Mortgage crisis in Canada

Too many housing starts means crunch 'may come soon,'Lost amid concern over United States government agencies moving in to support mortgage lenders Freddie Mac and Fannie Mae plus IndyMac Bankcorp, was a warning that Canada could soon face its own mortgage crisis.

Peter Hall, vice-president and chief economist with Export Development Canada, said in a report that in addition to U.S. housing woes, housing starts were down 56 per cent year-over-year during May in the United Kingdom, 18 per cent during the first quarter of the year in Spain and 17 per cent year-over-year in May in France.

Hall noted that housing starts in Canada are "soaring on the strength of the domestic economy and a huge dollop of very well-timed fiscal stimulus," and that a continuing excess of housing starts over requirements means "Canada's turn may come soon" for a housing crisis.

The report came in the wake of the Canadian government's attempt to avoid a housing crisis by no longer insuring mortgages with more than 35-year amortization periods and less than five-per-cent down payments as of Oct. 15.

Homebuyers with less than a 20-per-cent down payment are required to have their mortgage insured through the Canada Mortgage and Housing Corporation -- a Crown corporation -- or a handful of private firms that have entered the mortgage-insurance market.

In 2006, the government extended the maximum amortization period from 25 to 40 years, adding hundreds of thousands of dollars in interest costs. Last year, 37 per cent of mortgages taken out were for longer than 25 years.

Soon after the Canadian changes were announced, the United States Federal Reserve Board tightened up its mortgage-lending policies. As of Oct. 1, the Fed will require lenders to verify a borrower's income in determining repayment ability, to take a lender's ability to repay a loan from income into consideration, to establish escrow accounts for property taxes and homeowners insurance in certain cases, and basically to advertise rates and payments with clear notice if a rate isn't fixed.

One reason why U.S. lenders were willing to give mortgages to people with an unproven ability to make payments was that the lenders were able to package the loans with others and sell them to other institutions. Had the lenders been forced to hold the debt themselves, which is somewhat the case in Canada, lending would have been less reckless.

Rather than abating, the U.S. housing problem grows worse by the day, with foreclosures expected to flood the market with homes for sale early in 2009.

Things have deteriorated so badly in the U.S. that the Treasury Department will extend credit if needed to prop up Freddie Mac and Fannie Mae, two government-sponsored enterprises that hold nearly half of all American mortgages.

The GSEs each include a debt component and an equity component, with the latter falling in value as investors sold off shares due to concern over rising mortgage defaults.

Famed U.S. commodities investor Jim Rogers called the Treasury plan an "unmitigated disaster." Mortgage lenders are "basically insolvent," and taxpayers will be left footing the bill, according to Rogers.

At the same time, U.S. government agencies stepped in to take over IndyMac Bankcorp, after helping to bail out Bear Stearns. That leaves about 90 financial institutions -- out of about 7,500 -- set to go under.

Meanwhile, portfolio manager Adrian Mastracci of Vancouver-based CKM Wealth Management offers sound tips for homebuyers:

- Consider a condominium or townhouse as a starter home.

Remember that in addition to the purchase price of a home, you may have legal and realtor costs, expenses for moving, renovations, furniture, repairs, maintenance, property taxes, insurance and utilities.

- Save 20 per cent for a down payment to reduce extra fees, consider taking money from your registered retirement savings plan through the Home Buyers Plan, and forego making non-registered investments because you would need an 8.9-per-cent return to do better than paying down a 5.75-per-cent mortgage if you're in the 35-per-cent tax bracket.

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House prices to rise 3.5 per cent in Canada

The strong housing market of the last few years has now cooled down as supply and demand have come more into balance, but prices will still rise this year, though not by double digit figures of the past, says CEO Phil Soper of Royal LePage Real Estate Services.

Through the rest of this year and into next, he said, Royal LePage's second-quarter statistics released Thursday suggest that average prices will creep up by about 3.5 per cent.

"When you're looking at the real estate market, it's important to look at not just house price changes, but also the changes in activity levels," he said.

"There are significantly fewer homes trading hands now than there have been in the boom years of this decade," he said. "It's a moderate market."

Royal LePage's report followed one from the Canadian Real Estate Association on Tuesday indicating that average house prices in June fell 0.4 per cent compared with a year ago for the first time since early 1999.

CREA's figures suggested that house prices were "basically flat" in June, said Soper, adding they were somewhat skewed by the fact that the association was unable to include Montreal in their results due to a reporting foul up.

He estimated Montreal is about 10 per cent of the country.

"If you look at our numbers, Montreal had a price increase year-to-date in the four per cent range," Soper said.

While prices are forecast to move higher, the country's largest real estate company predicts the number of transactions this year will fall by 11.5 per cent to 461,000 units.

Along with an easing of pent-up demand, it also attributed the slowdown to jitters among prospective buyers because of economic uncertainty following layoffs in the manufacturing and forestry sectors due to the subprime mortgage fiasco in the United States and worldwide credit crunch.

Avery Shenfeld, senior economist at CIBC World Markets, said earlier this week that there has been a noticeable softening of the housing market over the past few months.

"Some of that is coming in cities where prices had gone through the roof in the previous one or two years," he said.

In the second quarter, the average price of detached bungalows rose by 5.6 per cent from a year earlier to $351,587. Two-storey properties increased 5.2 per cent to $418,943.

"After several years characterized by a persistent shortage of listings, home buyers have felt the pressure of bidding wars and take-it-or-leave-it counter offers ease during 2008," Soper said.

"Home sellers have had to come to grips with the longer time it is taking to sell properties, but can take comfort in a market that continues to support reasonable price increases."

The survey of 17 cities across the country found lower prices in two major markets - Edmonton and Calgary.

In Edmonton, the average price for a bungalow dropped 14.5 per cent while an average Calgary two-storey dropped six per cent.

The greatest price increase was in Regina, which has seen home values surge as higher commodity prices have driven the regional economy.

In Regina, all types of housing saw higher prices, even though inventory of homes increased five-fold, the survey said.

Across the country, said Soper, some regions are slightly oversupplied right now with houses, in particular Calgary and Edmonton. Meanwhile, supply shortages are still being reported in Regina, Saskatoon, St. John's and Winnipeg.

For most of Canada, however, the number of people looking for homes is approximately equal to the number of homes available for sale.

"The housing market is a cyclical one," said Soper. "We've gone through an extended period of excess demand which has caused prices to rise at an unusually high rate."

"What we're seeing at the end of the cycle is that there are fewer numbers of new buyers in the market because they've got their homes."

TD Bank changes mortgage maximum amortization

TD Canada Trust (TSX:TD) changed its mortgage offerings Wednesday to bring its lending rules in line with regulatory changes set to take affect in October.

The bank said effectively immediately the maximum amortization period for new mortgages will be 35 years and will require a five per cent down payment.

TD said it will continue to process those mortgages with a longer amortization period or a lower down payment that have already been approved.

TD joins Bank of Montreal in changing its lending rules ahead of the Oct. 15 change in regulations

Ottawa moved to tighten the rules for government-guaranteed mortgages this week in a bid to prevent a meltdown like the one in the U.S. subprime mortgage market.

Starting Oct. 15, the Finance Department said it will no longer guarantee 40-year mortgages and will require a minimum down payment of five per cent of the value of a home.

Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent - in other words the buyer has borrowed all the money to buy a home and then gets insurance coverage on the whole amount.

Fixed Mortgage Rate

With so much interest rate uncertainty in the market borrowers are facing a dilemma as to whether they should fix their home loan interest rate or not by applying for a fixed rate mortgage. A Montreal fixed rate mortgage will provide absolute security against interest rate rises ensuring that monthly repayments remain constant regardless of what the money market is doing.

The interest rate, and therefore the interest payments, on the fixed rate product will remain stable for the fixed rate period. This period is predetermined and is usually set between one and five years, although it can be for longer.

Fixing home loan repayments can help considerably with household budgeting which is why this type of product is popular with low income earners and first-time-buyers. Montreal Mortgage payments usually account for about a third of a household’s disposable income so it is important to ensure that rising interest rates do not make the home loan unaffordable. Locking in the interest rate at an acceptable level can reduce this risk considerably.

Borrowers should be aware, however, that fixed interest rates are usually higher than variable rates offered on the same products. Additionally, as a general rule, the longer the fixed rate period is, the higher the interest rate will be. This is because lenders must provide themselves with a profit margin on the money they lend. If they are expecting interest rates to increase in the future, their costs will increase and their profit margin will decrease.

Lenders therefore need to build in a larger profit margin for this type of home loan product when compared to variable rate products. Mortgage products that have a variable interest rate should provide a profit to the lender for the entire term of the loan. Borrowers should therefore keep in mind that they might pay over the odds for a fixed rate home loan however the reduction in risk should make up for this.

Another factor that borrowers should consider before applying for a home loan product of this kind is early repayment charges and arrangement fees. Although a fixed rate mortgage can save money over the long term if interest rates rise, borrowers should take into account any fees that may be payable on an existing home loan if it is redeemed and switched to a new product.

Additionally, fixed rate products may attract an arrangement fee. The cost of the arrangement fee should also be taken into account when calculating whether this type of home loan product is worth applying for. Also, home loan products typically come with early repayment charges during the fixed rate period. This means that if the borrower wishes to redeem the loan or remortgage to another product they will have to pay a fee to the lender. Early repayment charges can be as high as five percent of the balance of the loan.

If you are unsure on whether you should apply for a fixed rate home loan, contact a qualified independent financial advisor for expert advice. An independent advisor will be able to assess you borrowing needs and suggest the most appropriate mortgage products for you to consider for your home.

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Gas prising against housing market

Commute is costly. Off-island residents are having trouble selling their homes.

Single-family homes off the island of Montreal are becoming harder to sell, in part because of high gas prices, and some homeowners are throwing in free cars and SUVs to entice potential buyers.

Montreal mortgage brokers and real estate agents say most buyers are looking for homes on the island.

"Off-island houses, like in Hudson or in the swank neighbourhoods of St. Lazare, are not selling,". "People don't want to commute all the way to downtown and pay for soaring gas prices." To sell their houses faster, some homeowners are offering buyers the keys to their SUVs to "seal the deal." A Canadian Real Estate Association survey made public in March found that "the distance to work is the biggest 'driving' factor in consumer consideration of buying a home." And the survey, by IPSOS Reid, was conducted before gas prices spiked in April.

Montrealers might be interested in moving closer to where they work because of gas prices, but the evidence is anecdotal.

Homeowners willing to commute into town will make up for the price of gas with the lower real estate taxes, off-island home owner Dan Loiselle said.

"The taxes here (in St. Lazare) are a fraction of what you'd be paying in Beaconsfield or Kirkland," Loiselle said.

His 4,000-square-foot home in St. Lazare, complete with an in-ground pool, has been on the market since 2005. The price has fallen to $795,000 from $925,000.

"It's the quality of life in St. Lazare that will sell the house," said Loiselle, who plans to keep living in the off-island town. "There are parks, beaches, sand dunes, trails - things you would not find close to downtown." Loiselle said he knows someone in the neighbourhood who threw in a BMW 325 to close a deal on his house.

"I'm not giving away a car. If someone can afford an $800,000 house, I don't think a used car will make a big difference. But I have included a $2,500 gas card on top of the normal commission for the agent who sells my house,"

"If we're having trouble selling, it's because less people are buying homes priced above half a million," . "Many new development projects are building houses (priced) between $350,000 and $400,000. That's the bread-and-butter market of construction now." David Meyers, a real-estate agent with Remax who is responsible for several homes in the St. Lazare area, said the cost of gas will start affecting the housing market only once it reaches $2 a litre.

"At the moment, I don't see any clear trends," Meyers said. "But consumer confidence in Canada is at an all-time low" because of the ripple effects of the sub-prime mortgage crisis in the United States and other economic factors.

But I think it's too soon to tell if high gas prices have hit the housing market." Experts say gas prices won't ease any time soon: CIBC World Markets predict gas will hit about $1.86 a litre within the next two years.

Gas prices might influence not only how far people are willing to commute to work, but also how far they'll travel on vacation.

A poll made public Thursday by Royal LePage in Toronto found that one in five cottage owners in Ontario would consider selling their vacation property if gas prices continue to rise.

FHA changes help Homeowners to buy REOs / Bank Owned Homes

HUD has recently made changes allowing homeowners to qualify for FHA loans when buying homes that have been foreclosed, returned to lender (deed in lieu of foreclosure), AKA REO properties. REO stands for Real Estate Owned, which are essentially Bank Owned Repos.

Outdated regulations from HUD to prohibit property flipping and false price appreciation made it difficult for banks to sell recently foreclosed properties due to a HUD rule which prohibited the use of a FHA loan to purchase a home that had not been owned by the seller for atleast 90 days.

This has now been lifted until June 2009.

This will allow homeowners to qualify for Safe, Secure, & Affordable FHA loans to purchase the numerous bargain priced REO or Bank Owned properties coming to market.

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