Oh my, this has certainly sparked a debate.

Let capitalism be capitalism and the government shouldn’t interfere in the business of big business?

Except of course when greed takes over and they almost destroy then entire global economy, then it’s OK for government to step in… in a major way… and try and recover the situation. That’s a whole other topic unto itself.

All I can say is that Flaherty and the BoC have been doing all they can with all the tools they have at their disposal. The BoC used to be able to control the economy with that big leaver called the “overnight lending rate”. That lever lost its leverage when it dropped below 1%. I think Flaherty realized this and then started his tinkering with the mortgage rules as it was deemed a “potential” exposure if all mortgages were to default and CMHC (i.e. the government) had to cover all these loans.

It did serve to almost stall the economy last year and it remains to be seen if that will carry over to this year or the demand will simply push through one way or another.

They twiddled with the mortgage rules and all the while the rates just kept slowly dropping. Why? Well the bond market that keeps buying the mortgage securities kept buying our bonds. The more bonds purchased, the lower the the value of the bond (yield). The lower the yield, the cheaper it becomes for lenders to borrow money and make money on the spread. When the spread is large enough, rates drop. When the spread is less, the rates rise.

It’s basic economics of supply and demand.

Now the BoC has indicated no rate change (up) in the near future (I think the US Fed said 2015 recently) and the bond market (yield) keeps dropping on this kind of news (or anticipated news) and thus borrowing for the banks/lenders becomes less. So what do the banks naturally do? Lower their rates to “stay” competitive with the market.

Does massive advertising that you have the lowest rate really bring in business? Just ask BMO, they didn’t necessarily gain a massive mortgage share, but their other lines of business sure saw an up tick from people coming in to discuss mortgages, which lead to other “opportunities”.

Now I found it amusing that Manulife got the call from Flaherty, because they “opted” to advertise their low rate of 2.99%, yet several other lenders just quietly changed their rates (and some lower than 2.99) and yet none of them were reported to have been called. One has to assume they didn’t get the call as their rates are still unchanged at 2.89%.

(So good news for us brokers? We’ve got rates available lower than what the government thinks it should be for the banks)

So does the minister want to call ALL mortgage lenders and ask them to change? Only ones who actively advertise? The ones that are not in the ministers good books? Change CMHC rules to dictate that 3% is the absolute minimum a fixed mortgage rate can be?

Then there’s the variable mortgage bond market (different set of funds for this security). They have seemingly finally had some sanity restored to their market and are now looking at 30, 40 and likely soon 50 bps off prime. Is the minister also going to step in and regulate how variable mortgages are set too?

Seems to be an uneven playing field in the bank world thanks to Mr. Flaherty. Will it continue? Can it? Will it cause ripples in the bond market? Fed gov’t dictates to Canadian banks that they MUST make more profit on their mortgages.

Wont the world be asking instead what is Flaherty so nervous about that he has to meddle? Rates are low around the world. Why are you keeping yours artificially high? I know Quebec went all NDP federally, but not the whole country.

I had an email from a “potential” client last week asking about appraisals and my answer ended up being more of a comment on the state of the rental mortgage market. After hitting send, I thought maybe others might be interested in what I had to summarize (all 15 of you devoted readers .

The question in the email started out as, “why are residential rental appraisals not reflective of the actual market value?” Typically when I hear of people asking this type of question, they fall into that category of thinking that their home is worth way more than reality, because they’ve spent so much money on repairs and upgrades (to keep it at market value) that it has to be worth more than all the others on the street (who’ve also done similar repairs/upgrades).

In this instance however, this person had done their homework. I’m not talking about looking on MLS for something similar, he’s actually done his own comparables across the market where his unit is. It’s larger this and bigger that and higher rents, etc. etc.  Lots of ammunition to backup his case for a significantly higher value.

The easy answer is to write off the appraiser for not doing his/her job… or not well enough. Some appraisal firms (who shall remain nameless, as I still have to deal with them for certain lenders) are just down right a pain to deal with. All of their appraisals come in lower than all the others. We’re not talking a few thousand dollars, we’re talking percentages like up to 10%.

How do they get away with it? Well, the banks love them as it means they have less to loan out or less risk to take on each property.

Let’s put it another way, if a bank is ordering an appraisal (say for a refinance or an uninsured mortgage) and they are not particularly interested in financing this property or the client is on shaky ground, they have an easy scapegoat. “Oh, the appraisal came in too low.” There also tends to be a relationship between the banks & appraisers such that there may be non-verbal clues or direct phone calls to them to say “this property might be overvalued”.

That’s one aspect, but this past year one has to take a look at the “bigger” picture, at least in the rental property space.

For those following the headlines, you may recall first the announcement of FirstLine Mortgages going up for sale. No takers on this broker only business model and naturally over the course of a few months, brokers slowly shied away from sending them business, to the point where they decide to cease operations. Now on the surface most would think, big deal, just another lender packing their bags after a few difficult years in the mortgage world. Other lenders will pick up the slack and we’ll move on.

That’s pretty much what happened, except the fact that one of the primary business focuses for FirstLine was doing rental (or non-owner occupied in mortgage parlance) mortgages. These were the only folks who did mortgages for folks with portfolios. LARGE PORTFOLIOS. They had their rules and guidelines as to how to do these deals and it was painful at times to make clients fit into these square holes, but they’d do the deal if you could. If you own rentals in a corporate name (best structure for owning large amounts of real estate), they’d also have no issue with doing mortgages in this fashion. Clients still had to be guarantors, but they’d do the deal. They were also the only lender who would do HELOCs (linces of credit) on a rental, which no one else has ever done. For investors, this was the ideal solution, interest only option, which is tax deductible.

Exit FirstLine. Net result, scramble for MANY brokers (including myself) to try and find alternate solutions to “fill the gap”. I’d try one lender one month and come back to them not 3 weeks later for the same deal (same investor actually in one case) and suddenly there was a change in policy towards rentals. Some of the changes were subtle, like new GDS/TDS ratios and others were more direct “we don’t do rentals anymore”.

One by one, lender after lender starts changing their policy. Those that don’t, see a sudden uptick in rental properties. When lenders see a sudden change in anything, they get nervous. They then look to either change policy or they start to have conversations with… appraisers.

Now I have to feel a bit sorry for the appraisers, they are kind of at the razors edge a lot of the time. When values are rising slowly, things are fine they start to get comparable sales and they adjust. If there is a slow decline, THEY HAVE TO LEAD the decline, which then almost effectively causes a rapid decline. No appraiser wants to get caught providing a value slightly higher than the (now) declining market, as if they do this too often they may get cut from the banks/lenders list for not reacting quickly enough.

Case in point, FirstLine leaves the market (putting a dent in the rental space), every one else scrambles to get out of the rental space (don’t want to be known as the rental lender, too much risk, just look at what happened to FirstLine) and suddenly the rental market is “out of favour” and the appraisers must catch on to this change quickly… resulting in significantly lower appraised values on rentals.

Yes, you’ve increased the sqft of the building. Yes, you’ve increased rents. Yes, you’ve upgraded this/that. The overal condition of the property has improved, but unfortunately the market conditions at present say… values from 3-5 years ago.

The solution? Wait for the market to correct itself. Good thing that real estate is a LONG TERM investment plan…. RIGHT?

Follow up on my last post about statistics…

My understanding from the media is that consumer debt is on the rise and the highest it’s been in years… but this chart seems to contradict those reports.

I’ll let my kind readers give me their views on the topic.

Household Credit growth: Canada

This is what I love (hate) about stats… the above looks like consumer credit is down… significantly. The source, RBC, seems credible to me.

As Jim Rohn might say, “Fascinating”.