Monetary Requirements For Down Payment- some thoughts

Mark Carney has been VERY clear that he will not use monetary policy as a tool to keep credit demand in check.  It is too blunt a tool.  While they can reign in consumer borrowing by raising interest rates, they will simultaneously crush business spending, a key driver of growth coming out of the recession.  People who have been calling for a rapid rise in interest rates have been dead wrong for exactly this reason.  Last year they were adamant that we would very likely revisit emergency low interest rates before we would see rates shoot to the moon.  Deflation and not inflation remains the greater near-term threat.
With all of that in mind, it is very clear that the Bank of Canada is looking to Ottawa to rein in consumer debt.  They have made some clear policy suggestions in this paper, and you can bet that Jim Flaherty and Stephen Harper will be hearing all about them:

Recent international discussions have begun to examine the merits of adjusting mortgage market rules over time. For example, country authorities could change the maximum LTV ratio in acountercyclical fashion, lowering it during housing booms and raising it when house prices are depressed. One outcome of this type of policy is an increase in the resilience of the financial system since it requires borrowers to have a larger equity stake in their property during booms, thus reducing the potential losses to financial intermediaries during the bust phase when income and house prices fall.  In addition, the lower LTV ratio (higher down payment) would act against the boom in the first place by reducing the extent to which borrowers could extract equity from their homes or take on more leverage to buy a bigger home.

Christensen and Meh (forthcoming) investigate the role of a time-varying maximum LTV ratio in a model based on Christensen et al. (2009).13 They consider the impact when the public authorities respond to a credit boom by lowering the regulatory maximum LTV ratio below its long-run setting of 80 per cent.  The extent of the countercyclical response of the LTV ratio is determined by a regulatory rule that links the change in the LTV ratio to the level of mortgage credit relative to its long-run value.  Housing booms and busts are often attributed, at least in part, to an easing of mortgage-underwriting conditions. We now turn to the case in which lenders themselves supply more credit and consider how the outcome might differ if the LTV ratio was lowered in response.

And with that, the Harper government has just felt the heat to adjust down payments.  This move, coupled with the reinstitution of the regional maximum mortgage ceiling by CMHC would go a long way in letting air out of this exceptionally buoyant market and limiting consequences in the future.
Expect a flood of rebuttals from the mortgage industry...

Who Has the Lowest Cost of Borrowing?- That's the Right Question: Ask it!

I get several calls and emails a day asking something like: “Who has the lowest rate?”
Rarely do I hear folks ask: “Who has the lowest total cost of borrowing?”
There’s a big difference between the two. The interest rate is just one of multiple factors that determines your total cost of borrowing over the term
There’s so much in the fine print that can turn a low rate into an expensive rate, including but not limited to:

• Poor term selection
• Overlooked mortgage restrictions
• Bad conversion rates
• Onerous mortgage penalties (relevant when refinancing or terminating before maturity)
• Unanticipated fees
• Bad advice (e.g., on deal structuring, penalty minimization, etc.)

Regardless of where you plan to get your mortgage, you owe it to yourself to ask a professional if the mortgage you’re considering really does have the lowest “total cost of borrowing”, given your needs.
Make sure your adviser compares all available lenders for alternatives, not just the lender(s) he/she works for or work with, most often.

Lower Fixed Rate Mortgages on the Horizon

Yields Crash, Lower Fixed Mortgage Rates Coming

The 5-year bond yield has nose-dived 16 bps today, crashing through “support” at 2.00%. It’s the biggest plunge in yields since March 2009.
As of this writing, the 5yr GoC sits at 1.87%—seemingly en route to its 28-month low of 1.835%.

Yields are hurtling lower in response to a slew of negatives including:

• “Austerity measures” (spending cuts) built into Congress’s debt agreement. Those will drag on Canada’s economy.
• Weaker economic data out of the U.S. (like yesterday’s brutal ISM number)
• Ongoing angst about the euro-debt dilemma.

On a positive note, global investors are now finding Canadian treasuries far more appetizing—due in part to Canada’s AAA debt rating, budgetary prudence, and stable currency. That has sparked a money rotation into Canada, adding to today’s bond buying. (When investors bid up Canadian government bonds, our yields drop.)
With the American debt Band-Aid in place and yields crashing, lenders should now be ready to drop posted fixed mortgage rates (barring unforeseen events).
Today we’ve already seen:

• A major bank lower discounted fixed broker rates by 10 bps to 3.69%
• A few non-bank lenders cut 5-year fixed rates by 10 bps
• Brokers offering 3.39% on no-frills mortgages.

Variable-rate mortgagors should also benefit from all of this (mortgage-wise, if not economically). That’s because a BoC rate hike appears to be off the table in 2011…if you believe what Overnight Index Swaps (OIS) and BAX futures are implying. If true, prime rate will stay put for at least the short-to-medium term.