Mortgage rates: How low can they go in canada?

canadianbusiness

By Tim Shufelt

When the Bank of Montreal dropped its key mortgage rate below the 3% threshold in March, Paula Roberts started to get calls from her clients. They wanted to know if they should break their mortgages and refinance at BMO’s limited-time, bargain-basement 2.99% rate—the lowest rate ever officially offered by a Canadian bank for a five-year, fixed-rate mortgage. The sudden surge in interest baffled the Toronto mortgage broker. After all, these were clients who were already locked into mortgages with even lower rates and better terms than BMO’s. “All of our lenders were at lower than 2.99% at that point,” Roberts said.

It’s an open secret that Canadian homebuyers can secure mortgages on the cheap these days. BMO simply advertised the kind of lending practices that were already widespread. But stating the obvious got the bank plenty of attention—from media, from Canadian borrowers and from the federal government.

Finance Minister Jim Flaherty also picked up the phone, calling BMO to register his disapproval of the rate reduction. “My expectation is that banks will engage in prudent lending—not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.” He thanked the country’s other big banks for not following BMO’s lead. Manulife Bank apparently missed the subtext of that message, subsequently announcing a 2.89% mortgage offering. Flaherty blasted the promotion, calling it “unacceptable.”

After “consulting with the Department of Finance,” Manulife withdrew the offer the next day. BMO let its promotion expire at the end of March. Thus was restored the don’t-ask-don’t-tell practice of supplying discount mortgages without making too much of a fuss about it. “I bet if you went out today to any bank, if you have the right credit score and the down payment, you’d get a 2.89% mortgage,” says Peter Routledge, an analyst at National Bank Financial.

In reprimanding the financial sector, Flaherty again warned of risky household debt accumulation. But he also objected to the optics of the mortgage fire sale, adding: “It’s also symbolic.” In the midst of the effort to avert a housing crash and convince Canadians to stop borrowing, here were BMO and Manulife publicizing cut-rate housing debt with all the discretion of used-car salesmen. But you can hardly blame them. Fewer homes are being sold in Canada, reducing the demand for new mortgages. It’s simple economics: when demand falls, so do prices. To vie for the patronage of the dwindling ranks of borrowers, banks have to sweeten the terms of their mortgages.

Banks can afford to slash rates because money has never been cheaper in Canada. While the federal government appeals for restraint in debt accumulation, the Bank of Canada’s interest rate policy encourages just the opposite. And since policy rates aren’t likely to budge for at least another year, Flaherty is left to glower at banks from up on high while mortgage rates continue to drop. Just how low they go will be limited only by the banks’ profit margins and the government’s persuasiveness in discouraging loose borrowing and lending. “I really can’t see them going any lower. But I said that before,” Roberts says. “Who would have thought they would have gone this low?” There’s never been a better time to get a mortgage than right now. But there soon could be.

 

Having saved up enough money for a down payment while living with his parents in Toronto, Lucas Shearer decided to make his first foray into the real estate market in January. He quickly found the right place—a $344,000 condo in the Yonge and Eglinton neighbourhood—after qualifying for a 2.89% five-year fixed-rate mortgage. “At a higher rate, it definitely would not be as attractive,” he says. “I probably would have just stayed at home, saved more money and assessed it in a year from now.” Compared to the average discounted rate on five-year mortgages over the past five years, which according to ratehub.ca is about 4.25%, Shearer will have saved about $18,000 in interest and owe $6,000 less by the time his mortgage expires. Compared to the 6% peak five-year rate over the past five years, Shearer will save more than $50,000.

While Shearer wasn’t compelled to buy real estate by low mortgage rates alone, they were an added incentive that made the market more attractive to him. This runs counter to the government’s deliberate attempt to contain housing activity. Bank of Canada governor Mark Carney warned of a “brutal reckoning” when rates eventually climb and expose the finances of many households as unsustainable. There are those homeowners who can afford a $700,000 home today, but could only afford a $500,000 home at 6.5%, which is where rates could conceivably sit in five years when new mortgages expire, says John Andrew, a real estate professor at Queen’s University.

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Multi-billion mortgage deal favors banks, critics claim

After a four-year effort to save her home, Courtney Scott feels like she’s running out of options.

“When I got started (in 2008) there was HAMP, there was HARP and there were FHA options,” she said. “So now, I’m in limbo. How could I not be eligible to for any of these doggone programs they’ve set up?” 

Two weeks ago, she filled out a form under a federally mandated foreclosure review process set up after widespread mortgage abuses came to light in 2010. On Monday, that program was cancelled as part of an $8.5 billion settlement between federal regulators and 10 banks. 

Separately, Bank of America agreed on Monday to pay more than $10 billion to Fannie Mae to settle claims over mortgages that soured during the crash, mostly loans issued by Countrywide Financial, now a BofA subsidiary. 

Five years after the housing bubble burst, roughly a million other U.S. homeowners trying to save their homes from foreclosure are stuck in the same limbo as Scott.

With the latest multi-billion-dollar settlements, the nation’s mortgage lenders are hoping to put the mortgage mess behind them. But critics of the deal fear it may also leave behind millions of foreclosed homeowners who got little or no relief from the lenders that helped create the mortgage mess in the first place. 

"I have serious concerns that this settlement may allow banks to skirt what they owe and sweep past abuses under the rug without determining the full harm borrowers have suffered," said Rep. Elijah E. Cummings, D.- Md., a member of the House Committee on Oversight and Government Reform and a vocal critical of the government regulators handling of the mortgage crisis.

Monday’s settlement brings to an end the government’s two-year case-by-case foreclosure review to identify victims of industry-wide mistakes and abuses.

Under the agreement, JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and six other mortgage lenders will provide $5.2 billion in mortgage assistance and $3.3 billion in direct payments to wronged borrowers, according bank regulators. The other six include Aurora, MetLife Bank, PNC, Sovereign, SunTrust, and U.S. Bank. Four other banks — HSBC, Ally, EverBank and One West — are still in talks, said officials at the Office of the Controller of the Currency, which announced the settlement.

OCC officials said consumers will be better served under the deal because claims will now be paid more quickly. The program had proved so costly - more than $1.5 billion has been spent on individual reviews - that it was diverting funds that could have been used to pay claims, they said.

“When we began the Independent Foreclosure Review, the OCC pledged to fix what was broken, identify who was harmed, and compensate them for that injury,” Comptroller of the Currency Thomas Curry said in a statement. “While today’s announcement represents a significant change in direction, it meets those original objectives by ensuring that consumers are the ones who will benefit, and that they will benefit more quickly and in a more direct manner.”

OCC officials maintain that the amount set aside will be adequate to compensate homeowners who suffered a financial loss from one of the bank’s mistakes.

Courtney Scott has been fighting her mortgage battle for four years. She feels like she’s running out of options.

But critics of the process argue that, despite the high cost of the review program, the process wasn’t thorough enough to assess accurately whether a home had been wrongly seized.

“The only information that the reviewers were using to determine whether someone had been the victim of wrongdoing was the servicers’ files,” said Helene Raynaud, a senior official at the National Foundation for Credit Counseling, whose members advise homeowners facing foreclosure. “They did not systematically contact the counseling agencies or whoever else these homeowners may (have been) talking to. If the information was incomplete, how would they know?”

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Breakingviews: Canada's loony house prices

How some cities avoided the foreclosure crisis

By Michael B. Sauter

President Obama recently announced he would extend the nation’s mortgage refinancing program in an effort to provide relief to homeowners whose mortgages are worth more than the value of their homes. With 11 million underwater households no one can claim the housing crisis over. However, some regions have survived the crisis better than others. In those areas, home values are either stable or rising, and unemployment is below the national average.

24/7 Wall St. has identified the markets with the least underwater homes. When the housing bubble was in full swing in the beginning of the 2000s, millions of Americans bought new homes at historic high prices. Based on the belief that property values continue to rise, it seemed a good strategy. However, when the housing bubble finally burst and the recession began, home values declined sharply, unemployment skyrocketed, and homeowners could no longer make their mortgage payments.

24/7 Wall St.: American cities sunk by underwater mortgages 

Strong employment and housing markets went hand in hand. Regions that added jobs also had sizzling housing markets. Of course, the housing boom in these areas contributed to further job growth. In places like Las Vegas, which saw major job growth during the the boom, home prices increased by 36 percent during the first half of the decade. When the market collapsed, these regions were hurt the most. The extension of the Home Affordable Modification Program, which is considered a failure by many economists, may provide a shot in the arm to such markets.

It appears the only places that managed to survive this crisis were those that were suffering economically at the time when people were building and buying new homes. These cities, which include Rochester, Buffalo, and Pittsburgh, were in many cases former industrial powerhouses that have been steadily losing jobs for the past 40 years. In these regions, home values remained stable during the crisis and relatively few risky mortgages were taken out on new homes.

Now, these regions, which did not benefit from the nation’s housing boom, are doing better than most. Because fewer homes were built in the last decade and these cities are now adding jobs, prices have remained stable and even increased. More >

El Rescate Hipotecario de Obama

Multi-Billion Dollar Mortgage Settlement

The Obama administration is seeking to broker a deal that would have the nation's largest mortgage lenders agree to pay as much as $30 billion in fines to settle state and federal claims that they abused borrowers and illegally foreclosed on homes, according to state and federal officials engaged in the talks.

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