So this is the first time I have heard of this scheme, and I confess I am VERY impressed by the depth of deceit required to pull it off, and for nothing but information. In a mortgage broker professional magazine, an article was recently written by Vanessa Chris and reports on a new type of crime: that being perpetrated by Brokers.

How the scheme works:

In most cases, an established mortgage brokerage house receives an application from a seemingly perfect broker. In many cases, the applicant wows the hiring brokerage house by demonstrating their in depth knowledge of lender guidelines and underwriting criteria. Happy to receive such a qualified applicant, many brokerage firms do not do the necessary amount of background checking and reference checking due to the impressive nature of the original interview. The new broker gets hired.

Shortly thereafter, the new brokerage house receives a call from Equifax (the primary credit bureau in Canada) asking about an inordinate number of credit inquiries OR they receive a call from Equifax with a person claiming that they never applied for a mortgage yet received an inquiry on their credit bureau. When the brokerage house looks into it, they find that their new star employee has been doing many many credit inquiries on innocent people and recording their information. The offending broker is then never heard of again.

How does this happen?

Lenders publish their guidelines to all brokers, and it wouldn’t be difficult for a person to get a copy of the major lender guidelines from an innocent broker who is trying to mentor and train a new broker. Once they commit the guidelines to memory, they are easily able to wow and impress a hiring brokerage with their knowledge. Most hiring companies will be so impressed and blown away with a broker’s knowledge that they will rarely follow up in earnest on their references.

What is the payoff?

Now that the broker has a person’s credit bureau, what damage can they do? A person’s credit bureau contains all their personal information: address, SIN number. employer, other names, other accounts and account numbers, etc…  With this info, the perpetrators are able to make applications for other credit facilities, make a move towards their bank accounts, or do just about any other form of identity theft. On the open market, info this accurate and detailed is likely worth a fair amount to those in the know.

How can firms protect themselves?

The most obvious thing a brokerage house can do is to first limit the number of people that have access to credit bureau info credit applications. In smaller brokerage houses, this isn’t as vital as larger houses that have 40 or more brokers and where training and monitoring are vital

Brokerage houses that are hiring should also check ALL references and ensure that an applicant’s SIN number matches their identity so that the offending person can be tracked down and identified properly.

Historically, mortgage fraud has been comimitted by buyers that work with a group of other people to inflate property prices, and registere mortgages on unsuspecting victims’ homes. In this case, the perpetrators are actual mortgage industry professionals, many times with impeccable records and work histories. That people are willing to take such risks to get this information speaks to the value that such information has amongst organized crime.

So, if you are a hiring brokerage, take care and check the references of those brokers you hire. It doesn’t take that much time and effort and can save you a ton of headache.

If you are a client, you should be getting a copy of your credit bureau twice a year and going over all the inquiries on your report. Inquiries are all the companies that have looked at your credit bureau and obtaiined your info. For them to pull your credit, they require authorization, and if you see people or companies on there that are looking at your credit and to whom you did not give authorization, then you should contact Equifax as well as the offending inquiring company and track down why they looked at your credit.

One proviso on going after the companies looking at your credit: If you have existing accounts with, BMO, for example, and see an inquiry from BMO, don’t go all crazy immediately. Oftentimes, if you have an account with one lender, they will check your credit from time to time (often electronically and automatically with no human involved) to make sure you can still reasonably afford the credit facilities that you have. The time to be really worried is when a company you don’t recognize or deal with starts doing inquiries on your credit but you never did an application. In those cases, jump on it right away and make sure that your credit is clear and that your info hasn’t been stolen.

Until this happens, protect your information as much as possible and happy investing!

I found this article in the CIBC World Markets Forecast for September 23, 2008 written by Jeff Rubin entitled, “The Big Easy.” I found it to be a very accurate look at things, in my opinion, and have republished it here:

All of a sudden there appears to be an exit door from the credit crunch. The billions of illiquid, underwater mortgagebacked securities that have already bankrupted some of the world’s largest investment banks and choked up the world financial system are about to go away. The US Treasury, in an act of unprecedented charity, will effectively nationalize Wall Street’s most troubled assets and transfer them to the balance sheet of American taxpayers. What the ultimate cost would be of not intervening will of course never be known.

Both the slowing rate of recent housing price declines and vastly improved housing affordability ratios suggest that a trough in US real estate prices is probable within the next six months. But could Washington have waited that long before world financial markets would have totally seized up causing a global meltdown?

While the cost of taking another path will never be known, the cost of the one chosen is clear enough. Higher deficits can only bring higher taxes and higher inflation can only bring higher interest rates. Both are on their way in the American economy. The big easy in today’s  Fed/Treasury policy sets the stage for mean reversion in tomorrow’s policies. The world’s largest financial bailout is sending oil short-sellers to the sidelines. The earlier plunge in energy prices now only sets the stage for even higher inflation rates next year as oil prices rebound to set new highs.

With fears of a financial system meltdown and growth collapse averted, prices for a range of commodities have already seen their lows. The weak OECD backdrop will slow the extent and pace of recovery. Still, the combination of strong emerging market demand and limited new supply should see oil prices average a record-high $150/barrel over the second half of next year.

The resulting near-$5/gallon gasoline prices will see CPI energy inflation make a triumphant return, posting no less than a 40% increase from yesterday’s deleveraged prices (Chart 1). That, in turn, should see headline US CPI inflation punch through 6% towards the latter half of next year.

The last time CPI inflation was 6% was 1990 when the federal funds rate was 7½%, or almost four times today’s setting. US real interest rates haven’t been so negative since the second OPEC oil shock, nearly thirty years ago (Chart 2). Never have they remained so. And neither will they this time.

While the present job shedding in the US economy, and possibly a negative fourth quarter will keep the Fed tolerant of today’s inflation, any stabilization in employment will bring the onset of Fed tightening. The Fed should begin raising the funds rate by early in the second quarter of next year. Once started however, they have a long way to go. By year-end they will have hiked the funds rate by 200 basis points, in what is likely to be a protracted and painful adjustment in real interest rates.

Main Street was never as much at risk as Wall Street, but the US economy has bled jobs for the last eight months and will probably continue to do so for the balance of the year. And certainly growth and employment prospects are no better in Europe or Japan. But the OECD economies don’t pack nearly the same weight in global economic growth as they once did, and global growth is unlikely to fall much below 4%.

For the commodity- and particularly energy-leveraged Canadian economy, the Treasury bailout is unambiguously good news. After all, it won’t be Canadian taxpayers that are on the hook, while it will be Canadian resource and energy companies that will benefit from the stability brought to financial markets and the more bullish outlook that shines on world growth.

While growth in the OECD economies is likely to grind to a halt by year-end (Chart 3), global growth should regain a four-handle by next year. That will fall short of the near-record pace of growth of the last several years, but it will be more than sufficient to boost the energy and commodity-laden TSX.

The TSX is likely to take a run up to 14,000 before feeling the bite of interest rate hikes later next year. Not having cut rates as much as the Federal Reserve Board, the Bank of Canada will find itself in the enviable position of not having to raise them as much on the way up. The Bank is likely to do no more than half the Fed’s 200-point rise while the loonie breaks through parity again on the back of climbing crude prices.

While Canadian growth should also stumble during the second half of this year, rising energy prices next year will once again add momentum to both corporate profit growth and income gains throughout the resource-dominated Canadian economy. GDP growth rates back in the 3% area by the second half of the year should halt the rise in the national jobless rate which is likely to peak at just over 6½%. But inflation, stoked by the same energy price pressures felt south of the border, will re-ignite, suggesting the Bank of Canada’s work, like that of the Federal Reserve Board, may not yet be done.

After last week, many people have commented that the sub prime issue is finally solved. The government has created an absolute boatload of debt, and it appears to have been taken in stride by everyone. However, let’s look at what actually happened.

So on Monday this week, after everyone had a weekend to think about how the government is going to raise this $1,000,000,000 in cash, they realize that it will come at the taxpayer’s expense. No surprise to those that read my daily column, but nonetheless, the industry “experts” were a little worried. Not surprisingly, the markets took a tumble yesterday.

The total US debt is approximately $9.5 Trillion dollars. In the past week, the government has made plans to increase this amount by approximately 10%. So in the last 200 years of existence, they have wracked up $9.5 Trillion in debt, and in one week, have committed to spending another $1 Trillion or 10% approximately.

There is a lot of talk that the US debt will be downgraded from AAA to AA and this could have the effect of increasing their carrying cost of debt by a HUGE amount (billions annually).

There is also a lot of people ignoring the fact that there is a huge amount ($1 Trillion approx) of sub prime paper in Alt-A mortgages (stated income) that will face a rate reset or renewal trouble, and this could result in up to 60% of the mortgages going bad or being unable to renew and this could serve to deepen the crisis.

Sadly, in my opinion, we are a LONG way from the end of this crisis. How long? It’s anyone’s guess, though I Would suspect a 2-5 year time horizon before the real estate market is back in equilibrium…

An interesting point was raised by a colleague of mind: the US is the capitalist centre of the world when money is being made, but when losses begin to occur they change to a nearly-fascist or welfare state. They have criticized many countries in the past (Japan for example) and have said they should just let the bad companies go bankrupt. Now that shoe is on the other foot, and the bailouts and government intervention is coming fast and furious. Profits are a private matter, apparently, but losses appear to be a public issue.

I, for one, disagree with this policy, but then again I am just a mortgage broker with his opinion on a blog.

Until tomorrow…

When CMHC announced they were cancelling the Zero Down program and 40 Year Mortgage, I heard one mortgage broker remark that it was the beginning of the real estate recession. I first scoffed at his comment, but then had an absolute ton of applications for both of these product along with many, many, many applications that did not qualify. There was a rush of people trying to get in under both programs, and it was clear that a lot of people had assumed the zero down program or No Money Down Mortgage program would still be around. I also made this assumption.

So HOW DO YOU GET A NO MONEY DOWN MORTGAGE now that the rules have changed?

Prior to the current zero down program, there WERE other ways to buy with no down payment. Originally it was called “Flex Down” and this program allowed you (at the expense of a slightly higher CMHC fee) to borrow your down payment from a credit card, personal loan, family, or through a lender cashback incentive offer. This program still exists! However, there are a couple of rules:

1. Just having the required 5% down payment does not mean you qualify. You still need to prove adequate income and credit history. If you are borrowing the down payment, you can expect your bank to be extra strict on what they will or will not allow.

2. If you get the downpayment in the form of a cashback from your lender (For example, Scotiabank has a 5% cashback program where they will gift you the down payment) you can expect the following:

- A higher rate than everyone else with a saved up down payment is getting
- Harsh penalties if you break the term of the mortgage (maybe an extra large penalty)
- Forced repayment of the cashback if you sell the property or break the term of the mortgage

An example of how this looks is as follows. Let’s say you see a condo for $400,000 in downtown Vancouver that you like. You have a good job, great credit, no other debts, and you want to see what sort of terms are available.

OPTION #1 – Cashback mortgage

Under this option, the bank will GIVE YOU 5% of the purchase price (in this case $20,000) at the closing of your purchase that you can use this as the 5% down payment. Instead of the 5.50% that everyone else is able to get, you will be paying 6.70% instead. This will pay the bank back for their gift of $20,000 over the life of the mortgage. Therefore, your payments will be higher. In this case you will be paying $2,402 per month instead of the $2,090 that you would be paying if you had saved up the down payment. That is $312 more because you got the gifted downpayment from the bank. $312 x 60 months in a term = $18,720 which essentially repays the bank over the term of the mortgage. Should you pay out the mortgage early, you may face a longer than 3 month interest penalty (6 months, for example) and you will likely have to repay the bank the 5% gift they gave you. These are standard terms, and you will NOT be able to avoid them no matter how long you have banked there, or how much your family has with them. There is no free lunch in this game, and you can expect fees.

OPTION #2 – Borrowed Downpayment

Under this option, you will borrow the down payment from a visa or loan at whatever rate they charge (could be as high as 19% or more!) BUT… and this is a big “but”… you will get to borrow the rest of the mortgage at the fully discounted 5.5% rate. Most people will take an interest only line of credit at, say, 9.75% for the $20,000 needed and borrow the rest fully discounted at 5.50%. Under this scenario you would face the following payments:

$162.50             Payment on Line of Credit
$2,094 Payment on mortgage
$2,256.60

So, compare this to the payment of a gifted cashback downpayment versus a saved downpayment versus the current (but cancelled) zero down payment program. Here is the comparison:

$2,211.00                   Current program (being cancelled Oct 15th, 2008)
$2,090.00                   Saved Down Payment
$2,256.60                   Borrowed Down Payment
$2,402.00                   Gifted / Cashback Down Payment

So clearly, it is cheaper to save the down payment, but not everyone can do that. The next best option is to borrow it, but not everyone has th credit score to pull this off. Lastly, you can do a cashback mortgage, but even this requires a certain level of credit and income that not everyone has. However, these are three options for a no down payment mortgage that existed before the current program came into effect, and all will remain after the current program is cancelled.

So, in summary, zero down and the no down payment mortgage IS still available despite the CMHC rules changes. If you are having trouble obtaining financing, please let me know and I will make sure we set you up appropriately.

Consistently, people find my blog while shopping for mortgage rates. Usually, the ask me for a deeply discounted variable mortgage, or one of my promotional rates. However, when I talk to them, I often find out that their needs, and their wants, are VERY different. For example, a person that really has to stretch to afford their mortgage should NOT be on a variable rate mortgage with payments that could rise with prime rate. This could stretch their already-thin budget to the breaking point. As much as I like to write mortgages, I also have to be sure that my clients can afford what I set them up with.

As a result of this, I have decided to talk about the current interest rate trends, best rates in canada, and prime rate trends.

Let’s start with a survey of what my rates currently are:

1 Year                 4.70%
2 Year                 5.09%
3 Year                 5.04%
4 Year                 5.19%
5 Year                 5.14%
7 Year                 5.55%
10 Year               5.55%
Prime Rate           4.75%
Variable Closed  Prime – 0.65%
Variable Open    Prime – 0.50%

So at this point in the real estate cycle, what should you take? Let’s first look at your income type. Are you a salaried person who has a relatively stable income? Or are you, like me, self employed, and have good months, great months, and lean months?

If you are salaried, and you have a relatively stable income, and IF the mortgage payments you are contemplating are well within your comfort zone, then you should consider a variable rate mortgage as they are offered at a much greater discount (at this point in time) than a fixed rate mortgage. For example, you can 4.10% rate on a variable (Prime – 0.65% where prime is 4.75%). This is in contrast to a 5.14% fixed rate. On a $300,000 mortgage, the difference in rate works out to $191 per month! (Assuming a 35 year mortgage ammortization). That is a substantial savings that is available to you if you choose variable.

However, if you are self employed (or salaried with very little safety margin) the risk of your payments rising with prime rate may outweigh the benefits. Consider for a moment, that we are near the 30 year historic low for prime rate. 4.75%. That is a LOT of room to move up, and not a lot of room to move down. However, given the discounts below prime, there IS a savings that you can capture of 1.04% (5.14% – 4.10%) which adds up over 5 years on a $300,000 mortgage to $11,460. That is huge!

If rates rise by 1%… or 2%… (these are NOT rare moves in rates other than the last 5 years) then you are suddenly faced with a much higher payment ($180 more up to $360 more) which could seriously impact your lifestyle.

Personally, having seen the devastation that variable rates wrought on my own family in 1983 when rates shot to 23% I like to take fixed rates. I like to know what my mortgage payment is every month with the certainty that keeps me sleeping soundly at night. If we were in an interest rate declining environment, then perhaps I would think otherwise. However, we are in an environment of rising / stable rates, and there is a lot more room upwards than downwards, and therefore I have a personal bias towards fixed rates.

That said, if a variable rate is right for you, then that is what you will get.

So do the analysis on your own personal situation as well as your peace of mind, and let me know what you would prefer and why.

This last week has been perhaps the most harrowing in the financial industry that I have been around to see. The week came out of the gates with the 4th largest investment bank in the US (Lehman Brothers) going down after several failed buyout packages. Subsequently, when it appeared that Merrill Lynch was on it’s way out the door as well, the governement stepped in and bailed the out in an effort to restore confidence. However, the battered and bruised economy wasn’t done! Within hours it appears that many other investment banks, brokerages, and financial institutions were going down the bankrupcty road as well. AIG, one of the largest mortgage insurers in the country then gets a government bailout for $85 Billion dollars leaving many people shaking their head and asking, “why not Lehman Brothers?”

It appears the government is picking and choosing who will be left standing, and this does little for investor confidence. I came upon two graphs on the net today. Here is the first, and it shows in a graphical sense, the money the government has “printed off” to try and print their way out of this pending disaster.

The second chart is a visual representation of the losses taken by the major financial banks in the sub-prime crises. Remember, these are actual dollars that are lost. These numbers are staggering in their size, and the companies that lost the most stand out glaringly.

On the heels of all this news, the government has started issuing a guarantee for mutual funds as people are cashing out of them in a dangerously fast pace as they try to save their capital. The funds are guaranteed for one year, and in my opinion this is silly logic.

My point: EVENTUALLY, SOMEONE HAS TO PAY FOR THIS PROBLEM!

As I have said in earlier posts on this blog, those that pay will either be Government (you and me), Investors (you and me) or homeowners (you and me). You can see the trend here. We, the public, will ultimately pay for this. The only alternative is that the government buys and prints their way out of the problem, and from an economic standpoint this should totally devalue the US dollar and destroy confidence in it as a medium of trade if the government can just fabricate more of it in a fiat-economy sense. I strongly dislike it when government steps into the way of the market and tries to bail everyone out.

Please do not think that I am just saying this of Americans. The filtration effect that we see in Canada and mortgages in particular is a tightening of the monetary supply and availability of credit. This results in fewer buyers, and fewer buyers translates into lower real estate prices. As a home owner, I recognize that I am going to lose a lot of money, but I also enjoyed the ride up. What the government is doing is trying to give people the fun ride up, without the downside. Long term, this isn’t possible, and a financial reckoning is eventually going to happen to us. I hope it isn’t as harsh and hard a landing as I suspect, but eventually the piper has to get paid.

In the spring of 2002, the largest mortgage fraud in BC history was discovered and blown wide open. The name of Martin Wirick has been slung around and dragged through the mud since that time. Nearly any person in the industry that I talk to has heard of Martin Wirick and knows that he commited alleged mortgage fraud, but few people know the actual story. I am sure that the TRUE story will never be completely known, to anyone other than Mr. Wirick himself, but for my readers I would like to outline how the events unfolded and how this type of mortgage fraud occured in BC with such a strict land titles system.

The investigation into the fraud was so extensive, spanning 6 years, and covering over $30 million dollars in losses by lenders and homeowners, that the Vancouver Police Department actually had to form a joint task force with the Vancouver RCMP Commerical Crime Section and get a fresh start on things.

Martin Wirick was not alone in this alleged fraud. Tarsem Singh Gill, a local land developer had much of the funds funnelled through his various company accounts. They are both charged with two counts of fraud and theft against 77 different homeowners, and two counts of fraud and theft against lenders in 30 loan transactions.

Despite all this, the institution that lost the most money was the BC Law Society as a result of covering all the loses, and good on them for stepping up! They paid out $38.4 million in claims on account of Wirick’s alleged fraud. The society levieda $600 charge to all members of the law society (all lawyers) and has subsequently reduced this to $150 per year.

So you may be wondering what happened to these guys?

Wirick resigned in May of 2002 (the year the fraud was discovered) and declared bankruptcy. In a strange twist, he then took a job working for Koko’s Gourment Pet Foods in the pet food business. This is a rather large step down, which he appears to have taken of his own accord.

Tarsem Singh Gill has continued to develop property in the area. How this happens and is allowed to continue is very confusing to me. Granted, the charges are “alleged” at this point, but “where there is smoke there is fire,” and it appears to me that authorities should be able to restrict his continued development.

So how did the fraud work? The techinical details are beyond the scope of this blog, but I will summarise an article write up from the Vancouver Sun.

The method to the madness was Gill would develop and sell it to one of his nominees. This nominee would arrange a mortgage on the property and then sell it to an innocent purchaser. Once the purchaser arranged their own financing from their own bank, they would forward the funds to Wirick with an undertaking to pay out the mortgage and register a new mortgage. However, Wirick wouldn’t do this at all, and would pay the funds to Gill through Vanview group of companies.

Oftentimes, Wirick would provide falsified discharge documents, and he would hold back a portion of the stolen funds to make mortgage payments and keep anyone from figuring anythingwas wrong. The new mortgage holder would expect that they had a 1st mortgage, but often they had a 2nd mortgage, and in some cases this process was repeated over and over for far more than the property was even worth.

When the scheme finally caved in, the messy web of transactions, funds, hold-backs, and frauds was daunting (thus the joint task force between VPD and Vancouver RCMP Commercial Crime Section.

When the fraud occured the law society has  $17.5 million annual cap on client claims for lawyer fraud. To their credit, the law society removed this cap as i was clear that this would not be enought to compensate the victims of the fraud.

Since this time, the society has stepped up its auditing of this member’s (lawyers’) trust accounts and advised its members to tell the society when a lender takes undue time providing mortgage discharge documents which was one of the ways that Gill and Wirick managed to perpetrate this fraud.

So charges have been laid, the alleged villains arrested, (and released) but will they be found guilty. It will be interested to see how this legendary case unfolds…

I frequently have people come to me for a mortgage, and after I get them approved, get them a rate, and get it all lined up, they drop this line on me, “we are first time home buyers. Do we get a better rate or something like that?”

The answer: no.

There ARE benefits to being a first time homebuyer, but mortgage rate is not one of them. First time homebuyers pay the same rate (sometimes higher if they don’t have an established banking relationship with their bank) than people with established credit repayment histories.

The second question is: “do we have to pay the full CMHC fees as first time buyers?”

The answer: yes.

The only way to get a reduced CMHC premium is by purchasing an energy efficient home with an R rating of 77 or higher, or by already paying CMHC premiums in the past and needing to buy again.  Being a first time homebuyer doesn’t help you with the banks.

So where does it help you?

In most cases, it doesn’t. However, there are two elements of being a first-time buyer that are helpful:

1. You can withdraw up to $20,000, tax free, from your RRSP to assist in purchasing a home. This money can be used for a down payment, furniture, moving costs, or none of the above. It is up to you. This is only available to first time homebuyers (or those that have not owned property for 7 years or more). There are some repayment terms that you will need to be aware of. You will have to repay the $20,000 (or whatever you took out) over the next 15 years in 1/15th instalments. Failure to make an instalment simply means that the 1/15th for that year gets added to income and taxed. Alternatively, if you just continue making RRSP contributions, you can allocate whatever portion you like as a Home Buyer plan Repayment.

2. Property Transfer Tax. As a first time homebuyer, you can avoid the Property Transfer Tax (PTT) one time in your life. This can be a substantial savings, and should not be overlooked. If you are purchasing a property up to $425,000 (up to $450,000 with a pro-rated tax payment) you can avoid the tax altogether. The tax is calculated as 1% of the frist $200,000 of purchase price and 2% of the balance. So, on a $400,000 purchase, the tax would be (200,000 x 0.01) + (200,000 x 0.02) = $6,000!!! This is a huge savings a first time homebuyer, and is what people are referring to as first time home buyer discounts or advantages.

People often lose their ability to avoid this tax when their parents put the family home in their name as a child. The parents often are just trying to avoid the tax themselves, and fail to realize that this will have a huge impact on their children in the future. If you have owned a principle residence (technically anywhere in the world although it is tough for the government to police) then you are disqualified from this first-time home buyer savings.

Other than that, being a first time home buyer is the same as being a fifth-time home buyer or tenth-time home buyer. The process is costly, and there is little that can be done to get around this reality.

The last few days in the financial markets have been complete chaos. First the 4th largest investment bank in the country files for chapter 11 bankruptcy, and immediately following this, the government bails out one of the largest mortgage default insurance companies in the country. It seems that the government is picking and choosing who they are going to bail out. For example, why not Lehman Brothers? No one seems to have any good answers as thousands of investors have eaten major losses in the Lehman Brothers failure, but then those invested in AIG have been bailed out. Why? There doesn’t seem to be any rhyme or reason, and if there is one thing in the financial markets that people don’t like it is uncertainty.

So how have these problems made their way up to Canada? Many people think that the sub prime problem is centered in the US and that we in Canada are isolated despite the US being our largest trading partner.

To understand the effect that the US crisis is having on Canada, you first have to be aware of how interconnected the banking and mortgage world is. For example, the government in US bailed out AIG, the largest single corporate holder of mortgage insurance. They are similar to CMHC and Genworth in Canada who allow lenders to lend more than 80% of the value of a property. AIG recently came up to Canada and launched aggressive new lending guidelines that revamped the face of the mortgage industry and cause CMHC and Genworth to also change their guidelines or risk being thrown to the side of a rapidly moving business.

Rumours have abounded for the last few months that AIG was no longer insuring mortgages in certain areas of Canada where it felt prices had gotten ahead of values. Although I have nothing to substantiate this claim, the two cities I heard most about were Calgary and Edmonton, both of which have experienced sharp price pullbacks.

So what is mortgage insurance and what is it for? Traditionally, banks could only lend up to 75% of a home’s value, but with the National Housing Act which set up CMHC in the 50’s (I think) banks were able to lend more than 75%. This type of mortgage is referred to as a high-ratio mortgage. What the insurance covers is default, or, in other words, when someone doesn’t make payments and the bank has to foreclose. In this case, the insurance company pays the bank any losses it incurs as a result of the foreclosure. Up until 8 years ago, only CMHC was around, but then GE (a division of General Electric) got into the market, and then recently AIG came up from the US. That makes 2 of the 3 of the insurers in Canada US firms! Should the US market start to take a dive, and should the insurers in the US (there are many more down there) start to take a beating, and start to go out of business, then we in Canada will likely see their Canadian arm disappear or retract and tighten up (as we ARE seeing). Should those companies fail altogether, it will leave Canadians with fewer choices for mortgage insurance, and we will likely see a major real estate correction. Fewer choices means less competition, and less competition means lower prices. It is simply supply and demand.

Add to this flux in the US the fact that rates in the UK have shot up dramatically in the past week. The LIBOR or London Interbank Offered Rate went from 3.33% to 6.44% in one day. That is nearly DOUBLE, and this is the rate that many mortgages in the US and Canada are pegged to. If this type of increase and volatility continues, you can expect banks offering variable rates to trim their discount dramatically. This is already happening with CIBC leading the charge and reducing their variable discount to prime – 35% (on average) and Royal Bank, TD, BMO, and many others following suit. We may soon see a time when variable rate mortgages are no longer offered below prime and could even be offered ABOVE prime if the volatility continues.

So that is the state of the mortgage world in Canada at the moment. I have a sneaking suspicion that the Sub Prime fallout is far, far from over, and that things will get much bleaker before they get better again. Ultimately, all this debt has to be repaid. It doesn’t just vanish, and whether it is investors (i.e. you and me), the governemtn (i.e. you and me), or borrowers (i.e. you and me) you can see that crunch time is upon us and will continue for some time.

I will try and update the status of this worldwide credit crunch more and more as it continues to be a major cause of concern for buyers and borrowers.

There was an article in the Vancouver Sun on September 15th 2008 that talked about the EXTREMELY LOW vacancy rates in Vancouver’s rental market. According to a recent report published by CMHC (Canadian Mortgage and Housing Corporation), vacancy rates for studio apartments and one bedroom apartments has plummeted to a 25 year low of 0.3%. In some cases, as many as 30, 40, or even 50 people are lining up hoping to get to rent a unit.

A researcher at Simon Fraser University, Kennedy Stewart, says that “it comes with urbanization. A chronically low vacancy rate is the sign of a city that has to adjust its expectations of lifestyle.” He went on to say that people wanting to live in in high density cities in their “teenage years” such as Vancouver may have to forgoe space and pets for the forseeable future. Apparently more than 50% of all units in Vancouver are rental units!

Pet owners are particularly feeling the squeeze as landlords are looking past them if they have pets of any kind. Until 2006 landlords didn’t have any right to select people if they did or did not have pets, but in Vancouver, with a relatively young housing stock, owners are more concerned about keeping their property in pristine condition and would prefer not to have pets in their units. Even visible minorities such as aboriginals and elderly are finding that they are being dismissed as potential tenants despite discrimination on these two factors being against the human rights code.

The article states that, “Even parents are finding it hard to find places to rent. “People act as if children are a disease,” reads a Craigslist post titled, “WHY DOES NO ONE ALLOW KIDS!!!”

The reality is that children are noisy, can damage things, and frequently are irrationally so on both counts, and it doesn’t shock me that landlords would prefer not to have them there. With the market awash with young professionals with great income and lifestyles outside of the home, why wouldn’t they have this preference? While I don’t morally agree with this practice, in the realm of investment, you SHOULD do whatever possible to protect that investment. With market prices declining across the board, landlords are feeling the squeeze to protect their investment more than ever and this is leaving women with children in a very tight spot.

The alternative, that no one likes to talk about, is an acknowledgement that not everyone can live in the high density areas. Politicians and media are loathe to make any claim that sounds “anti family” or “anti child” but the reality of the cold, hard, impassive dollar is that if I were choosing a tenant, I would prefer a young, single professional, to a single mother with children. It isn’t a moral judgment or a value judgment on my behalf, it is a judgment as to what is best for my investment. The day the government stands up and says how I can and can not invest, is the day that I pull out of rental estate, and the more owners that feel this way, the more compounded and difficult this issue will become. Stop gap remedies that force landlords to do (or not do) one thing or another to protect their investment are ill advised and rarely work. Again, this blog is all my opinion, and there it is.

Happy investing!