You read that right…

The biggest of the banks are all writing down investments and claiming huge losses. In fact, in the case of some institutions, they have had to go back to the equity markets to raise capital.

TD Bank said it was forced to raise up to $1.4 Billion in new capital to shore up their reserves. This is a very large step (selling a stake in itself) and has made it one of the few institutions in the world to issue common equity given the state of the markets.

RBC said they too would be raising $225 Million, a far more modest amount, by selling recallable preferred shares on the heels of disclosing over $1 Billion in losses on its investments that have depleted its reserves.

Scotiabank also announced that they would be taking a $595 Million dollar after-tax loss due to the turmoil in the financial markets. The charges include $115 Million in trading revenues related to the Lehman Brothers bankruptcy, and $370 million in adjustments to the value of their investments.

So, the big banks are taking losses all over the place. The market is changing, and the mortgage offerings that people will receive will no doubt change as well to account for this. I will be posting a lengthy post tomorrow about how the Canada and US markets differ, and I hope this makes the case that even price-heavy markets such as Vancouver do not have to worry as much as the US.

Looking back at the past, oh, 15 years that i’ve been consciously aware of the banks, finances, and the market, I cannot remember seeing the banks take these steps: even during the massive losses that were incurred in the tech bubble. Change is in the wind and I have no idea where it will take us, but I’m sure that wherever it is, money will remain tight for a very long time.

The bank of canada moved rates more than expected today by lowering its target overnight rate by 0.75% to 1.50%. Usually, this means the banks will follow suit by lowering their prime rate by 0.75%

USUALLY…

Does this mean the banks “have to lower prime rate” by 0.75%.

NO.

There is no legal mechanism that preserves this relationship. The Bank of Canada is not able to force the banks to lower their rates as doing so would be tantamount to forcing the banks to potentially take a loss. Highly unlikely.

The inital reaction was the TD, RBC, Scotia, and several other lenders lowered their prime rate. But, by how much? In EVERY case so far, prime rate at the banks has only fallen 0.50%.

The exact same thing happened the last time the Bank of Canada lowered its prime rate: initially the banks didn’t follow suit. However, competitive pressures (not the Bank of Canada) resulted in them ultimatley all lowering rates to same level as the Bank of Canada.

With the recent declines in trade, real income growth, and consumer confidence, the Bank of Canada no doubt hopes that this move will spur some further consumer spending. With sales this year already higher than last year at retailers (so far) , the lower rates paid by consumers may be working, but lower rates usually take several months to filter down to higher spending, so likely we are seeing the results of prior rate cuts.

With lower rates available in Canada, look for the Canadian dollar to tread lower in coming days. Why? Rates have been falling on fixed rate mortgages (and term deposits) for a few months now. As rates available to investors go lower, the demand for Canadian dollars falls, and therefore, the price falls. The relationship is more complex than this, but this provides a macro look at why we may see a lower dollar in the future.

The Bank of Canada will continue to monitor the economic conditions and will make another planned announcement on January 20th, 2009 when they next meet.

So, I am happy to see rates falling, as this always makes my job as a Mortgage Broker easier and easier. That said, there is a reason that the banks have eliminated discounts off of prime rate in past months: lower profits (or sometimes losses). Most institutions are still at prime + 1% for variable rate mortgages (with a couple at Prime + 0.60%). With the rates falling lower, and therefore their profits, how low can the banks allow the variabler rate mortgage to go?

My asnwer is that clients that have a discounted variable product (whether it is at prime – 0.90% or prime – 0.35%) you should hold tight and NOT convert to fixed until we see an upward bias appear in rates. Currently, rates appear to be poised to fall further. For clients looking at variable rates on a NEW mortgage, you may want to take advantage of some of the low 4.80% fixed 5 year rates that are available. However, you personal situation may make the prime + 0.60% variable an attractive offer. Call me for a free consultation and to determine what is in your best interests at 604-657-6775 as I am a registered mortgage broker and AMP (Accredited Mortgage Professional).

I was listening to the president of CAAMP (Canadian Association of Accredited Mortgage Professionals) today and he was making mention of his take on interest rates, where they are, and where they are going. I thought his comments were quite insightful, while also providing some good advice to callers. However, several points were, again, glossed over, and I think we need to cover them here.

WHERE ARE RATES TODAY:

Here is a list of the BEST rates that I am currently offering:

1 Year                – 4.35%
2 Year                – 5.10%
3 Year                – 4.79%
4 Year                – 4.89%
5 Year                – 4.80%
7 Year                – 6.05%
10 Year              – 6.20%
Variable:
5 Year Closed    – Prime + 0.60% (4.60% Currently)
5 Year OPEN      – Prime + 1.00% (5.00% Currently)
Line of Credit     – Prime + 1.00% (5.00% Currently)
Prime                  – Is Currently 4.00%

Since posting these rates I have taken a plethora of question and emails and I will attempt to address them here…

I have received several emails saying, “Rowan, my bank is offering me an open mortgage at PRIME RATE,” and you are posting prime + 1% on an open. How come?”

The answer: If you are an existing client of a bank (RBC for example) and are trying to renew early, and not take any new money, and keeping the same amortization they MAY offer you this deal as it requires no re-registration with a lawyer (it’s already registered at that rate). I say “may” because I have yet to see one of these offers in writing. For a new client, buying a home, or seeking to refinance, this offer is not being extended.

I also hear the question, “Rowan, why is your 5 year rate so much lower than my bank?”

The answer: My firm chooses to do a lot of business with the top lenders in the country. As we send them hundreds of millions of dollars per year, we get treatment that a single client may not receive. Think of it as financial clout or “mass quantity discounts.” Just the same way that you can buy 1 orange for $0.25 or 100 oranges for $20.00 (just an example). The more business we do with specific lenders, the more efficient we are, and the more they like doing business with us – thus they offer better pricing (rates) than they offer – sometimes better than they even offer through their own branches. The bottom line: it pays to use a broker that is associated with a high volume office.

Another common question is: “Yeah, I know your rates are low, but are they with a reputable bank?”

The answer: Of course! They are with a nationally chartered bank! We don’t deal with unstable, unscrupulous institutions. We deal with all the major lenders out there (and some smaller ones you may or not know) but they are chartered banks that are offering my low rates currently.

Lastly, I hear the question from other BROKERS: “Where are you getting that rate?”

The answer: Unfortunately, I am not willing to divulge this information to other brokers. I have worked hard, and so have the team in my office, to establish our relationships with our lenders. This is what makes us different, better, and a cut above the competition: our relationships. If a client wants to discuss who the lender is, that is fine, but I will not give the “keys to the kingdom” to another broker who is unwilling to do their homework. Sorry. This is the same reason I don’t post which lender has which rate on my website or blog. If you like what you see, please give me a call.

Happy hunting!

I’ve been made slightly crazy this week with clients telling me they have been working with a “TD Mortgage Broker” or a “RBC Mortgage Broker.” Why is this making me crazy?

Because, they are NOT Mortgage Brokers!

The very essence of a Mortgage Broker and our service, is that we are independent, not tied to any one lender, and able and willing to access lenders with the best rate, product, and service to fit a client’s unique situation. If you are dealing with someone from TD or Royal Bank or BMO who is a “Mobile Lending Specialist” or Business Development Manager, THEY ARE NOT A BROKER. They are just the same as the person in the branch. They are there to drive business to their respective institution, but they are given a slightly different mandate: They can come to you, at your house, or in a move convenient location. However, they are, and always will be, working for the institution with their parent company’s best interests ahead of your own.

A true mortgage broker does not deal with only one lender (or even two or three!). A true mortgage broker acts as a third party who has a fiduciary duty to their client. This is a duty to look out for the financial best interests of their client. If TD is offering a rate of 5.55% for a standard 5 year closed mortgage, and, all other things being equal, we can get you the same product at Scotiabank but at a rate of 5.25%, a mortgage broker will ensure that your mortgage gets done at Scotiabank. A TD “Rover” or Mobile Lending Specialist is only equipped (and heavily incented) to send the business to their own company.

Now, there are exceptions to this rule. I have seen TD Mortage Specialists that can’t get a deal done at TD, and then end up using a broker-channel lender once TD has declined the business. However, the business still gets first shot at TD.

I am naming TD here, not because of any inherent dislike of them, but rather because their TD Rovers and mobile lenders are often confused with mortgage brokers because many of them work out of real estate offices, and work non-traditional hours. Naturally, they don’t want to change this image of themselves as independent brokers, so they say little to contradict the rumour that their client is dealing with a mortgage broker.

Be very wary when dealing with a mobile lender that deals exclusively (or primarily) with one lender. As a true, independent, mortgage broker, I take your mortgage “to market” and shop for the best rate and terms at ALL lenders (except RBC, Coast Capital, and BMO because they won’t deal with mortgage brokers and have their own mobile lending staff which they feel is more cost effective). I have over 30 institutions that I can take your mortgage to: many you will have heard of, and many that you will not have heard of.

Lastly, a mortgage broker is a licensed individual, who is overseen by FICOM (Financial Institution Commission) who regulates and assures ethical practices amongst its member brokers. Most mortgage brokers also are members of their provincial and national broker associations. In my case, I am a Member of the Canadian Assocation of Accredited Mortgage Professionals (CAAMP) as well as the Mortgage Broker Association of British Columbia (MBABC). Lastly, I hold my AMP designation making me an Accredited Mortgage Professional, and this is the highest level of education, oversight, ethical training, and continuous education in the country for lending professionals. Your local bank employee rarely has any of the the above certifications that attempt to ensure ethical practices and ensure proper training and oversight.

When dealing with me, you can be sure that you are getting truly independent advice. I don’t favour one lender over another (unless they have the best rate or product in the market at that time) and always send my deals to whichever institution offers the best overall package. Rate is a very important part of the package, but it is by NO means, the only issue. Term, ammortization, pre-payment priviledges, flexibility, portability, assumability, and many other concerns need to be given equal consideration along with long-term plans, career aspirations, and credit worthiness.

Don’t mistake your local banks’ mobile staff members as brokers. They aren’t. Deal with a true broker, and you will receive superior rates, service, and product selection. Call us up, you’ll be glad you did.

So I haven’t posted in over a week, and it’s been because i’ve had my head down working like a dog while reeling from the effects of the last week’s meltdown in the financial sector. Finally, after an up and down week, and Fed in the US approved the bailout. You would think that this is great news for the real estate industry, right?

I’m not so sure. What this plan effectively did is nationalize a private problem. There is a saying somewhere that when profits are made they are private, but when losses are taken, they’re public. I know that isn’t a direct quote, but it is close enough to get the gist of it. It is also very very true. So long as the market continued along unabated, with profits being made, private investors got to keep all their profits, spend it as they wished, and not have to pay anything other than taxes. When the problems set in, and the investors all stood to lose a lot of money, enter the Fed and a massive public bailout that effectively increases the national debt that took them over 100 years to build by 10% in a single blow. I don’t like the precedent that this sets, and hope that the bailout doesn’t totally bail out all the lenders and institutions that acted irresponsibly over the past 8 years. That said, I also don’t want the market to go into a tailspin and melt down.

A lot of the price appreciation we have seen in Vancouver Real Estate in the past few years is driven by the market being very desirable to live in, own in, and even rent in. As a result, prices have (and should have) risen. However, as someone on the front lines of mortgages and real estate, I DO think that prices have gotten ahead of value, and we are in for a correction.

Unlike the United States market, however, I do NOT think that prices will come crashing down around us. Our lenders up in Canada, (yes, even those based out of the US) were more conservative than there brethren in the US and required a borrower to have more than a pulse and sufficient body temperature to warrant getting approved for a mortgage.

Did we have true sub-prime lending in Canada? Yes, but only at a few lenders, and always at no more than 95% financing with most preferring to remain at less than 80% financing even on rock-solid properties. The US actually had lenders lending (in some rare cases) up to 125% of the purchase price with the hopes that property prices would continue to rise and put the clients back “into the black” in a few short years. While this strategy allowed clients to roll all their other debts into their mortgage as well, it only worked while prices continued their meteoric rise upwards. When they started to roll back, that was the end for those lenders (and insurers who insured the mortgages).

So where are we going from here? I met with a few other brokers over the weekend and we chatted about where the market is as well as some of the large pull backs in prices we have seen recently. Most of us agree that prices are likely still going to continue downwards for a while, and the fact that money is still getting tighter and tighter and guidelines more and more restricted will only compound this issue in the near future. CMHC is slated to release some new guidelines any time soon, and I suspect that their “Self Employed Simplified” program will disappear or reappear in a far more conservative form. This could make it far more difficult for self employed borrowers who show no income to get qualified. Given the very high percentage of self employed borrowers in BC, this will have a disastrous effect on real estate prices if we are correct. I hope that we aren’t.

So, if prices continue to decline, should you still buy?

The answer depends on your plans:

1. If you intend to buy and hold it for 5 years or more, then yes you should still consider purchasing rather than renting.

2. If you are buying an investment property, I would likely shy away from the Vancouver market in the next year.

3. If you are intending to flip the property, DO NOT get into this market. I have many, many buy-and-flip investors who have purchased properties, poured $100K into them, and cannot sell them for their original purchase price at this point. Buy and flip is not shrewd in this market unless you are buying at a substantial discount and putting essentially no capital into it.

The bottom line is that if you are buying a home, long term, you should always get into the market, buy as much house as you can afford, and let history, scarcity, and payments do the rest for you. You will always come out ahead, and I defy anyone to prove a 10 year period in Canadian history where if you purchased you would have been better off to have rented. That period doesn’t exist, and for that reason, buying property in Vancouver is still a good LONG TERM investment.

Happy hunting!