of interest-free period, you should leave room at the top.

It’s like when ordering a coffee, leave room at the top for the milk—even if you take it black, avoid spillages.

Accept All Offers of Increased Limits

You should usually welcome credit limit increases. You look healthier and stronger to the casual reader, because your limits have some heft to them. And perforce, you instantly reduce your percentage utilization of credit with an increased limit. This often results in a higher credit score.

Equifax Canada states percentage utilization has a 30% weighting on your personal credit score.

Spread Around Your Balances

When maximizing your personal credit score, you should look at your utilization of available credit for each individual credit facility. If your goal is to maximize your score at all times, but you do carry credit balances, try to spread it around, rather than cluster it all on one card. One way this can arise is when you use balance transfer promotions to reduce interest expenses. You’ll have to evaluate the trade-offs of each approach.

Exercise All Cards and Lines of Credit

We tend to favour one particular credit card (maybe we like their rewards program) and we might neglect our other cards. If you are trying to maximize your credit score, it is good to use all available credit fairly regularly, even if it’s just for a brief moment every few months.

These trade lines can get stale and they are not pulling their full weight. Update the DLA (date of last activity) with a modest transaction and then pay it online immediately.

Coincidentally, only yesterday I received a message from my bank telling me my personal line of credit was now dormant and no longer accessible. I had not used it in eighteen months—not following my own guideline!

If in Doubt, Do NOT Close a Credit Card

It will rarely be correct to close older, unused credit facilities since they are contributing “score juice.” If you want to close the card to avoid an annual fee, just ask the card issuer to downgrade your card to a free card. You will retain your valuable history, but avoid annual fees (and the spectre of forgetting to pay the fee).

Equifax Canada states your history can have a 15% weighting on your personal credit score.

Use It or Lose It

If you never borrow money, or you have a solitary credit card in your wallet and you never actually use it, eventually you will have nothing generating a credit score for you. And you may end up with no score at all. And that can really cramp your style when you need a mortgage.

Pay Your Active Credit Cards At Least Twice Monthly – The Statement Date Strategy

I keep track of the statement cycle of my oft-used cards, and I pay the balance in full several days BEFORE the next statement is issued. The card issuer typically reports my statement date balance to the credit bureaus – so I always want that balance to be small, and that way my utilization ratios are really good.

And within a week or so of the statement being issued, I go back in and pay the statement balance in full. This ensures I never have interest charges on my core credit card usage, since the balance is always brought to zero before the due date.

The smaller the limits on your credit cards, the more dramatic the impact of the statement date strategy.

Pay Disputed Items – Then Argue Your Position

You may know someone who was offended by charges they were certain did not belong on their credit card statement. They refused to pay and preferred to wait out the investigation process. Unfortunately, by doing that they run the risk of interest charges and late payments.

My own experience has always been the card issuers do the right thing when fraud or outright billing errors are at hand. So, I pay and wait for the credit to come back to my account when the investigation is complete.

NOTE – if the fraudulent charges are very large and quite serious, this is a different matter altogether and you should strategize the best approach with the authorities and management at the card issuer.

Scour & Clean All Reporting Errors

There might be some incorrect information in your personal credit history that is needlessly dragging down your score. Those are easy and necessary fixes. And the impact on the personal credit score can be profound. There are many types of errors, but two examples are:

• You have two or more personal profiles with the credit bureau, so your information is scattered and diffused. Combining it all into one credit report could well increase your score and strengthen your look. (This often happens to people whose name is hard to spell, or who have legally changed their name.)
• You completed a consumer proposal and all the debts included in the proposal should be reporting zero balances and should NOT be “R9s.”

Each agency provides a mechanism on its website for reporting errors. Mortgage brokers can fast-track an investigation with Equifax Canada for their clients. What might take a consumer two months we can often get done in a few days.

The Takeaway

The credit reporting agencies may generate a different score for credit card issuers, car dealerships or mortgage lenders, and the score they provide the consumer upon request is typically none of these. Therefore, you should be more concerned with ensuring you are always using best practices that will score well, regardless of who is doing the measuring.

The credit hygiene strategy ensures your credit history is a weapon you can wield with confidence, and that whatever method is generating your credit score, it will always be optimized and at its maximum potential.

–Ross Taylor

Latest in Mortgage News: Home Price Recovery Not Expected Until 2022

On the heels of new data showing that home prices tumbled in April across many of Canada’s largest cities, CMHC is forecasting it will take at least until 2022 for a return to pre-recession levels.

The federal housing agency modelled out a pandemic scenario that was “not as severe as this,” CEO Evan Siddall said in a teleconference following the release of CMHC’s annual report. “And I’m sure that you’d understand that the realm of plausibility has expanded significantly as a result of all the experience we’ve had…Tens of thousands of Canadians are having trouble meeting their mortgage commitments.”

Siddall noted that early figures suggest about 10% of CMHC’s insured mortgages are now in deferral.

CIBC economists say the housing market faces challenges in the coming 12 to 18 months, particularly once the mortgage deferral periods run out.

“Forced sales will add to supply, and probably outweigh the offsetting impact of reduced supply of new units,” they wrote.”In the coming few quarters, housing activity will dance to the volatile tune of economic activity. During that period, we expect continued reduced levels of activity, and an unreliable and volatile price mechanism.”

Prices are already down in April, according to recent data from a number of local real estate boards, including:

• The Greater Toronto Area: Home sales down 67% year-over-year; average price down 11.8% month-over-month to $821,392
• Greater Vancouver Area: Home sales down 39.4% year-over-year; benchmark price flat month-over-month to $1,036,000
• Montreal Census Metro Area: Home sales down 68% year-over-year, median price for single-detached homes down 1.4% month-over-month to $360,000
• City of Calgary: Home sales down 63% year-over-year; detached benchmark price down 0.35% from March to $479,100

Most of the above home prices are still up compared to April 2019, although forecasts peg eventual year-over-year price declines anywhere from 5% (Capital Economics and RBC) to 10% (Moody’s).

CMHC chief economist Bob Dugan says that reliable forecasts are difficult to make given the many unknown variables, but made this prediction: “For Canada and for Ontario, I think, the best case we’re looking at … house prices getting back to their pre-recession levels, at the earliest, by the end of 2022.”

CMHC Declares $2B in Dividends in 2019

The Canada Mortgage and Housing Corporation returned more than $2 billion back to taxpayers in the form of dividends to the Canadian government, according to its 2019 annual report.

The federal housing agency also reported its insurance in force stands at $429 billion, down 4% from $448 billion in 2018, and down from $526 billion in 2015.

CMHC attributed this to “run-off of existing policies-in-force, primarily in portfolio insurance due to reduced volumes since the introduction of pricing increases commensurate with revised regulatory capital requirements in 2017.”

In an update on the First-Time Home Buyer Incentive, CMHC reported 2,950 applications for the shared-equity program as of December 31, 2019, representing financial commitments of $56 million. The program has a $1.25-billion budget with a goal of assisting up to 100,000 first-time homebuyers.

In his parting Message from the President, outgoing CEO Evan Siddall noted one of the agency’s accomplishments during the year being to “speak out against homeownership policies that stimulate demand via increased borrowing.” He added: “Containing housing demand and limiting indebtedness are also reinforced by the mortgage insurance stress test, notwithstanding opposition from mortgage brokers, realtors and homebuilders. Our role is to promote housing affordability, not to stay silent when the real estate industry seeks to preserve its income at the expense of housing affordability.”

New Bank of Canada Governor

We learned earlier this month that Tiff Macklem will become the next Bank of Canada Governor on June 3, replacing outgoing head of the Bank Stephen Poloz.

Macklem, a former deputy governor, was passed over for the job seven years ago to Poloz. Since then he has spent the past six years as dean of the University of Toronto’s Rotman School of Management.

In a press conference following his appointment, Macklem indicated support for current policy measures and confirmed he sees supporting market stability and providing liquidity as the bank’s top priorities. He also noted that he sees negative interest rates as “disruptive” at the present time, and that the bank isn’t justified in making firm economic forecasts given the current market instability.

–Steve Huebl

Why Is My Credit Score Different From What Lenders See? (Part I)

It’s pretty easy to track your credit score these days⁠—perhaps through a paid subscription to Equifax Canada or Trans Union Canada, or through free offerings from your bank, or other entities such as Borrowell, Credit Karma, Mopolo or Mogo.

But there is no consistency among these various sources. In fact, there can be dramatic differences. Therefore, you should focus more on your overall “credit hygiene” rather than any one particular score. Meaning, focus on best practices at all times. More on that later.

CBC News ran a solid investigative piece last fall called “Why 4 websites give you 4 different credit scores and none is the number most lenders actually see.” One Canadian encountered a 200-point difference between his highest and lowest scores from several score providers!

Scott Terrio, manager of consumer insolvency at Hoyes, Michalos & Associates Inc., thinks Canadians are obsessed with their credit scores. He is perhaps jaded by having met thousands of insolvents, many of whom had high credit scores.

Terrio notes, “It’s also important to remember that the credit score you see might not be the one the bank sees. That’s right. Lenders can (and do) order credit reports that are designed to meet their specific needs.”

What is their merit then? What exactly are people tracking? What does it even mean when someone tells you what their credit score is?

How Useful Are Free Credit Scores When Applying for a Mortgage?

To bring the conversation around to mortgage borrowing, the only credit score that matters is the one your lender sees when your application is submitted. And it’s almost certainly NOT a score you have seen for yourself from all the score providers out there.

These days, prospective mortgage clients are often excited to tell me what their credit score is. I bite my tongue, and instead applaud them for caring and for monitoring their credit, while explaining that, no, a screenshot of their Borrowell credit score is not sufficient for our mortgage lenders.

We actually need their signed consent to access a comprehensive (and completely different-looking) credit report.

FICO Score 8 is the Gold Standard

For the most part, mortgage brokers submit their mortgage applications with an Equifax Canada credit report attached. This report will display a few different measures to the lenders, but the one we pay the most attention to is called FICO Score 8. It’s the number we cite when a lender wants to know our mortgage applicants’ credit scores.

FICO says 90% of Canadian lenders use it, including major banks. But Canadian consumers cannot access their FICO score on their own.

Some banks and other mortgage lenders rely solely on the TransUnion credit report, which may use the Credit Vision Risk Score, and others use both reporting agencies. But they can all generate a FICO score.

Rob McLister, founder of RateSpy.com, picked up the cause last week with a short piece on the need to standardize the credit score that various providers of free credit scores offer. He wrote, “It’s time for companies hawking partly useful free scores (the Mogos, Borrowells and Credit Karmas of the world) to offer a more practical score. For mortgage purposes, FICO 8 is best of breed.”

Why You Should Worry About Your Credit Hygiene, Not Your Credit Score

I am delighted Canadians care about their credit history—it is so essential to many aspects of life, not just for major events like financing a home or an automobile. For example, some employers check candidates’ credit history, and so do most landlords when considering tenancies.

We are not here extolling the need for standardized credit score reporting. Because that is not going to happen anytime soon, as desirable as it may seem. Instead, we will talk about best practices of maintaining great credit hygiene.

In Part II, we will look at various ways you can proactively manage your personal credit history and keep your score (whatever score that may be) optimized at all times.