Paul Vieira, Financial Post
Ottawa -- Bank of Canada governor Mark Carney has had a busy time of it since taking over as the country's central banker 27 months ago, mostly tackling the financial crisis, mapping out the road to recovery and reassuring Canadians that at the end of the day the bank's extraordinary policies would work.
The one thing he has yet to do during his term, however, is raise interest rates. That might be about to change on Tuesday. If he does pull the trigger - and that is what most analysts expect - it won't be after grappling with competing forces that convey two starkly different messages about the economic outlook.
"We are at point where it is a tug of war between structural issues that are facing the eurozone and a very strong economic cyclical backdrop," says Stéfane Marion, chief economist at National Bank Financial.
Weighing on the governor are the economic data, which call out for a rate hike - as much as 50 basis points, some reckon. The data have been consistently strong and surprising to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank's preferred 2% target. The sterling fundamentals prompted the central bank last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July, leading traders to price in a nearly 100% chance of a rate hike on June 1.
That was until sovereign debt worries exploded in Europe, once Greece formally asked for international help days after the last Bank of Canada rate decision. That sparked an across-the-board retreat in global equity markets, down 9.3% since the beginning of May, as traders sold stocks and poured into risk-averse U.S. treasuries and other government securities on fears that another credit crunch was at hand. Mr. Carney is likely aware of this better than most, given his capital markets background from Goldman Sachs.
The most worrying sign on Mr. Carney's radar screen might be the small but steady increases in the cost of borrowing among banks, a signal European lenders are finding it tough to access cash from their peers on concern over how much Greek, Portuguese and Spanish debt they hold.
In the end, the consensus is Mr. Carney is leaning toward a rate hike - a modest one, though, of 25 basis points. The thinking is, an ounce of prevention now is worth a pound of cure later. "We can't look at things in a vacuum, because there are so many other factors besides Europe's issues" says Jonathan Basile, an economist with Credit Suisse in New York who closely watches Canadian markets. "The truth is the macroeconomic evidence is outweighing the financial risks right now."
The last time the Bank of Canada raised its benchmark rate was in July 2007, by 25 basis points to 4.5%. At the time, former governor David Dodge said the economy was operating above its production potential, and inflation was likely to stay above its 2% inflation target for longer than forecast.
Little did Mr. Dodge know that the U.S. subprime crisis would morph into the worst financial crisis since the Great Depression, roiling markets and economies around the world. This is why Europe's recent fiscal woes have triggered a case of nerves, and might prompt Mr. Carney to rethink any rate move.
"The Bank of Canada wants to raise rates, but it doesn't have a crystal ball," CIBC World Markets said in a note to clients. "It can't be certain that the recent financial market downturn isn't going to morph into something more severe that would make a rate hike look out of place."
There's another school of thought, though, that suggests markets have overreacted to a regional problem. In this context, it is key to remember the Bank of Canada didn't expect the eurozone to contribute much to global growth, envisaging only 1.2% expansion this year and 1.6% in 2011.
"The European picture will calm down and people will realize it is not as dramatic as being played out," says Carlos Leitao, chief economist at Laurentian Bank Securities.
Yes, he acknowledges, the debt-ridden southern European economies have tough years ahead. But other countries, led by Germany and France, are going to capitalize on the lower euro and boost their exports to emerging economies and North America, which will help offset the drag from the so-called Club Med nations.
Besides Europe, Mr. Carney has other factors to consider.
Canada's sovereign debt levels are indeed much better than the industrialized world, as our politicians like to remind us. But the amount of debt held by households, measured as a percentage of disposable income, stood at a historical high of 146% - of which 98% is mortgage related - at the end of 2009, rating agency DBRS estimates. That would put Canadian households ahead of the United States but behind Britain on this measure. A rate hike would signal it might be time to live more modestly and refrain from too much debt-financed consumption (which helped fuel those nasty asset bubbles that central banks may want to pay more attention to in the aftermath of the subprime debacle).
Mr. Carney's other challenge is to explain why, and what's ahead. He has come off a period where he provided extraordinary guidance to markets. Don't expect similar language from the governor. If anything, Mr. Marion warns the central bank should refrain from using the type of guidance the U.S. Federal Reserve deployed in 2004, when it signalled a period of "moderate" rate hikes were in the offing. In retrospect, the Fed's use of the word moderate "encouraged more financial excesses," leading to the subprime bust, Mr. Marion says. "Carney doesn't have to be brusque about it. He has the luxury to start slowly, and leave his options open," from pausing should Europe deteriorate to hiking aggressively, by 50 basis points, if conditions warrant. Mr. Carney reminded us recently that "nothing is pre-ordained" at the Bank of Canada. He's likely to drive home that point on Tuesday, rate hike or not.
Monday, May 31, 2010
Friday, May 28, 2010
Home foreclosures don't add up
Why do people default on mortgage and other loans? It turns out that it's not so much the amounts they owe, but that they are unable to do the math that tells them exactly what their financial situation looks like. Lack of ability to add turns out to be a cause of many consumer insolvencies.
The damage caused by failure to do sums becomes evident when people find themselves in credit counselling.
"The common characteristic of people in serious debt is that they don't know how to budget or track expenses," says Sandra Sherk, executive director of the Credit Counselling Service of Ontario's Durham Region. "They let what they owe and incidentals get ahead of them."
The problem is not limited to Canada.
In a Federal Reserve Bank of Atlanta working paper published in April 2010, economists Kristopher Gerardi, Lorenz Goette and Stephan Meier found, "a large and statistically significant negative correlation between financial literacy and measures of mortgage delinquency and default."
Translation – folks who can't add up their obligations are more likely to default on them than those who can do their sums.
The researchers asked a series of questions to test responders' financial fluency.
For example: "a second hand car dealer is selling a car for $6,000. This is two-thirds of what it cost new. How much did the car cost new?"
Gerardi and his Fed colleagues connect lack of financial fluency to the U.S. mortgage meltdown. Their argument – soaring house and condo prices in 2004 to 2008 led some people to think that finance cost did not matter and therefore did not need to be tracked or even understood. All that followed is history, but as Gerardi noted, low levels of saving are correlated with inability to do simple calculations. When income, which is correlated with education, is statistically removed from the analysis, the conclusion remains – if you can't add up what you owe, you can be in big trouble. And that's how innumeracy, the lack of ability to cope with numbers, became one of the causes of the mortgage meltdown.
What happened to arithmetic? In many schools, the three Rs – readin', ‘writin' and ‘rithmetic – have had to make way for the teaching of social skills and community values. According to Statistics Canada, high school dropout rates, 12.2% for young men and 7.2% for young women in 2004-2005, have declined from the level in 1990-1991 when the rates were 19.2% and 14.0%, respectively. The dramatic improvement in school retention rate reflects students' awareness that education is the ticket to employment and a good income. It also reflects grading standards that allow those with poor academic skills to advance rather than be stigmatized by flunking out. The consequence of this shows up when graduates can't handle questions such as another asked in the Atlanta Fed survey:
In a sale, a shop is selling all items at half price. Before the sale, a sofa cost $300. How much will it cost in the sale?"
Lack of basic arithmetic skill compounds a serious and growing problem. The days of a farmer or shopkeeper with one debt to one bank are long gone. As Brock Cordes, a lecturer in marketing at the Asper School of Business at the University of Manitoba notes, "people are baffled by the many credit obligations they may have. A few decades ago, a person might have one credit card and one mortgage. Today, he may have seven credit cards, a few lines of credit, and a mortgage. There are different payment options. And there is ever more fine print on credit card disclosures and other documents. People have lost the ability to add. They let little calculators do it for them. It is no wonder that innumeracy is a problem."
Inability to add shows up in Canadian bankruptcy data. Bill Courage, a Chartered Insolvency Restructuring Professional in the Owen Sound, Ont., office of BDO Canada LLP says, "lack of numeracy is a contributing factor in personal bankruptcy. People don't keep track of what they are doing. ‘No money down and $27.95 per month starting next year, is something that they can understand, but they don't use their common sense. Many people just don't add up what they owe."
This casual attitude toward debt shows up when snowballing debts become an avalanche of obligations. "People who get into credit trouble don't watch the cost of loans They go from 5% on a mortgage to 15% to 19% on standard credit cards like Visa, then they load up on credit on store plastic that may have 28% interest rates, then borrow from payday loan stores at rates that may work out to 58% per year," Ms. Sherk explains. These rates, to which they agree, trap them in debt forever, she explains. "If you owe $3,000 on a major credit card and you pay $60 per month, which is a minimum, and the interest rate is 17%, it will take 7 years and 4 months to pay if off."
What to do? "We prepare people for budgeting, even if we turn them down for a loan," says Laura Parsons, area manager for specialized sales at the BMO Financial Group in Calgary. "It is not so much that people don't know that they should sharpen their pencils, it's not knowing what to do with them."
The damage caused by failure to do sums becomes evident when people find themselves in credit counselling.
"The common characteristic of people in serious debt is that they don't know how to budget or track expenses," says Sandra Sherk, executive director of the Credit Counselling Service of Ontario's Durham Region. "They let what they owe and incidentals get ahead of them."
The problem is not limited to Canada.
In a Federal Reserve Bank of Atlanta working paper published in April 2010, economists Kristopher Gerardi, Lorenz Goette and Stephan Meier found, "a large and statistically significant negative correlation between financial literacy and measures of mortgage delinquency and default."
Translation – folks who can't add up their obligations are more likely to default on them than those who can do their sums.
The researchers asked a series of questions to test responders' financial fluency.
For example: "a second hand car dealer is selling a car for $6,000. This is two-thirds of what it cost new. How much did the car cost new?"
Gerardi and his Fed colleagues connect lack of financial fluency to the U.S. mortgage meltdown. Their argument – soaring house and condo prices in 2004 to 2008 led some people to think that finance cost did not matter and therefore did not need to be tracked or even understood. All that followed is history, but as Gerardi noted, low levels of saving are correlated with inability to do simple calculations. When income, which is correlated with education, is statistically removed from the analysis, the conclusion remains – if you can't add up what you owe, you can be in big trouble. And that's how innumeracy, the lack of ability to cope with numbers, became one of the causes of the mortgage meltdown.
What happened to arithmetic? In many schools, the three Rs – readin', ‘writin' and ‘rithmetic – have had to make way for the teaching of social skills and community values. According to Statistics Canada, high school dropout rates, 12.2% for young men and 7.2% for young women in 2004-2005, have declined from the level in 1990-1991 when the rates were 19.2% and 14.0%, respectively. The dramatic improvement in school retention rate reflects students' awareness that education is the ticket to employment and a good income. It also reflects grading standards that allow those with poor academic skills to advance rather than be stigmatized by flunking out. The consequence of this shows up when graduates can't handle questions such as another asked in the Atlanta Fed survey:
In a sale, a shop is selling all items at half price. Before the sale, a sofa cost $300. How much will it cost in the sale?"
Lack of basic arithmetic skill compounds a serious and growing problem. The days of a farmer or shopkeeper with one debt to one bank are long gone. As Brock Cordes, a lecturer in marketing at the Asper School of Business at the University of Manitoba notes, "people are baffled by the many credit obligations they may have. A few decades ago, a person might have one credit card and one mortgage. Today, he may have seven credit cards, a few lines of credit, and a mortgage. There are different payment options. And there is ever more fine print on credit card disclosures and other documents. People have lost the ability to add. They let little calculators do it for them. It is no wonder that innumeracy is a problem."
Inability to add shows up in Canadian bankruptcy data. Bill Courage, a Chartered Insolvency Restructuring Professional in the Owen Sound, Ont., office of BDO Canada LLP says, "lack of numeracy is a contributing factor in personal bankruptcy. People don't keep track of what they are doing. ‘No money down and $27.95 per month starting next year, is something that they can understand, but they don't use their common sense. Many people just don't add up what they owe."
This casual attitude toward debt shows up when snowballing debts become an avalanche of obligations. "People who get into credit trouble don't watch the cost of loans They go from 5% on a mortgage to 15% to 19% on standard credit cards like Visa, then they load up on credit on store plastic that may have 28% interest rates, then borrow from payday loan stores at rates that may work out to 58% per year," Ms. Sherk explains. These rates, to which they agree, trap them in debt forever, she explains. "If you owe $3,000 on a major credit card and you pay $60 per month, which is a minimum, and the interest rate is 17%, it will take 7 years and 4 months to pay if off."
What to do? "We prepare people for budgeting, even if we turn them down for a loan," says Laura Parsons, area manager for specialized sales at the BMO Financial Group in Calgary. "It is not so much that people don't know that they should sharpen their pencils, it's not knowing what to do with them."
Tuesday, May 25, 2010
New rules cuff some mortgages to banks
Garry Marr, Financial Post
A headlock would be the wrestling term to describe the hold Canadian banks will have on some consumers because of new, more strict mortgage rules.
We are already seeing the impact of the changes that came into effect on April 19, but were put in place well in advance by Canadian financial institutions. Consumers are increasingly selecting fixed-rate mortgages of five years or more because it's easier to qualify for them.
On mortgages for terms of four years or less, including variable-rate mortgages, consumers must be able to pay based on the five-year fixed posted rate, which is now 6.1%. Go longer and you can use the rate on your contract, as low as 4.6%. No more than 32% of your gross income can cover principal and interest, property taxes and heat.
Peter Vukanovich, president of Genworth Financial Canada, the largest private provider of mortgage-default insurance, says only 5% of new high-ratio mortgages are going variable versus 15% just six months ago.
But there is another wrinkle to the new rules: Anybody shopping around for a better rate has to requalify based on their current credit situation. Stay with the same bank and there's no check.
"It's definitely a headlock and not a loophole because a loophole you can get out of," says Vince Gaetano, a mortgage broker with Monster Mortgage.
There is a large percentage of Canadians who get a renewal notice from their bank and just sign on the dotted line. The Canadian Association of Accredited Mortgage Professional has found only 22% of Canadians switch banks at renewal time. A significant portion of the remaining 78% are sheep being led around by their financial institutions.
Those looking for some choice may find what was good enough to get into the market a month ago may not meet the test today.
Consider that as recently as two years ago, consumers were able to buy a house with no money down and a 40-year amortization schedule. If that consumer was making regular monthly payments, they would have paid down only 4.7% of their principal after five years. Today, that customer would still be high ratio and subject to requalifying if they switched banks.
"It's not all of them, but a majority of first-time buyers with just 5% down or less won't be able to qualify if they go to another bank," Mr. Gaetano says. Many of those buyers were qualifying based on the three-year rate - about 200 basis points lower than the current qualification rate.
If house prices went down, something many in the real estate community have suggested could happen, that would be an even bigger blow for consumers. It would mean an even larger percentage of homeowners would still be considered high ratio upon renewal because they wouldn't meet the test of having 20% equity in their home.
Marcel Beaudry, vice-president of ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks, but noted anyone who had a 40-year amortization and changed institutions also had to requalify and there hasn't been a huge impact.
"There will be a segment of the population tied down by the new rules to their bank," Mr. Beaudry says.
That's a position nobody should be in.
A headlock would be the wrestling term to describe the hold Canadian banks will have on some consumers because of new, more strict mortgage rules.
We are already seeing the impact of the changes that came into effect on April 19, but were put in place well in advance by Canadian financial institutions. Consumers are increasingly selecting fixed-rate mortgages of five years or more because it's easier to qualify for them.
On mortgages for terms of four years or less, including variable-rate mortgages, consumers must be able to pay based on the five-year fixed posted rate, which is now 6.1%. Go longer and you can use the rate on your contract, as low as 4.6%. No more than 32% of your gross income can cover principal and interest, property taxes and heat.
Peter Vukanovich, president of Genworth Financial Canada, the largest private provider of mortgage-default insurance, says only 5% of new high-ratio mortgages are going variable versus 15% just six months ago.
But there is another wrinkle to the new rules: Anybody shopping around for a better rate has to requalify based on their current credit situation. Stay with the same bank and there's no check.
"It's definitely a headlock and not a loophole because a loophole you can get out of," says Vince Gaetano, a mortgage broker with Monster Mortgage.
There is a large percentage of Canadians who get a renewal notice from their bank and just sign on the dotted line. The Canadian Association of Accredited Mortgage Professional has found only 22% of Canadians switch banks at renewal time. A significant portion of the remaining 78% are sheep being led around by their financial institutions.
Those looking for some choice may find what was good enough to get into the market a month ago may not meet the test today.
Consider that as recently as two years ago, consumers were able to buy a house with no money down and a 40-year amortization schedule. If that consumer was making regular monthly payments, they would have paid down only 4.7% of their principal after five years. Today, that customer would still be high ratio and subject to requalifying if they switched banks.
"It's not all of them, but a majority of first-time buyers with just 5% down or less won't be able to qualify if they go to another bank," Mr. Gaetano says. Many of those buyers were qualifying based on the three-year rate - about 200 basis points lower than the current qualification rate.
If house prices went down, something many in the real estate community have suggested could happen, that would be an even bigger blow for consumers. It would mean an even larger percentage of homeowners would still be considered high ratio upon renewal because they wouldn't meet the test of having 20% equity in their home.
Marcel Beaudry, vice-president of ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks, but noted anyone who had a 40-year amortization and changed institutions also had to requalify and there hasn't been a huge impact.
"There will be a segment of the population tied down by the new rules to their bank," Mr. Beaudry says.
That's a position nobody should be in.
Friday, May 21, 2010
DAY OF DECLINE
John Greenwood, Financial Post
In a worrying replay of the crisis of 2008 and 2009, lending rates in Canadian credit markets continued to react to the growing turmoil over European debt, with key overnight bank lending spreads doubling since February.
"We are starting to see interbank lending rates back up again and that's an unfortunate development," said Doug Porter, deputy chief economist at BMO Capital Markets. "We are starting to see investors shun any kind of risky trade again, whether corporate bonds or equities. We are seeing risk aversion right across the board."
While Canada has only modest direct exposure to troubled European countries, like other major economies it is feeling the indirect impact of turmoil in global financial markets sparked by fears of a possible sovereign default.
The early days of the crisis that climaxed early last year were characterized by a steady retreat by lenders from any kind of risk, reflected in steadily rising rates that banks charged each other for short-term loans, which eventually moved so high that interbank lending was effectively halted.
Conditions in Canadian credit markets are still nowhere near where they were in March 2009 at the height of the storm but the widening of spreads in just about every sector is a worrying "echo of what happened," Mr. Porter said.
The comments come after German Chancellor Angela Merkel slapped a ban on the short-selling of certain kinds of stocks and bonds, that sparked anger among other European leaders and sent equity markets into a tailspin as investors concluded the European bailout was unravelling.
The closely watched London Interbank Offered Rate climbed to the highest level in 10 months earlier this week as international banks hoarded money and investors grew more leery of risk.
Meanwhile, a U.S. Federal Reserve governor yesterday warned that the European troubles could spark another financial crisis, with credit markets freezing up around the world all over again.
"The European sovereign-debt problems are a potentially serious setback," Daniel Tarullo said in testimony before congressional subcommittees.
But Mr. Porter said the markets have now moved beyond that and are now focused on the possibility of "a deeper global slowdown" that would result if the European issues are not contained.
As a major global economy roughly the size of the United States, Europe is a key driver of global growth and if European demand starts to fall, as is already happening, the rest of the world will feel it.
As a major global economy roughly the size of the United States, Europe is a key driver of global growth.
If European demand starts to fall, as is already happening, the rest of the world will feel it.
That includes regions such as Canada and China that have so far avoided serious recessions.
Indeed, Canada emerged largely unscathed from both the crisis and the economic downturn that followed partially because Canadian governments did a better job of handling their finances than most other countries.
But one reason for the widening of credit spreads on Canadian government debt may be that investors are starting to take a second look at the quality of that debt.
In a report titled Is Canada Really So Pristine on the Debt Front, Mark Chandler, a fixed-income strategist with RBC Dominion Securities Inc., notes that Canada is average with other major countries in terms of the size of its debt, about 83% of gross domestic product, sandwiched between Britain (78%) and the United States (93%).
As a result of being downgraded by most of the rating agencies about 15 years ago, Canada lost its appeal to many foreign investors and little Canadian debt is now held by foreign institutions, which is a good thing when credit markets are roiled.
However, Canada still faces the worry that holders of its debt may not be willing to renew, known as "roll-over risk," and once again we are about at "the middle of the pack" internationally, Mr. Chandler says in the report released yesterday.
In a worrying replay of the crisis of 2008 and 2009, lending rates in Canadian credit markets continued to react to the growing turmoil over European debt, with key overnight bank lending spreads doubling since February.
"We are starting to see interbank lending rates back up again and that's an unfortunate development," said Doug Porter, deputy chief economist at BMO Capital Markets. "We are starting to see investors shun any kind of risky trade again, whether corporate bonds or equities. We are seeing risk aversion right across the board."
While Canada has only modest direct exposure to troubled European countries, like other major economies it is feeling the indirect impact of turmoil in global financial markets sparked by fears of a possible sovereign default.
The early days of the crisis that climaxed early last year were characterized by a steady retreat by lenders from any kind of risk, reflected in steadily rising rates that banks charged each other for short-term loans, which eventually moved so high that interbank lending was effectively halted.
Conditions in Canadian credit markets are still nowhere near where they were in March 2009 at the height of the storm but the widening of spreads in just about every sector is a worrying "echo of what happened," Mr. Porter said.
The comments come after German Chancellor Angela Merkel slapped a ban on the short-selling of certain kinds of stocks and bonds, that sparked anger among other European leaders and sent equity markets into a tailspin as investors concluded the European bailout was unravelling.
The closely watched London Interbank Offered Rate climbed to the highest level in 10 months earlier this week as international banks hoarded money and investors grew more leery of risk.
Meanwhile, a U.S. Federal Reserve governor yesterday warned that the European troubles could spark another financial crisis, with credit markets freezing up around the world all over again.
"The European sovereign-debt problems are a potentially serious setback," Daniel Tarullo said in testimony before congressional subcommittees.
But Mr. Porter said the markets have now moved beyond that and are now focused on the possibility of "a deeper global slowdown" that would result if the European issues are not contained.
As a major global economy roughly the size of the United States, Europe is a key driver of global growth and if European demand starts to fall, as is already happening, the rest of the world will feel it.
As a major global economy roughly the size of the United States, Europe is a key driver of global growth.
If European demand starts to fall, as is already happening, the rest of the world will feel it.
That includes regions such as Canada and China that have so far avoided serious recessions.
Indeed, Canada emerged largely unscathed from both the crisis and the economic downturn that followed partially because Canadian governments did a better job of handling their finances than most other countries.
But one reason for the widening of credit spreads on Canadian government debt may be that investors are starting to take a second look at the quality of that debt.
In a report titled Is Canada Really So Pristine on the Debt Front, Mark Chandler, a fixed-income strategist with RBC Dominion Securities Inc., notes that Canada is average with other major countries in terms of the size of its debt, about 83% of gross domestic product, sandwiched between Britain (78%) and the United States (93%).
As a result of being downgraded by most of the rating agencies about 15 years ago, Canada lost its appeal to many foreign investors and little Canadian debt is now held by foreign institutions, which is a good thing when credit markets are roiled.
However, Canada still faces the worry that holders of its debt may not be willing to renew, known as "roll-over risk," and once again we are about at "the middle of the pack" internationally, Mr. Chandler says in the report released yesterday.
Thursday, May 20, 2010
Friday's inflation rate expected to open door to interest rate hikes: economists
By Julian Beltrame, The Canadian Press
OTTAWA - Canadians likely have only two weeks left to enjoy historically low interest rates.
With global markets beginning to stabilize following the recent fears over a Greek debt default, economists say the pieces are falling into place for the Bank of Canada to move off its emergency 0.25 per cent rate on June 1.
Economists — and markets — have already pencilled in a doubling of the policy rate in two weeks. But that is only a beginning say analysts who believe governor Mark Carney will keep on hiking rates through the rest of the year.
Even the TD Bank, which only a few months ago was advising Carney to wait until at least the third quarter of 2010, is now calling for an incremental hike beginning in June.
The reason, says the bank's director of forecasting Beata Caranci, is that the Canadian economic recovery is well ahead of schedule with what looks like two consecutive quarters of five per cent and beyond growth, a jobs recovery more robust than predicted with another 109,000 added in April, and inflation — the key indicator for the central bank — heading toward two per cent.
"The bank is looking a year or year-and-a-half out, and they are looking at an output gap that is not going to be there anymore, so they've got to start adjusting now to get the interest rate at what would be considered more neutral," she explained.
"And if they don't go now, it could mean we see bigger adjustments down the road," she added.
Higher rates are meant to slow down excessive borrowing and head off asset bubbles like an overheated housing market, which the central bank has already highlighted as a risk. Cheap money is also seen as destabilizing in the long term, much as happened in the United States in the early part of the decade and eventually led to the most recent crisis.
Economists caution that the anticipated hikes by the central bank should not be seen as an attempt to slow down activity, but merely as moving to a more traditional posture. With inflation at near two per cent, the current 0.25 per cent level is actually a negative interest rate, they note.
The TD Bank and many others believe Canada's policy rate will hit 1.5 per cent by year's end, more in line with inflation.
Carney gave a strong hint last month that he was preparing to move, surprising observers by dropping his year-long conditional pledge not to hike rates until at least July.
He has since added an element of doubt into expectations by noting that he considered the very act of removing the conditional commitment to have been a policy tightening measure. The rate-hiking narrative took another detour earlier this month with the recent turmoil in equity and financial markets over government debt issues in southern Europe — that added new uncertainty to the global recovery scenario.
But unless Europe again flares up in a major way, the only question remaining for Carney will likely be answered Friday with the release of April inflation data by Statistics Canada, say economists.
The consensus is that headline inflation will rise to 1.6 per cent and core underlying inflation — the index the central bank closely watches — will edge up to 1.8 per cent.
Those numbers are still below the bank's two per cent target but economists say they are worried because inflation is digging in at a time when the economy is still operating far below capacity, and at a time when the Canadian dollar is near parity.
That is not the case in the U.S., where inflation is actually heading south and could once again approach zero by year's end.
"Even with the current volatility in financial markets, the Canadian story remains intact as underlying fundamentals continue to improve alongside strong corporate and household balance sheets," write Scotiabank economists Derek Holt and Karen Cordes Woods in forecasting an interest rate hike.
Bank of Montreal economist Douglas Porter says there is still a chance Carney will wait until July 20, or even later, especially if the European crisis threatens to leak into North American credit markets, or if there's a big downward surprise in underlying inflation Friday.
Increasing rates in Canada, especially since the U.S. is likely to keep its policy rate at zero until 2011, will put added upward pressure on the Canadian dollar, which will further depress the country's manufacturing and exporting sectors.
But Caranci believes the dollar impact will be minor, because markets have already priced in several moves by Carney ahead of the U.S. And the loonie's recent dip below parity to about 96 cents US has partly removed an important impediment to act on rates for the Bank of Canada, she adds.
OTTAWA - Canadians likely have only two weeks left to enjoy historically low interest rates.
With global markets beginning to stabilize following the recent fears over a Greek debt default, economists say the pieces are falling into place for the Bank of Canada to move off its emergency 0.25 per cent rate on June 1.
Economists — and markets — have already pencilled in a doubling of the policy rate in two weeks. But that is only a beginning say analysts who believe governor Mark Carney will keep on hiking rates through the rest of the year.
Even the TD Bank, which only a few months ago was advising Carney to wait until at least the third quarter of 2010, is now calling for an incremental hike beginning in June.
The reason, says the bank's director of forecasting Beata Caranci, is that the Canadian economic recovery is well ahead of schedule with what looks like two consecutive quarters of five per cent and beyond growth, a jobs recovery more robust than predicted with another 109,000 added in April, and inflation — the key indicator for the central bank — heading toward two per cent.
"The bank is looking a year or year-and-a-half out, and they are looking at an output gap that is not going to be there anymore, so they've got to start adjusting now to get the interest rate at what would be considered more neutral," she explained.
"And if they don't go now, it could mean we see bigger adjustments down the road," she added.
Higher rates are meant to slow down excessive borrowing and head off asset bubbles like an overheated housing market, which the central bank has already highlighted as a risk. Cheap money is also seen as destabilizing in the long term, much as happened in the United States in the early part of the decade and eventually led to the most recent crisis.
Economists caution that the anticipated hikes by the central bank should not be seen as an attempt to slow down activity, but merely as moving to a more traditional posture. With inflation at near two per cent, the current 0.25 per cent level is actually a negative interest rate, they note.
The TD Bank and many others believe Canada's policy rate will hit 1.5 per cent by year's end, more in line with inflation.
Carney gave a strong hint last month that he was preparing to move, surprising observers by dropping his year-long conditional pledge not to hike rates until at least July.
He has since added an element of doubt into expectations by noting that he considered the very act of removing the conditional commitment to have been a policy tightening measure. The rate-hiking narrative took another detour earlier this month with the recent turmoil in equity and financial markets over government debt issues in southern Europe — that added new uncertainty to the global recovery scenario.
But unless Europe again flares up in a major way, the only question remaining for Carney will likely be answered Friday with the release of April inflation data by Statistics Canada, say economists.
The consensus is that headline inflation will rise to 1.6 per cent and core underlying inflation — the index the central bank closely watches — will edge up to 1.8 per cent.
Those numbers are still below the bank's two per cent target but economists say they are worried because inflation is digging in at a time when the economy is still operating far below capacity, and at a time when the Canadian dollar is near parity.
That is not the case in the U.S., where inflation is actually heading south and could once again approach zero by year's end.
"Even with the current volatility in financial markets, the Canadian story remains intact as underlying fundamentals continue to improve alongside strong corporate and household balance sheets," write Scotiabank economists Derek Holt and Karen Cordes Woods in forecasting an interest rate hike.
Bank of Montreal economist Douglas Porter says there is still a chance Carney will wait until July 20, or even later, especially if the European crisis threatens to leak into North American credit markets, or if there's a big downward surprise in underlying inflation Friday.
Increasing rates in Canada, especially since the U.S. is likely to keep its policy rate at zero until 2011, will put added upward pressure on the Canadian dollar, which will further depress the country's manufacturing and exporting sectors.
But Caranci believes the dollar impact will be minor, because markets have already priced in several moves by Carney ahead of the U.S. And the loonie's recent dip below parity to about 96 cents US has partly removed an important impediment to act on rates for the Bank of Canada, she adds.
Tuesday, May 18, 2010
Mortgage Rates – Is It Time To Gird Our Loins?
by Andrew Pyle, for Yahoo! Canada Finance
Now that Europe appears to have bought itself some time from those vicious currency and bond speculators (and what a price tag, at a cool trillion dollars), individuals are also feeling a little more relieved about their finances. And they are indeed quite eager to put May behind them. Where investors were lulled into a sense of false security during April, as equity volatility fell to the lowest level since July 2007 (as measured by the VIX index), the spike in volatility this month knocked people off their chairs. True, the high in the VIX last week of just above 40 was still only 50% of the peak seen in November 2008; however, it has served as a wake-up call that there are as many risks out there as rewards.
For now, though, let’s assume there are no further shocks to the system for the coming weeks and that volatility subsides. The focus for individuals and households should then return to their own fundamentals. What does the job and income situation look like? Are financial plans still intact? And what about that mortgage coming due next month?
Ah, the dreaded mortgage decision. Despite the signs of an impending rise in the general level of interest rates and warnings from government officials, I find that there is still a lack of conviction among Canadians as to whether they should lock in their mortgages at prevailing rates, versus holding on to a floating rate mortgage. It’s therefore a good time to review the facts and fiction out there so that you can make a better educated decision.
Regardless of the recent jump in rates, we still look to be in the middle of a downward trend in mortgage rates since 1981. You may remember that year, when five-year term rates were in excess of 22% in Canada. It came at the same time that North America fell victim to a painful double-dip recession. Of course, inflation was also sitting around 12% at the time. Many families lost their homes to be sure, but the threat posed by higher rates today is greater because of the fact that debt levels are much higher today than back then. The increased leverage in the housing sector, to say nothing of general credit among individuals, increases the sensitivity to rates – something we saw so very clearly in the US housing sector from 2003 to 2006.
Today, floating rate mortgages are still trading at various spreads to the prime rate, which itself hasn’t budged from 2.25% since April of last year. How much that spread is will depend on a host of factors, not the least of which is your credit score and perceived credit worthiness by your lender. That said, whether you chose a floating versus fixed rate mortgage doesn’t matter anymore since the new federal regulations went into effect last month. You must now meet the requirements or standards of a five-year term mortgage even if you want the adjustable rate variety. In other words, if you’re not going to budget for the possibility of short-term rates rising to where prevailing five-year rates are today, the government has done it for you.
That five-year rate has been a bit of a bouncing ball over the past year. In April 2009, the conventional five-year rate (or the posted rate) fell to a generational low of 5.25%, coinciding with the last quarter-point rate cut by the Bank of Canada. Through the summer and fall of last year, the rate got as high as 5.85%, but then eased back during the early months of this year as equity markets got a little shaky and bond yields stabilized. That all changed towards the end of the first quarter. Economies were looking a lot better, equities picked up the pace and inflation fears began to creep back in the market. There was also a definite shift in opinion as to when the Bank of Canada would start hiking rates, with the consensus focused on June 1st. Since bond yields needed to price in this new anticipation, other rates went up in sympathy, including mortgage rates as well as GICs. To give you an illustration, the five-year Government of Canada yield rose from about 2.4% in February to 3.2% in April. The five-year mortgage rate, which reached a low of 5.25% in March, shot up to 6.25% by late April. The only relief for borrowers has been a paltry 15-basis-point reduction by banks in the past week to 6.10%. Hardly a surprise when you consider the sharp drop in bond yields worldwide when it looked like contagion was going to put a recessionary grip on the world again.
But, have a look at where things are today. Despite the recent mortgage cuts, bond yields are rising again as investors move money from fixed income to stocks (not what I’m necessarily recommending). Assuming the European calm persists, economic fundamentals in North America continue to firm and China doesn’t upset the apple cart too much with its measures to rein in credit in that country, bonds will likely come under more pressure, sending yields higher. This should pave the way for five-year mortgage rates in Canada to climb to 6.5% and then potentially to 7%. Note, the high before the recession was only 7.5% - a level which could be reached this year under ideal economic conditions.
Now, some will say that it doesn’t matter where longer-term mortgage rates go, since short-term rates won’t likely climb to those levels. This has some merit to it, as the prime rate only got as high as 6.25% prior to the recession. Of course, with today’s spreads added on, the mortgage rate then for some would have been close to the 5-year rate. Whether or not short rates return to those levels depends on a number of things, including inflation, and with world governments still borrowing ridiculous amounts to fund fiscal spending, inflation cannot and should not be ruled out.
All this aside, the decision on which mortgage to chose ultimately comes down to a combination of expectations and emotion. It might seem okay to assume that the stock market won’t experience another meltdown like in 2008-09, but few of us would be willing to throw 100% of our assets into the market on that call. We need to sleep at night and therefore we apply balance to our portfolios. The same holds true for our borrowing decisions. I can come up with an economists’ tale of how interest rates will stay relatively low because of economic headwinds and the increased sensitivity to debt, but what if inflation fears overrule that view?
For those looking to put a household budget together that allows for an extended uninterrupted sleep, the five-year term option is still the best bet. There is also what I call a ‘sticker shock’ factor to keep in mind here. If rates at both ends of the spectrum climb over the next several years, those already acclimatized to a higher borrowing rate will find it less ‘shocking’ upon renewal than the individual with a floating rate mortgage that has to see a continual erosion of their monthly payment towards interest. In other words, the person with the longer and fixed-term mortgage will arrive at the principal amount that was anticipated. The adjustable rate mortgagor will not.
My final point on this has to do with opportunity cost. If the view of rising interest rates turns out to be false, and rates fall or stay flat, then this probably means the economy isn’t so hot. I would suggest in that event that there will be bigger concerns on the household budget than the extra couple of percentage points in interest. In short, this is not a time for aggressive offense, but a good shield.
Now that Europe appears to have bought itself some time from those vicious currency and bond speculators (and what a price tag, at a cool trillion dollars), individuals are also feeling a little more relieved about their finances. And they are indeed quite eager to put May behind them. Where investors were lulled into a sense of false security during April, as equity volatility fell to the lowest level since July 2007 (as measured by the VIX index), the spike in volatility this month knocked people off their chairs. True, the high in the VIX last week of just above 40 was still only 50% of the peak seen in November 2008; however, it has served as a wake-up call that there are as many risks out there as rewards.
For now, though, let’s assume there are no further shocks to the system for the coming weeks and that volatility subsides. The focus for individuals and households should then return to their own fundamentals. What does the job and income situation look like? Are financial plans still intact? And what about that mortgage coming due next month?
Ah, the dreaded mortgage decision. Despite the signs of an impending rise in the general level of interest rates and warnings from government officials, I find that there is still a lack of conviction among Canadians as to whether they should lock in their mortgages at prevailing rates, versus holding on to a floating rate mortgage. It’s therefore a good time to review the facts and fiction out there so that you can make a better educated decision.
Regardless of the recent jump in rates, we still look to be in the middle of a downward trend in mortgage rates since 1981. You may remember that year, when five-year term rates were in excess of 22% in Canada. It came at the same time that North America fell victim to a painful double-dip recession. Of course, inflation was also sitting around 12% at the time. Many families lost their homes to be sure, but the threat posed by higher rates today is greater because of the fact that debt levels are much higher today than back then. The increased leverage in the housing sector, to say nothing of general credit among individuals, increases the sensitivity to rates – something we saw so very clearly in the US housing sector from 2003 to 2006.
Today, floating rate mortgages are still trading at various spreads to the prime rate, which itself hasn’t budged from 2.25% since April of last year. How much that spread is will depend on a host of factors, not the least of which is your credit score and perceived credit worthiness by your lender. That said, whether you chose a floating versus fixed rate mortgage doesn’t matter anymore since the new federal regulations went into effect last month. You must now meet the requirements or standards of a five-year term mortgage even if you want the adjustable rate variety. In other words, if you’re not going to budget for the possibility of short-term rates rising to where prevailing five-year rates are today, the government has done it for you.
That five-year rate has been a bit of a bouncing ball over the past year. In April 2009, the conventional five-year rate (or the posted rate) fell to a generational low of 5.25%, coinciding with the last quarter-point rate cut by the Bank of Canada. Through the summer and fall of last year, the rate got as high as 5.85%, but then eased back during the early months of this year as equity markets got a little shaky and bond yields stabilized. That all changed towards the end of the first quarter. Economies were looking a lot better, equities picked up the pace and inflation fears began to creep back in the market. There was also a definite shift in opinion as to when the Bank of Canada would start hiking rates, with the consensus focused on June 1st. Since bond yields needed to price in this new anticipation, other rates went up in sympathy, including mortgage rates as well as GICs. To give you an illustration, the five-year Government of Canada yield rose from about 2.4% in February to 3.2% in April. The five-year mortgage rate, which reached a low of 5.25% in March, shot up to 6.25% by late April. The only relief for borrowers has been a paltry 15-basis-point reduction by banks in the past week to 6.10%. Hardly a surprise when you consider the sharp drop in bond yields worldwide when it looked like contagion was going to put a recessionary grip on the world again.
But, have a look at where things are today. Despite the recent mortgage cuts, bond yields are rising again as investors move money from fixed income to stocks (not what I’m necessarily recommending). Assuming the European calm persists, economic fundamentals in North America continue to firm and China doesn’t upset the apple cart too much with its measures to rein in credit in that country, bonds will likely come under more pressure, sending yields higher. This should pave the way for five-year mortgage rates in Canada to climb to 6.5% and then potentially to 7%. Note, the high before the recession was only 7.5% - a level which could be reached this year under ideal economic conditions.
Now, some will say that it doesn’t matter where longer-term mortgage rates go, since short-term rates won’t likely climb to those levels. This has some merit to it, as the prime rate only got as high as 6.25% prior to the recession. Of course, with today’s spreads added on, the mortgage rate then for some would have been close to the 5-year rate. Whether or not short rates return to those levels depends on a number of things, including inflation, and with world governments still borrowing ridiculous amounts to fund fiscal spending, inflation cannot and should not be ruled out.
All this aside, the decision on which mortgage to chose ultimately comes down to a combination of expectations and emotion. It might seem okay to assume that the stock market won’t experience another meltdown like in 2008-09, but few of us would be willing to throw 100% of our assets into the market on that call. We need to sleep at night and therefore we apply balance to our portfolios. The same holds true for our borrowing decisions. I can come up with an economists’ tale of how interest rates will stay relatively low because of economic headwinds and the increased sensitivity to debt, but what if inflation fears overrule that view?
For those looking to put a household budget together that allows for an extended uninterrupted sleep, the five-year term option is still the best bet. There is also what I call a ‘sticker shock’ factor to keep in mind here. If rates at both ends of the spectrum climb over the next several years, those already acclimatized to a higher borrowing rate will find it less ‘shocking’ upon renewal than the individual with a floating rate mortgage that has to see a continual erosion of their monthly payment towards interest. In other words, the person with the longer and fixed-term mortgage will arrive at the principal amount that was anticipated. The adjustable rate mortgagor will not.
My final point on this has to do with opportunity cost. If the view of rising interest rates turns out to be false, and rates fall or stay flat, then this probably means the economy isn’t so hot. I would suggest in that event that there will be bigger concerns on the household budget than the extra couple of percentage points in interest. In short, this is not a time for aggressive offense, but a good shield.
Monday, May 17, 2010
Fixed or float? Combination mortgages increasing in popularity: RBC poll
TORONTO, May 17 /CNW/ - The popularity of combination mortgages - which offer both fixed and floating rate segments - is on the rise, according to RBC's 17th Annual Homeowners Survey. In fact, 40 per cent of Canadians who are likely to purchase a home within the next two years plan to take out a combination mortgage, compared to 32 per cent in 2009.
The surging popularity of combination mortgages indicates that Canadians are trying to maximize low interest rates while at the same time retaining the security of a fixed mortgage. The poll also revealed a marked gender split with more women (46 per cent) than men (35 per cent) preferring a combination mortgage.
"Although interest rates are expected to rise, our study shows that not all Canadians intend to automatically opt for a fixed mortgage with a longer term," said Marcia Moffat, head, Home Equity Financing, RBC Royal Bank. "As consumers begin to learn about the benefits of mortgage diversification, we're seeing more homebuyers gain a better comfort level with adding floating rate mortgage options."
While combination mortgages are gaining in popularity, fixed-rate mortgages continue to be the most common choice for potential buyers and are preferred by 44 per cent of Canadians likely to buy a home within the next two years. Atlantic Canadians are most likely (54 per cent) to opt for a fixed rate, with Ontarians (41 per cent) least likely to do so.
"Many Canadians believe that a fixed-rate mortgage is the only way to have a locked-in and predictable payment, but a variable rate does not always mean variable payments," noted Moffat. "With our floating-rate mortgage, the portion of your payment that's applied to the principal changes, as interest rates change, not the actual payment itself. This means that when interest rates go up, your payment will pay off more interest; when interest rates go down, your payment will pay off more principal."
When current homeowners were asked about the impact of potential interest rate increases, 66 per cent said they were concerned, with women (70 per cent) more concerned than men (60 per cent).
"We expect the Bank of Canada to increase the overnight rate starting in June, with the pace of increases being fairly steady through the remainder of 2010 and 2011, which will continue to put upward pressure on borrowing costs," added Paul Ferley, assistant chief economist, RBC Economics.
Mortgage findings at-a-glance:
Fixed rate mortgages are preferred by:
- 44 per cent of Canadians likely to buy a home within the next two years - down from 47 per cent in 2009
- 54 per cent of Atlantic Canadians (the highest in Canada)
Variable rate mortgages are preferred by:
- 16 per cent of Canadians likely to buy a home within the next two years - down from 20 per cent in 2009
- 19 per cent of men compared with 12 per cent of women
Mortgage term most likely to be chosen by those opting for a fixed or combination mortgage:
- Five-year term: 43 per cent
- More than five-year term: 29 per cent
- Three-year term: eight per cent
63 per cent: the proportion of Canadian homeowners who have mortgages (compared to 56 per cent in 2005)
$124,131: the average amount remaining on Canadian homeowners' mortgages (compared to $109,504 in 2005)
The surging popularity of combination mortgages indicates that Canadians are trying to maximize low interest rates while at the same time retaining the security of a fixed mortgage. The poll also revealed a marked gender split with more women (46 per cent) than men (35 per cent) preferring a combination mortgage.
"Although interest rates are expected to rise, our study shows that not all Canadians intend to automatically opt for a fixed mortgage with a longer term," said Marcia Moffat, head, Home Equity Financing, RBC Royal Bank. "As consumers begin to learn about the benefits of mortgage diversification, we're seeing more homebuyers gain a better comfort level with adding floating rate mortgage options."
While combination mortgages are gaining in popularity, fixed-rate mortgages continue to be the most common choice for potential buyers and are preferred by 44 per cent of Canadians likely to buy a home within the next two years. Atlantic Canadians are most likely (54 per cent) to opt for a fixed rate, with Ontarians (41 per cent) least likely to do so.
"Many Canadians believe that a fixed-rate mortgage is the only way to have a locked-in and predictable payment, but a variable rate does not always mean variable payments," noted Moffat. "With our floating-rate mortgage, the portion of your payment that's applied to the principal changes, as interest rates change, not the actual payment itself. This means that when interest rates go up, your payment will pay off more interest; when interest rates go down, your payment will pay off more principal."
When current homeowners were asked about the impact of potential interest rate increases, 66 per cent said they were concerned, with women (70 per cent) more concerned than men (60 per cent).
"We expect the Bank of Canada to increase the overnight rate starting in June, with the pace of increases being fairly steady through the remainder of 2010 and 2011, which will continue to put upward pressure on borrowing costs," added Paul Ferley, assistant chief economist, RBC Economics.
Mortgage findings at-a-glance:
Fixed rate mortgages are preferred by:
- 44 per cent of Canadians likely to buy a home within the next two years - down from 47 per cent in 2009
- 54 per cent of Atlantic Canadians (the highest in Canada)
Variable rate mortgages are preferred by:
- 16 per cent of Canadians likely to buy a home within the next two years - down from 20 per cent in 2009
- 19 per cent of men compared with 12 per cent of women
Mortgage term most likely to be chosen by those opting for a fixed or combination mortgage:
- Five-year term: 43 per cent
- More than five-year term: 29 per cent
- Three-year term: eight per cent
63 per cent: the proportion of Canadian homeowners who have mortgages (compared to 56 per cent in 2005)
$124,131: the average amount remaining on Canadian homeowners' mortgages (compared to $109,504 in 2005)
Friday, May 14, 2010
The Latest Read on Interest Rates
Andrew Willis
Bond traders are still expecting the Bank of Canada to raise short term interest rates on June 1, but the move is no longer the sure bet it was a few short weeks ago.
Credit markets are currently putting a 84 per cent probability on a 25 basis point hike in overnight rates after the central bank meeting in June, according to a report that TD Waterhouse published late Tuesday on BAX sentiment, a reflection of what the futures market is predicting. BAX sentiment put a 100 per cent probability on a hike prior to the most recent Greek credit crisis, and European financial bailout.
BAX sentiment puts a 94 per cent probability on another 25 basis point rise in rates at the July 20 Bank of Canada meeting.
Bond traders are still expecting the Bank of Canada to raise short term interest rates on June 1, but the move is no longer the sure bet it was a few short weeks ago.
Credit markets are currently putting a 84 per cent probability on a 25 basis point hike in overnight rates after the central bank meeting in June, according to a report that TD Waterhouse published late Tuesday on BAX sentiment, a reflection of what the futures market is predicting. BAX sentiment put a 100 per cent probability on a hike prior to the most recent Greek credit crisis, and European financial bailout.
BAX sentiment puts a 94 per cent probability on another 25 basis point rise in rates at the July 20 Bank of Canada meeting.
Thursday, May 13, 2010
Bank Regulations Miss the Point
Story, Rob Jr., CMB
Modernizing the regulation of our financial institutions will play a critical role in restoring confidence in our financial system and facilitating the recovery of our national economy. For almost two years, the financial services industry has been working with legislators and regulators to improve oversight and protect consumers without restricting consumers' access to affordable financial products.
An often overlooked concept found in both House and Senate reform bills seeks to ensure that loan originators have an additional financial interest in the long-term success of the loan by requiring lenders to retain a portion of a loan's risk on their books if they sell the loan to the secondary market. Though well-intentioned, this approach to risk retention has the potential to have unintended consequences stifling the recovery of both the residential and commercial real estate markets. More important, it would be duplicative of the current risk-retention requirements and require lenders to put aside large amounts of capital, limiting the credit available to consumers.
As it pertains to real estate financing, the principle, known as "skin in the game" or "risk retention," is built on the fallacious notion that residential and commercial mortgage lenders can make reckless loans with no regard for the long-term performance of those loans because once a loan is sold to the secondary market, the lender is free of any responsibility for how the loan was underwritten.
This couldn't be further from the truth. When I sell a loan, whether it is secured by a residential or commercial property, to a secondary market investor, I make representations and warranties to the buyer with respect to the borrower, the underwriting of the loan, the documentation and the property securing the loan.If the loan fails - that is, if it goes into foreclosure - because of an error or oversight on my part, I am required to buy back the loan or reimburse the buyer. Investors, now more than ever, enforce those warranties to hold me accountable for the loans I have made.
Enacting broad risk retention, requiring lenders to keep a portion of the original loan on their books, has the potential to eliminate a sizable percentage of the mortgage-lending capacity in this country. There is an entire segment of the residential mortgage-lending industry that only does mortgages and does not take deposits from customers. Those lenders make loans to borrowers, sell the loans into the secondary market (with representations and warranties) and then use the money they receive from the sales of the loans to make the next mortgage to another borrower.
Requiring these independent mortgage lenders--many of which are small businesses--to retain a portion of every mortgage they sell would render their business model unsustainable. Elimination of this critical segment of the market - often smaller lenders that serve underrepresented areas and borrowers -would limit capacity and choice for consumers, driving up borrowing costs or limiting access to mortgages altogether, which is the last thing we need in a real estate market that is just beginning to see signs of recovery.
Additionally, elimination of these businesses ultimately would mean job losses, which, again, would not be helpful in the current economic environment. Mortgage banking companies that would be forced out of business by this provision employ between 45,000 and 55,000 people.
In order to avoid this, legislators should provide explicit exemptions from additional risk-retention requirements for qualified residential loans that have particular features and meet certain underwriting guidelines. For example, a fully documented, fully amortized mortgage with a 30-year fixed rate has well-understood risk characteristics.
The market for residential real estate already contains mechanisms that serve to ensure that risk is appropriately accounted for.Consumers are best served by a marketplace that gives them choices and competition. Driving competition and liquidity from the residential mortgage market with broad, one-size-fits-all risk-retention requirements is not the means to bringing back confidence and stability to our markets.
Modernizing the regulation of our financial institutions will play a critical role in restoring confidence in our financial system and facilitating the recovery of our national economy. For almost two years, the financial services industry has been working with legislators and regulators to improve oversight and protect consumers without restricting consumers' access to affordable financial products.
An often overlooked concept found in both House and Senate reform bills seeks to ensure that loan originators have an additional financial interest in the long-term success of the loan by requiring lenders to retain a portion of a loan's risk on their books if they sell the loan to the secondary market. Though well-intentioned, this approach to risk retention has the potential to have unintended consequences stifling the recovery of both the residential and commercial real estate markets. More important, it would be duplicative of the current risk-retention requirements and require lenders to put aside large amounts of capital, limiting the credit available to consumers.
As it pertains to real estate financing, the principle, known as "skin in the game" or "risk retention," is built on the fallacious notion that residential and commercial mortgage lenders can make reckless loans with no regard for the long-term performance of those loans because once a loan is sold to the secondary market, the lender is free of any responsibility for how the loan was underwritten.
This couldn't be further from the truth. When I sell a loan, whether it is secured by a residential or commercial property, to a secondary market investor, I make representations and warranties to the buyer with respect to the borrower, the underwriting of the loan, the documentation and the property securing the loan.If the loan fails - that is, if it goes into foreclosure - because of an error or oversight on my part, I am required to buy back the loan or reimburse the buyer. Investors, now more than ever, enforce those warranties to hold me accountable for the loans I have made.
Enacting broad risk retention, requiring lenders to keep a portion of the original loan on their books, has the potential to eliminate a sizable percentage of the mortgage-lending capacity in this country. There is an entire segment of the residential mortgage-lending industry that only does mortgages and does not take deposits from customers. Those lenders make loans to borrowers, sell the loans into the secondary market (with representations and warranties) and then use the money they receive from the sales of the loans to make the next mortgage to another borrower.
Requiring these independent mortgage lenders--many of which are small businesses--to retain a portion of every mortgage they sell would render their business model unsustainable. Elimination of this critical segment of the market - often smaller lenders that serve underrepresented areas and borrowers -would limit capacity and choice for consumers, driving up borrowing costs or limiting access to mortgages altogether, which is the last thing we need in a real estate market that is just beginning to see signs of recovery.
Additionally, elimination of these businesses ultimately would mean job losses, which, again, would not be helpful in the current economic environment. Mortgage banking companies that would be forced out of business by this provision employ between 45,000 and 55,000 people.
In order to avoid this, legislators should provide explicit exemptions from additional risk-retention requirements for qualified residential loans that have particular features and meet certain underwriting guidelines. For example, a fully documented, fully amortized mortgage with a 30-year fixed rate has well-understood risk characteristics.
The market for residential real estate already contains mechanisms that serve to ensure that risk is appropriately accounted for.Consumers are best served by a marketplace that gives them choices and competition. Driving competition and liquidity from the residential mortgage market with broad, one-size-fits-all risk-retention requirements is not the means to bringing back confidence and stability to our markets.
Monday, May 10, 2010
Housing starts expected to build on recovery data
Derek Abma, Financial Post
If record job gains from April weren't enough to convince you the Canadian economy is on solid ground, a few more measures are coming down the pipe over the next week that could support the case.
"In Canada, we're in the home stretch of reports on what was evidently a very strong first quarter, and the early news on Q2," CIBC World Markets chief economist Avery Shenfeld said in a research note on Friday, which followed Statistics Canada's report that 108,700 additional people found work last month-- about four times what was expected.
Today, Canada Mortgage and Housing Corp. reports its April housing-start figures. Economists anticipate an annualized rate of 205,000, up from a revised figure of 200,900 in March. The last figure marked a small decline from the previous month, on a seasonally adjusted basis, but things have come a long way since the market bottomed out at 112,000 in April 2009.
"To date, housing starts have risen a massive 80% from their cyclical lows, retracing over half of the peak-to-trough drop," Millan Mulraine, senior strategist with TD Securities, said in a report released on Friday.
Mr. Mulraine, who's forecasting a start level of 210,000 for April, attributes some of the current strength to homebuyers looking to avoid the new harmonized sales taxes taking effect in Ontario and British Columbia in July. He also noted that April was warmer than usual, helping along construction efforts.
Another big report comes Wednesday in the form of merchandise trade data for March. Economists anticipate a Canadian surplus -- the amount exported minus what's imported -- of $1.6-billion, up from $1.4-billion in February. If right, it would mark the fourth straight surplus.
CIBC World Markets economist Krishen Rangasamy credited improved economic conditions globally as probably helping Canada maintain it trading-surplus streak in March, including greater demand for vehicles in the United States.
"The merchandise trade report for March will likely add to earlier data that presages (Canadian economic) growth of around 5.7% (annualized) for the first quarter," Mr. Rangasamy said. "But the party won't last forever for exporters, given the lagged effects of a strong Canadian dollar and the expected slowdown in the U.S. economy later in the year."
Speaking of the auto industry, Statistics Canada on Friday will release data on domestic new-vehicle sales for March. A 4% monthly decline is expected following an 8.1% jump in February.
The federal agency will also release March figures for manufacturing sales that day. A one% rise in the value of factory transactions is expected by economists after the slim 0.1% gain in February.
"Canadian manufacturing-sector activity has been on a breathtaking run lately, with sales rising for six consecutive months on the back of strong domestic and foreign demand," Mr. Mulraine said.
Mr. Mulraine is in line the consensus of economists in his March manufacturing forecast, citing transportation equipment as well as products made of petroleum and coal as helping to fuel the gains.
Besides these reports, a number of Canadian companies, such as George Weston and Jazz Air, will release quarterly earnings. As well, the United States will see data on March wholesale trade toomorrow, its own March trade data on Wednesday and April retail sales on Friday.
If record job gains from April weren't enough to convince you the Canadian economy is on solid ground, a few more measures are coming down the pipe over the next week that could support the case.
"In Canada, we're in the home stretch of reports on what was evidently a very strong first quarter, and the early news on Q2," CIBC World Markets chief economist Avery Shenfeld said in a research note on Friday, which followed Statistics Canada's report that 108,700 additional people found work last month-- about four times what was expected.
Today, Canada Mortgage and Housing Corp. reports its April housing-start figures. Economists anticipate an annualized rate of 205,000, up from a revised figure of 200,900 in March. The last figure marked a small decline from the previous month, on a seasonally adjusted basis, but things have come a long way since the market bottomed out at 112,000 in April 2009.
"To date, housing starts have risen a massive 80% from their cyclical lows, retracing over half of the peak-to-trough drop," Millan Mulraine, senior strategist with TD Securities, said in a report released on Friday.
Mr. Mulraine, who's forecasting a start level of 210,000 for April, attributes some of the current strength to homebuyers looking to avoid the new harmonized sales taxes taking effect in Ontario and British Columbia in July. He also noted that April was warmer than usual, helping along construction efforts.
Another big report comes Wednesday in the form of merchandise trade data for March. Economists anticipate a Canadian surplus -- the amount exported minus what's imported -- of $1.6-billion, up from $1.4-billion in February. If right, it would mark the fourth straight surplus.
CIBC World Markets economist Krishen Rangasamy credited improved economic conditions globally as probably helping Canada maintain it trading-surplus streak in March, including greater demand for vehicles in the United States.
"The merchandise trade report for March will likely add to earlier data that presages (Canadian economic) growth of around 5.7% (annualized) for the first quarter," Mr. Rangasamy said. "But the party won't last forever for exporters, given the lagged effects of a strong Canadian dollar and the expected slowdown in the U.S. economy later in the year."
Speaking of the auto industry, Statistics Canada on Friday will release data on domestic new-vehicle sales for March. A 4% monthly decline is expected following an 8.1% jump in February.
The federal agency will also release March figures for manufacturing sales that day. A one% rise in the value of factory transactions is expected by economists after the slim 0.1% gain in February.
"Canadian manufacturing-sector activity has been on a breathtaking run lately, with sales rising for six consecutive months on the back of strong domestic and foreign demand," Mr. Mulraine said.
Mr. Mulraine is in line the consensus of economists in his March manufacturing forecast, citing transportation equipment as well as products made of petroleum and coal as helping to fuel the gains.
Besides these reports, a number of Canadian companies, such as George Weston and Jazz Air, will release quarterly earnings. As well, the United States will see data on March wholesale trade toomorrow, its own March trade data on Wednesday and April retail sales on Friday.
Friday, May 7, 2010
Was typo behind Wall Street plunge?
The Canadian Press, Reuters and thestar.com
What was that? For a brief, heart-stopping period, stock markets plunged, currencies went crazy, bonds ran wild and investors ran for cover.
But by the end of the day U.S. stocks had recovered much of their losses, the Toronto Stock Exchange was basically flat losing 32.7 points to close at 11,842.43, and the Canadian dollar, though pummeled, was still intact.
Experts were flustered, but puzzled by the wild action, though they generally pointed to the ongoing Greek debt crisis.
Rumors also circulated that the panicky sell-off had been triggered by a U.S. stock trader mistakenly put in a sell order for 15 billion shares of Procter & Gamble on the New York Stock Exchange, instead of 15 million.
Whether that’s true or not, the stock dived to $40 from $60 within moments just before 2.30 p.m..
The Dow Jones Industrial Index also began a free-fall of about 1,000 points, or 10 per cent, in less than half an hour.
It didn’t stop with stock markets. The U.S. dollar soared, which meant the Euro plunged along with the Canadian dollar.After rising as high as 97 cents U.S, at one point the Canadian dollar was down almost 4 cents. It finished the day at 95.03 cents U.S.
Pascal Gauthier of TD Economics pointed to the Greek debt crisis as a possible trigger for the turmoil.
Jean-Paul Trichet, who heads the European Central bank, said in Lisbon Thursday that the bank’s governing council had not discussed the possibility of buying government bonds. Many analysts have speculated it might do so, as a means of providing debt-crushed governments with financial support.
“There might have been expectations that the bank might take some measures, though we were of the view that they would not,” Gauthier speculated.
He warned that other days like this could loom ahead.
“On the fiscal side, those economies that were fragile to begin with before the recession like Greece, Italy, Spain are going to be vulnerable, and markets are going to be nervous,” he said.
“This is going to stay with us. This isn’t just a one-day thing.
Camilla Sutton, currency strategist at Scotiabank, said no one was attacking the Canadian dollar. Instead, investors ran for the safety of U.S. investments.
“This story is about the U.S. dollar,” she said. “What we’re seeing is a very strong, strong U.S. dollar, because very quickly people are closing out foreign positions and moving into the deepest capital markets in the world: The U.S. and the U.S. treasury market.”
The Canadian dollar was simply trampled by the rush into the U.S., she said.
* NEW YORK—The biggest intraday point drop ever in the Dow Jones Industrial Average may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said Thursday.
The so-called "fat finger" trade apparently involved an exchange-traded fund that holds shares of some of the biggest and most widely traded stocks, sources said. The trade apparently was put in on the Nasdaq Stock Market, sources said.
Several sources said the speculation is that the trade was entered by someone at Citigroup. A Citigroup spokesman said it was investigating the rumor but that the bank currently had no evidence that an erroneous trade had been made.
CNBC reported this afternoon that a trader entered a "b" for billion instead of an "m" for million in a trading order, setting off a series of events that led to the Dow’s biggest one-day drop since 1987.
What was that? For a brief, heart-stopping period, stock markets plunged, currencies went crazy, bonds ran wild and investors ran for cover.
But by the end of the day U.S. stocks had recovered much of their losses, the Toronto Stock Exchange was basically flat losing 32.7 points to close at 11,842.43, and the Canadian dollar, though pummeled, was still intact.
Experts were flustered, but puzzled by the wild action, though they generally pointed to the ongoing Greek debt crisis.
Rumors also circulated that the panicky sell-off had been triggered by a U.S. stock trader mistakenly put in a sell order for 15 billion shares of Procter & Gamble on the New York Stock Exchange, instead of 15 million.
Whether that’s true or not, the stock dived to $40 from $60 within moments just before 2.30 p.m..
The Dow Jones Industrial Index also began a free-fall of about 1,000 points, or 10 per cent, in less than half an hour.
It didn’t stop with stock markets. The U.S. dollar soared, which meant the Euro plunged along with the Canadian dollar.After rising as high as 97 cents U.S, at one point the Canadian dollar was down almost 4 cents. It finished the day at 95.03 cents U.S.
Pascal Gauthier of TD Economics pointed to the Greek debt crisis as a possible trigger for the turmoil.
Jean-Paul Trichet, who heads the European Central bank, said in Lisbon Thursday that the bank’s governing council had not discussed the possibility of buying government bonds. Many analysts have speculated it might do so, as a means of providing debt-crushed governments with financial support.
“There might have been expectations that the bank might take some measures, though we were of the view that they would not,” Gauthier speculated.
He warned that other days like this could loom ahead.
“On the fiscal side, those economies that were fragile to begin with before the recession like Greece, Italy, Spain are going to be vulnerable, and markets are going to be nervous,” he said.
“This is going to stay with us. This isn’t just a one-day thing.
Camilla Sutton, currency strategist at Scotiabank, said no one was attacking the Canadian dollar. Instead, investors ran for the safety of U.S. investments.
“This story is about the U.S. dollar,” she said. “What we’re seeing is a very strong, strong U.S. dollar, because very quickly people are closing out foreign positions and moving into the deepest capital markets in the world: The U.S. and the U.S. treasury market.”
The Canadian dollar was simply trampled by the rush into the U.S., she said.
* NEW YORK—The biggest intraday point drop ever in the Dow Jones Industrial Average may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said Thursday.
The so-called "fat finger" trade apparently involved an exchange-traded fund that holds shares of some of the biggest and most widely traded stocks, sources said. The trade apparently was put in on the Nasdaq Stock Market, sources said.
Several sources said the speculation is that the trade was entered by someone at Citigroup. A Citigroup spokesman said it was investigating the rumor but that the bank currently had no evidence that an erroneous trade had been made.
CNBC reported this afternoon that a trader entered a "b" for billion instead of an "m" for million in a trading order, setting off a series of events that led to the Dow’s biggest one-day drop since 1987.
Monday, May 3, 2010
Canadian consumers more confident than European, U.S. counterparts
Julie Fortier, Financial Post
OTTAWA -- Canadian consumers may be more confident than their European or U.S. counterparts, but many say they are more careful now about how they spend, according to a report released Monday by The Boston Consulting Group.
The report, titled The New World Order of Consumption, found that only 18% of Canadians do not think the economy will improve in the next six months, a vast improvement from 52% who thought the same a year ago. Meanwhile, 37% of U.S. residents and 39% of European Union residents do not think the economy will improve in the next six months.
"Canadian consumers believe the worst of the recession is over and are more optimistic than they were a year ago. In fact, they're significantly more confident about the economic future and their jobs than consumers in other Western economies," said Cliff Grevler, a partner in the Toronto office, and leader of the Canadian Consumer Practice.
Nonetheless, Mr. Grevler pointed out, Canadians clearly are not forgetting the lessons of the recession, as 74% of Canadians say they are now spending more time shopping around for better prices. As well, 55% of Canadians still plan to cut spending non-essential items.
"While belt-tightening is lightening up a bit, Canadians have structurally changed the way they spend and consume. It's much more focused on price, and there's much more thought given before expenditures on non-essential items," he said.
The survey, which was conducted online by Research Now in early April 2010, surveyed 1,000 Canadian adults with a household income of $50,000 or more. A similar version of the survey, fielded at the end of December 2008, was conducted in the United States and Europe, providing a basis for comparison.
The results echo an American Express and LoyaltyOne survey released last week that found a "seismic shift" in the way Canadian consumers spend. That poll of 1,000 Air Miles collectors found 62% of respondents said they feel more confident about the economy, and 58% say they see brighter days in their financial future, but 48% say they're nervous about their current fiscal status.
Also, a Bensimon Byrne report last month suggested that in Canada the "culture of thrift and frugality that developed during the recession" will continue, largely due to growing household debt, which is at record-high levels.
OTTAWA -- Canadian consumers may be more confident than their European or U.S. counterparts, but many say they are more careful now about how they spend, according to a report released Monday by The Boston Consulting Group.
The report, titled The New World Order of Consumption, found that only 18% of Canadians do not think the economy will improve in the next six months, a vast improvement from 52% who thought the same a year ago. Meanwhile, 37% of U.S. residents and 39% of European Union residents do not think the economy will improve in the next six months.
"Canadian consumers believe the worst of the recession is over and are more optimistic than they were a year ago. In fact, they're significantly more confident about the economic future and their jobs than consumers in other Western economies," said Cliff Grevler, a partner in the Toronto office, and leader of the Canadian Consumer Practice.
Nonetheless, Mr. Grevler pointed out, Canadians clearly are not forgetting the lessons of the recession, as 74% of Canadians say they are now spending more time shopping around for better prices. As well, 55% of Canadians still plan to cut spending non-essential items.
"While belt-tightening is lightening up a bit, Canadians have structurally changed the way they spend and consume. It's much more focused on price, and there's much more thought given before expenditures on non-essential items," he said.
The survey, which was conducted online by Research Now in early April 2010, surveyed 1,000 Canadian adults with a household income of $50,000 or more. A similar version of the survey, fielded at the end of December 2008, was conducted in the United States and Europe, providing a basis for comparison.
The results echo an American Express and LoyaltyOne survey released last week that found a "seismic shift" in the way Canadian consumers spend. That poll of 1,000 Air Miles collectors found 62% of respondents said they feel more confident about the economy, and 58% say they see brighter days in their financial future, but 48% say they're nervous about their current fiscal status.
Also, a Bensimon Byrne report last month suggested that in Canada the "culture of thrift and frugality that developed during the recession" will continue, largely due to growing household debt, which is at record-high levels.
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