Category Archives: default insurance

New program will help first-time homebuyers in BC, but is it a good idea?

first-time buyers bc

 

New program will help first-time homebuyers in BC, but is it a good idea?

It looks like Christmas has come early, at least for some BC house hunters. The BC government has revealed plans to launch a new program for first-time buyers, and it’s expected to help as many as 42,000 households in the province enter the market.

Announced December 15th, the BC Home Owner Mortgage and Equity Partnership program will see the BC government match the amount of money first-time buyers put toward their down payment, to a maximum of $37,500. Loans will be interest free for five years, and recipients won’t have to start paying the money back during that time. Once five years have passed, they will be expected to begin making monthly payments at current interest rates.

“We believe every British Columbian deserves a place to call home,” Premier Christy Clark said in a press release. “We’ve invested in affordable rental housing, we’ve invested in transitional and emergency housing, and now we’re partnering with first-time buyers to make the purchase of their first home more affordable.”

The news came the same day that the BC Real Estate Association released its latest data on residential real estate sales and prices. While it shows that in November the average MLS price for a home in the province fell 6.4 per cent year-over-year to reach $625,871, that’s still out of reach for many first-time buyers.

First-time buyers hoping to participate in the program will have to meet a number of requirements in order to be eligible. For starters, applicants must be planning to buy a home for $750,000 or less and have total annual household income of $150,000 or less; they must also be preapproved for a high-ratio insured mortgage. Other requirements include being a Canadian citizen or permanent resident for at least five years, and living in BC for at least one year.

Reactions to the program have been mixed. While some have taken to Twitterto voice optimism about it, many people, including several key BC housing market commentators, have expressed concerns.

Speaking to The Times Colonist, Tom Davidoff of UBC’s Sauder School of Economics said that making it easier for people to buy homes when the province’s ability to increase housing supply is limited may drive up home prices. “I just think it’s lousy economics,” he said. NDP housing critic David Eby also pointed out that if interest rates are higher in five years, those who participate in the program will be at an increased risk of defaulting on their mortgages.

The program will start accepting applications on January 16th, 2017, and the BC government plans to invest about $703 million in it over the next three years. As there is no cap on the initiative it could eventually be expanded.

Sources: BuzzBuzzHome 

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Maple Bank Siezed by OSFI and Cut Off by CMHC

Maple Bank

Maple Bank, a niche securitization player in Canada’s mortgage market, looks like it’s going down.

Banking regulator OSFI has taken control of the bank’s Canadian operations according to the Financial Post, which quotes OSFI Superintendent Jeremy Rudin as saying, “We are guided by our mandate, which is to protect the depositors and creditors of the Canadian branch and have taken this step to safeguard their interests.”

On top of that, CMHC has terminated Maple as an approved issuer of mortgage-backed securities (MBS). CMHC made this statement:

Effective immediately, Canada Mortgage and Housing Corporation (CMHC) has suspended Maple Bank GmbH – Toronto Branch as an Approved Issuer of National Housing Act Mortgage-Backed Securities (NHA MBS). The suspension is the result of restrictions placed on the operations of Maple Bank GmbH by Germany’s Federal Financial Supervisory Authority (BaFin) that affect its ability to fulfill its obligations as an Approved Issuer.

CMHC provides a timely payment guarantee of interest and principal to NHA MBS investors. CMHC’s guarantee of NHA MBS issued by Maple Bank GmbH – Toronto Branch are not impacted by the suspension.

Here is a good summary from Handelsblatt about what triggered Maple’s woes → Link.

 

maple bank chart

Maple Bank is probably not coming back. National Bank has already written off its 25% stake. That’s disappointing for the mortgage market because, while Maple was a small player in the MBS market, it was still a player. And in a market where MBS spreads have widened significantly in the last year, the market needs all the liquidity it can get. (MBS spreads refer to the extra yield that mortgage investors demand on top of safe government bonds.)

According to sources, Maple bought mortgages from a handful of non-bank lenders. It also provided warehouse facilities (i.e., short-term capital to fund mortgages until they’re sold to investors). Lenders would take funded mortgages, package them up, sell them to Maple and then Maple (as a former CMHC-approved issuer) would issue MBS and/or sell those mortgage pools into the Canada Mortgage Bond (CMB) program. This provided cheaper funding for lenders than simply selling their mortgage commitments to big institutional buyers.

Based on CMHC data, Maple was ranked 21st out of 82 MBS issuers in terms of market share, with $3.49 billion of MBS outstanding out of $441 billion industry-wide.

“Losing any funder is never good,” said one lender executive who preferred not to be quoted. “All of their mortgages were originated in the broker space.” That leaves big securities firms like TD Securities, RBC Dominion Securities, National Bank Financial and Merrill Lynch as the main buyers of broker-originated mortgages. “If it’s just big players left, it’s not positive for consumers,” he added, noting that less competition raises funding costs for bank challengers.

Side story: On an unrelated positive note, we hear that Laurentian Bank is now going to be a player in the securitization space. That is very welcome news for broker lenders. More from Bloomberg.

None of this should cause investors in Canada’s MBS market to lose confidence. What sunk Maple Bank was unrelated to Canada’s housing or securitization markets. CMHC is now managing its MBS to ensure investors get paid as expected. The housing agency sent CMT this statement today:

Canada Mortgage and Housing Corporation’s (CMHC) guarantee of NHA MBS issued by Maple Bank GmbH – Toronto Branch is not impacted by the suspension, therefore there is no impact on MBS investors.  Furthermore, this suspension will have no impact on homeowners or mortgage holders.

CMHC has taken control of the NHA MBS and related mortgage cash flows and provides a timely payment guarantee of interest and principal to NHA MBS investors.

CMHC has previously had four issuer defaults in the early 1990s. No MBS payments to investors were ever missed and CMHC did not incur any losses on these previous issuer defaults.

We’re told by other sources that CMHC has never lost money by guaranteeing NHA MBS, even when issuers default. That’s thanks in part to the excess spread that’s earned between the mortgage interest (paid by borrowers) and the MBS interest (paid to investors). 

“The [MBS] trades themselves are fine; but with Maple now essentially closed for business…whoever was using them will have to find alternative funding…” said one capital markets pro we spoke with. Fortunately, all lenders who relied on Maple have backup funders, we’re told.

As for small Canadian depositors, the fallout is limited. Maple’s latest annual report notes: “The Toronto branch specializes in lending businesses, in particular the acquisition of mortgage loans for securitization, and deposit taking.” According to OSFI, however, Maple Bank is a foreign bank “authorized under the Bank Act to establish branches in Canada to carry on banking business in Canada.” Foreign banks cannot generally “accept deposits of less than $150,000” in Canada.

Maple’s last report noted that its “securitization business grew significantly” through 2014. And now it’s gone; just like that.

Source: Canadian Mortgage Trends  February 10, 2016  Robert McLister  

Maple Bank

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CBC FORUM House keys sent to the bank? Your thoughts on mortgage defaults

The federal government is worried about Albertans making strategic defaults on their mortgages.

 

Some Albertans are walking away from their mortgages by putting their keys in the mail and sending them back to the bank.

It’s a phenomenon known as jingle mail — sparked by a combination of high debt and lost jobs — and was a big problem in Alberta back in the 1980s.

As a result, the federal government is watching the Alberta market closely. Jingle mail, or strategic defaults, weaken the housing market and increase loan losses among Canada’s banks, say experts.

We asked what this means to you: Does your mortgage keep you awake at night? What would make you send your house keys to the bank? Any personal mortgage anecdotes you want to share?

You weighed in via CBC Forum, our new experiment to encourage a different kind of discussion on our website. Here are some of the best comments made during the discussion.

Please note that user names are not necessarily the names of commenters. Some comments have been altered to correct spelling and to conform to CBC style. Click on the user name to see the comment in the blog format.

Many chimed in with their own mortgage advice.

  • “Sending house keys back to the bank seems very irresponsible. The banks are not going to absorb the costs — customers will be on the hook in the end.” — EOttawa​
  • “People who buy the McMansions in the hopes that someday they will become part of the upper class are the ones who should worry. Big risks have serious consequences. Good luck with it.” —Chris K
  • “No, it doesn’t keep me awake for the simple reason that we bought a home well within our means with a mortgage way lower than what the banks said we could borrow … It’s a question of common sense and priorities.” — docp

There was some discussion on who should be blamed.

  • “Lots of blame and finger pointing to go round. Bottom line, as many others have said, it falls on personal responsibility to make good decisions and sometimes circumstances outside our control force us to make tough decisions to survive — like using ‘jingle mail’ in Alberta.” — Don Watson

Several commenters even had their own jingle mail stories.

  • “My ex-husband and I returned the keys to the bank when it became clear that he was unable to maintain the mortgage payments on the home he had bought before we were married. This happened in the first year of marriage and it was a terrible blow to him. Later he declared bankruptcy.” — LinneaEldred
  • “We purchased our home within our means and have been able to keep up with the payments. We lived in Fort McMurray for four years, after they went through the downturn of the economy in the early 80s. Folks were turning in their keys then and walking away. People still don’t learn from past mistakes.” — Leslie Riley​

There were even some thoughts on the future … or lack of it.

  • “I have a mortgage and I also have a full-time job, yet I still worry about the future of my mortgage. I don’t believe that we need to point out the fact that even if you were or are smart about your money, you cannot predict your future.” — Samantha R.

You can read the full CBC Forum live blog discussion on mortgages below.

Can’t see the forum? Click here

Source: By Haydn Watters, CBC News Posted: Feb 09, 2016 12:26 PM ET

 

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Self-employed? Prepare for a long conversation with your mortgage broker

Getting financing isn’t as easy as it used to be, say mortgage brokers — and for the 15% of Canadians who earn money for themselves without a steady employer’s salary, it’s harder still.

If you’re self-employed and about to apply for a mortgage, be prepared for some serious form-filling. Getting financing isn’t as easy as it used to be, say mortgage brokers — and for the 15% of Canadians who earn money for themselves without a steady employer’s salary, it’s harder still.

“Back in the day, five years ago you could hold up three fingers and say ‘I promise I earn $100,000, and many lenders would take your word for it,” says Claire Drage, a senior mortgage agent with Mortgage Alliance in Greater Toronto. But things have changed, she warns. “It will take more paperwork, more documentation, more justification from the borrower on why they should be approved.”

Since 2008, the government has lowered the maximum amortization period from 40 to 25 years, and reduced the maximum gross and total debt service ratios to 39% and 44% respectively. Then, last October, the Office of the Superintendent of Financial Institutions’ B-20 rules put the underwriting practices of federally regulated financial institutions under scrutiny.

“Generally these changes have made for more rigorous review of documentation which does impact the self-employed borrower programs to a greater extent than salaried borrowers,” says Gary Siegle, Alberta-based VP of the Prairies for mortgage services firm Invis.

The self-employed often hinder themselves with creative accounting to lower their income. “They may have a different way of reporting all their income, reducing all their taxes as much as possible. Those are the ones that are more challenging,” says Daryl Harris, a broker at Verico One Link Mortgage & Financial in Winnipeg, and chair of the Canadian Association of Accredited Mortgage Professionals. Those not reporting cash jobs also reduce their provable income, making it harder to get a mortgage.

 

“Even though you’re self-employed and you benefit from amazing tax breaks, and your personal income tax return is incredibly low, you still have to prove to the lender that you can afford to pay this mortgage back,” adds Ms. Drage.

For those that find it hard to prove their income, stated income programs are an option. Designed for those with less than three years’ business operation, it requires at least a 10% downpayment, and not all lenders support it. TD Canada Trust, for example, looks instead at documented income such as T1 financials, business financials, and notices of assessments.

Changing attitudes among lenders makes it more difficult for the self-employed to deal with top-tier banks, says Don Barr, president of Verico Select Mortgage in Victoria. “It is forcing a lot of stuff out of the ‘A’ business and into the alternative business,” he says. Alternative lenders, some of which are not federally regulated, may take a less rigid approach when assessing self-employed applicants. However, the trade-off is often a higher interest rate.

There are several things to remember when applying for financing:

• Loan-to-value matters. Offering a 10% downpayment will make the process far more difficult. They care more than ever about up-front equity.
• Keep up with your payments. Make sure that you are up to date with the CRA before applying to a lender.
• Be organized. Ensure that all your accounting and tax documentation is up to date, and that you are reporting
• Pay off your credit. Get those outstanding cards and lines of credit paid down before you let your lender score you.
• Be prepared to adjust your expectations. You may have to adjust your target price after talking to a lender.
• See if your lender will ‘gross up’ your income. Some lenders may add a percentage when assessing your taxable and/or non-taxable income to allow for business expenses you incur.

And above all, start early in the process, preferably with a pre-approval before you look for a home, because one thing’s for sure: you’ll be doing more hoop-jumping than you think.

Source: Danny Bradbury, Special to Financial Post |September 19, 2013 

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We don’t charge you mortgage insurance: CMHC – You could still pay a premium even with a 20% down-payment

CMHC and Genworth don't charge mortgage insurance fees. You're bank does (Getty Images / Oxford)

Source: Money Sense, by by May 25th, 2015

We recently got an email from a reader who was quite perturbed. He had saved his money was diligent about his budgeting, and was set to purchase a modestly priced home near Ottawa. But when he went to use the Canada Mortgage and Housing Corporation’s mortgage calculator to figure out his final costs, he was surprised to see an additional $2,500 tacked on to his mortgage. Here’s why:

Q: Every resource I’ve consulted says that a down-payment of 20% or more on a home waives any mortgage insurance premium that I would be required to pay if I were putting down less of a down-payment. However, when I use the CMHC mortgage affordability calculator, and enter a purchase price of $250,000 with a down-payment of $50,000 (20% of the home’s value), it gives me a mortgage insurance premium of $2,500 not $0. My question is why are home buyers told that a 20% or more down-payment is sufficient to avoid mortgage insurance fees, if that’s not the case? —Peeved with Premiums

Dear, Peeved with Premiums: You have a right to be concerned. Home buying is a stressful process and every dollar counts, so it would certainly come as a surprise to learn that despite saving up a 20% down-payment you’re still expected to pay a mortgage insurance premium.

But there’s good news: You won’t have to pay.

Any property purchased in Canada that has less than a 20% down-payment is required, by law, to have mortgage insurance. This insurance is to protect the lender, not you, and the fees drop as your down payment gets larger. In Canada there are currently two entities that provide lenders this insurance:Genworth and Canada Mortgage and Housing Corporation (CMHC).

But don’t be confused. The laws to purchase this insurance don’t actually impact you—they impact your lender. In other words, federal laws demand that lenders purchase this insurance from Genworth and CMHC. Federal laws don’t stipulate whether or not lenders have to pass on this cost to Canadian home buyers. That decision is up to the lender.

But before you get out the placards and set up a protest, let’s put this in perspective. A conventional mortgage is where you put 20% of your own money (or more) as collateral towards owning a home. But it’s a large purchase and 20% can be tough to save up (particularly in a hot real estate market where prices keep going up). That’s why the federal government came to an agreement with CMHC and Genworth to offer mortgage default loan insurance (the official name) to lenders who were willing to accept a less than 20% down payment when it came to a home purchase. When a borrower qualifies to purchase a home using a non-conventional or high loan-to-value mortgage, the federal law requires mortgage loan insurance and this cost is passed on to the borrower.

Simply put: It’s a fee passed on to you for the benefit of owning a home with less than 20% down.

BANKS PASS ON THE COST TO BUYERS

Still, it’s pretty much an industry standard for lenders to pass on the cost of mortgage insurance to their borrowers who put down less than a 20% down-payment.

What’s not typical is to pass on this cost if a home buyer puts down 20% or more as a down-payment on a property. But that doesn’t mean it doesn’t happen. Fact is even when you purchase a home with more than 20%, many lenders will still opt to purchase the insurance. Why? It helps defray the downside risk of mortgaging a more expensive property. Think: Toronto and Vancouver where average prices for detached urban homes reach or surpass $1 million.

But in only a few cases, will a lender decide to pass on the cost of this mortgage insurance when a borrower puts down a 20% or more as a down-payment. “It’s not typical,” says one mortgage broker, “but it can happen.”

It will only really happen if the borrower moves from the A-list (of high quality borrowers) to the B-list (riskier borrowers) and red flags for getting on the B-list include: bad credit rating, you’re self-employed or have a spotty employment history, you carry a large debt load that’s close to the threshold (to understand mortgage ratios, read my blog on the basics of debt ratios and qualifying for mortgages.)

THE MORTGAGE CALCULATOR IS NOT WRONG

Of course, none of this applies to Jon our reader. He’s been steadily employed for decades, he doesn’t carry an exceptional debt loan and the size of the mortgage on the property is not only manageable, but conservative given the current real estate market.

For that reason, I reached out to the CMHC to ask, specifically, why their calculator would include this fee. Karine LeBlanc, media relations officer with CMHC, responded:

“It is important to note that CMHC’s mortgage affordability calculator is for general illustrative purposes only. The amounts it projects are based upon assumptions and estimates made according to generally accepted principles for mortgages in Canada. CMHC cannot guarantee the projections. Actual payment amount must be obtained from a person’s lender.”

In other words: Don’t take any mortgage calculator at face value.  Talk to your lender. And if you find that your bank feels it necessary to pass on the fee, I would suggest shopping around. The mortgage business is hyper-competitive these days and finding a lender with a great rate that doesn’t pass on extraneous fees should be easy as 1-2-3.

Read more from Romana King at Home Owner on Facebook »

(Just a heads up: Mortgage insurance premium rates recently went up both at CMHC and Genworth and investors, those with vacation homes or second mortgages will want to pay attention to the different rates that Genworth applies to these types of properties.) Here’s the standard rate charts for both Genworth and CMHC.

CMHC mortgage insurance premiums

Genworth's mortgage insurance rates

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Are you helping or hurting your client?

Are you helping or hurting your client?

Mortgage loans for clients with bruised credit happen every day – but the industry as a whole needs to ensure those loans are improving fiscal responsibility, and not sinking the client deeper in debt, says one alt lender.

“One of the things we try to say when talking to brokers is, ‘How are we helping the client in providing this funding?’” says Jason Provencher, the manager of business to business solutions with Bridgewater Bank. “We want to say, ‘Is this client likely to take the advice of the lender and the broker and correct this situation, or are they just trying to get money to buy a new truck?’”

It is a vital role that brokers can play in concert with lenders, Provencher told MBN, advising clients to improve their financial situation and find fiscal restraint, instead of falling prey to wanting everything right now.

“Provide the advice to the client, show them everything they need to do to correct the situation and how it will benefit them, and continue to follow up with them as part of the relationship,” he says. “It is important that these talks include future financial planning, because it isn’t just about how this money is going to help you today, but how is it going to set you up for success tomorrow.”

Provencher says that Bridgewater Bank sells the mortgage product with an eye to how it will help the client down the line, to move them into better things.

“Yes, we want to prevent bankruptcies and foreclosures; but what we hope we’re doing in the market is helping the client improve their situation,” he says.

As for the future of lending, Provencher sees a three-tier lending market where people with bruised credit may start in the private space, later moving to the alternative space, and eventually moving into the prime space.

“It is very competitive on the alt side,” he says, “and the rates really aren’t that bad – we’re talking four to five per cent for those with bruised credit or who may have been in bankruptcy before.”

Looking to the future, Provencher reflects on how much has changed since he applied for his own first mortgage.

Source: MortgageBrokerNews.ca by Donald Horne | 16 Jul 2015

Rate hike could leave mortgage holders stretched, survey finds

Many mortgage holders in Canada have very little financial cushion and could be in trouble if rates rose or they lost a job, according to a new survey.

About 15 per cent of respondents to a survey done for Manulife Bank of Canada said they would have difficulty making payments if their mortgage payments went up. That means they might face tightened circumstances if rates have risen by the next time they renegotiate their mortgage, a likely circumstance as most analysts believe interest rates will rise this year.

Nearly half said they couldn’t manage a 10 per cent increase in their mortgage payment.

“Having your payments go up 10 per cent sounds like a lot, but if you have a $200,000 mortgage and interest rates go up one per cent, that’s a 10 per cent increase in your mortgage payments,” said Manulife Bank CEO Rick Lunny said. “So there’s not much room here for those people.”

It is likely the Fed will raise rates by one quarter of a point only this fall and the Bank of Canada may not follow immediately, but mortgage rates also could be affected by movements in the bond markets.

Oliver Roundtable 20141127

As housing costs rise, Canadians find themselves with little wiggle room after they pay the mortgage. Losing a job or seeing rates rise could leave some people in trouble. (Darren Calabrese/Canadian Press)

Faced with loss of employment by the major breadwinner, most respondents to the survey said they had a very limited financial cushion.

About 16 per cent said they’d be in trouble within a month and a total of 43 per cent said they’d have difficulty within three months if someone in the household lost a job.

The online survey was done for Manulife by Research House between Feb. 10 and 27. The survey polled 2,372 Canadians in every province, all of them homeowners between the ages of 20 and 59 with a minimum household income of $50,000.

The rate of mortgage default in Canada is very low, but as housing costs rise, many observers have warned about the amount of debt Canadians have taken on.

Manulife found the average amount these homeowners had outstanding on a mortgage was $190,000.

Albertans were carrying the heaviest debt load — an average of $242,400 on the mortgage. That’s followed by $217,600 in British Columbia, $197,100 in Manitoba and Saskatchewan and $193,000 in Ontario.

But 78 per cent of respondents to a survey said paying down debt was a priority for their household and 40 per cent had either increased the amount they pay towards the mortgage or made a lump sum payment within the past year.

Source: CBC News Posted: Jun 16, 2015 12:49 PM ET