The Mortgage Investor
Tuesday, September 1, 2009
The Ascent of Money
The Ascent of Money by Niall Ferguson is a worthwhile read for anybody who saves money, owns a home or makes a living paid in some form of currency. In other words, it is for just about everybody, but most importantly, it is useful for those who make our living in the mortgage investment field, and those whose income is derived from mortgage investments. "Of far greater interest is Mr Ferguson’s general theory, which does not emerge until the end of the book. He thinks that finance evolves through natural selection. Although the professor cautions against the sort of Darwinism that sees evolution as progress, he believes that new sorts of finance are constantly coming into being as the environment changes. The sequence of creation, selection and destruction is what has generated many of the financial techniques that modern economies depend on." The Economist Book Review
And then there is the tendency of the United States to have a major financial services conflagration every fifteen to twenty years, the last one being the most severe since the Great Depression. No one should ever bet against the Americans coming to the forefront again. They still have the world's largest economy despite its difficulties with its fundamental financial and regulatory institutions. It may even be that these fundamental flaws allow for an evolutionary die-off of participants including major banks and other financial institutions every few years to allow the new growth of a entirelyh new generation.
The rebirthing of the American economy allows the weak to die and the strong to thrive. This may not be what Adam Smith (the Scottish economist who founded economics as a discipline) had in mind when he talked about the "invisible hand." However, unfortunately for the weak, economic Darwinism may be just what the doctor ordered for a stronger economy long term.
Beyond the Age of Leverage: New Banks Must Arise
Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt....Niall Ferguson in "The Ascent of Money"
Friday, August 28, 2009
Why Use a Mortgage Broker?
As far as it goes, the above probably is what most people understand as the main advantage of using a mortgage professional.The result of this belief is that most people only consider going to a broker to get the best interest rate rather than the best mortgage for them. And this distinction is the foundation of what a mortgage professional should be doing for most consumers. Far more consumers would use brokers if they truly understood the advantages to them of doing so.
There are actually many differences between lenders, and between mortgage products marketed even by the same lenders. Mortgage products are highly nuanced in their design, and actually there are major differences simply based on the type of mortgage obtained.
I’ll briefly cover some of the major differences:
1. Open vs closed mortgages. An open mortgage is simply a mortgage that can be paid off at any time without any penalty for being paid out early. Although an open mortgage always has a specific term, the term is simply the period at the end of which it must be paid out or renewed by the lender and borrower. Open mortgages are therefore more desirable for someone who may wish to pay off his mortgage prior to the end of a normal mortgage term, and are often preferred by real estate investors who buy and sell real estate as a business proposition. There are good reasons for the average consumer to avoid an open mortgage, primarily the fact that open mortgages have signicantly higher interest rates for the same term as a closed mortgage.
2. The term of the mortgage. Mortgages range in term from six months to forty years. In Canada there are mortgages available from six months to 10 year terms. The term is simply the period at the end of which a mortgage must be paid out or renewed by mutual agreement of the lender and borrower. Popular terms for mortgages are six month, one year, two year, three year, four year and five year. Seven and Ten Year mortgage terms have been recently reintroduced to the market and are gaining some popularity with people who want a high level of certainty in their mortgage costs over a long period. Different terms often reflect different interest rates to be charged for the duration of the loan. Sometimes longer term mortgages are more expensive and sometimes less. These changes in interest rates, based on terms, are critical to a borrower getting the right deal to meet their situation. A wrong choice for a consumer can have serious long term consequences including major cost differences upon the sale or refinance of a property. Picking a mortgage term and rate without analysing a borrower’s situation is like buying a vehicle without knowing what it is going to be used for. Would you drive a dump truck back and forth to work every day? Not likely, but sometimes a mortgage picked without consideration of various issues is at least as inappropriate as using a sportscar to haul cement to a construction site.
3. Amortization. The period of time over which the principle of a mortgage is paid off by periodic payments. Historically most mortgages in Canada are twenty-five year amortizations. In the last few years the lenders have made other, longer term mortgages available. This has the effect of reducing the monthly payment needed to pay the mortgage payment, but increasing the length of time that a person has to pay that payment. The net effects of a longer amortization period are both good and bad, including making housing more affordable for new home buyers, but also keeping people paying mortgages long after their retirements, or forcing people to postponing their retirements. Historically Canadians paid off their mortgages long before retirement. This is no longer true in major urban markets due to a combination of high housing costs and other economic factors that determine the relative allocation of income to paying off a borrowers debts.
4. Variable vs fixed mortgages. Variable mortgages are mortgages where interest rates fluctuate over the term of the mortgage, based on a relationship to the bank prime rate. Historically variable mortgages were considered to be superior to fixed rate mortgages in assuring the lowest possible cost for mortgage financing over the term of the mortgage. However, since the collapse of cheap money from the US bond market, variable rates have fallen out of favour due to their increased costs. Bank have increased variable rates significantly since the US financial collapse. Most brokers today recommend against variable rates except under special circumstances. There are still situations where variable rate mortgage make sense, and a mortgage broker will consider those alternatives when making a recommendation to a client.
5. Conventional vs insured mortgages. If you want to purchase a home in Canada, and you have less than 20% of the purchase price for a downpayment, and you want the best interest rate in the market, you will be required by your institutional lender to qualify for and pay for mortgage insurance. This specialized insurance product insures the lender against loss caused by default from non-payment for any reason. In other words it eliminates the risk that a borrower will fail to pay the mortgage, and allows the lenders to lend money at what would otherwise be an uneconomic rate of return. By the passing the risk of foreclosure off to an insurance company (CMHC) or (Genworth) banks and other institutional lenders reduce dramatically their costs associated with risk management. The insurance is paid for by the borrowers, but its direct benefit is to the lenders, as borrowers in Canada (generally) are still liable for any shortfall paid by the insurance company. The only benefit to consumers is that it makes mortgages substantially cheaper than they would be in the absence of this insurance. Insurance premiums are paid at the beginning of the mortgage out of the proceeds of the mortgage loan at range from 2.5% of the borrowed amounts up to 6.5%. Loan below 80% of the value of the purchased property do not always require insurance, and are known as conventional mortgages, however it is increasing common for lenders to insure these mortgages as well, but without charging the consumer a direct mortgage insurance premium. The advantage to a lender is that insured mortgages are marketable in the bond marketplace, whereas uninsured mortgages are not (at the present time, although they may become so again in the near future if US financial markets continue to improve).
6. First, second and other mortgages. Most people don’t know that a second mortgage is only a second mortgage because it is registered later on the title of a property than the “first” mortgage. Second mortgages have become increasingly popular as a means of obtain additional capital between the end of terms of various bank mortgages, as they may be less expensive, overall, than rewriting a first and incurring a mortgage penalty. Also, many people who cannot get a new first mortgage because their credit has been damaged by circumstances or unemployment, can borrow under a second mortgage, pay off their other debts, and improve their credit rating. This then allows them to qualify for a new insured (lower cost) first mortgage.
7. Mortgage Life Insurance. While mortgage life insurance is sold by virtually every bank and institutional lender in the Canadian marketplace there are substantial differences in the nature of the life insurance purchased from a bank compared to comparable products sold by mortgage brokers. Banks typically sell insurance where the underwriting takes place after a claim is made. As unbelievable as this seems to the uninitiated, what it means is that if someone has bank sold life or disability insurance, and then they make a claim, it is the insurance company’s policy to challenge the claim by requiring medical evidence be obtained from the deceased person’s doctor or disabled person’s doctor that the insurance company can use to disqualify any claim, by claiming that the insured person had a pre-existing condition which means that they weren’t really insured at all. The bank will refund the premiums collected from the borrower, but his heirs are out of luck as is he if he disabled. Brokers have access to mortgage life insurance that is underwritten prior to the policy being issued, so that if a policy is issued, and there is a claim under the policy, except for fraud, the claim is paid as expected. In addition, life insurance sold by the banks is automatically cancelled if the mortgage is refinanced through another lender. With broker supplied mortgage life insurance the policy is not affected by a change in lenders.
The above differences between different mortgage products and services demonstrates the value of using a mortgage professional to choose your mortgage and mortgage provider, however, a mortgage professional provides many addition benefits to a borrower including facilitiation of meeting the requirements set out by a lender when they approve a mortgage loan. A good broker will ensure that a borrower is well prepared to meet these requirements prior to actually applying for a mortgage, including advising the borrower as to the documentation to be required such as:
1. Evidence of income for at least two previous years
2. Job proof
3. Purchase and Sale document of all sorts
4. Information about property such as heat, water, local utilities, type of construction, etc.
5. Other documents needed by the lenders
Finally, a mortgage professional will monitor your mortgage so that six months before its term is over, the broker will contact you to ensure that you are given the best alternatives available to replace the mortgage.
And these are only the highlights of what a professional mortgage broker does for his clients. It’s a lot more than just shop for a cheap rate. However, that’s not the end of it.
Brokers don’t generally shop your mortgage at all but rather place your mortgage with a lender based on a complex set of considerations one of which is the best rate available for the client under the circumstances. As discussed above, the cheapest rate is not always the best rate for a given client’s situation and a lender with the cheapest rate for a given term and type of mortgage may still not be the best choice. Banks and lenders generally are in a service business, and the quality and diversity of their services also enters into consideration. In addition lenders decide which brokers have the right to submit business to them and reward their chosen brokers very well with bonuses and other financial and other considerations for sending them business.
In an ideal world brokers would never choose to send a deal to a bank just because they would receive a higher commission for doing so. Given human nature, and the fact that banks and lenders would not provide bonuses and other compensation unless it worked to cause brokers to send them deals, it is highly likely that brokers are influenced by the compensation earned.
In most provinces there is Conflict of Interest legislation which requires disclosure of a financial relationship between a lender and mortgage broker. I generally don’t believe that it goes far enough but disclosure rules are designed to flush out bad apples, not professionals operating ethically.
But lest you think that the banker isn’t in the same potential conflict of interest, think again. Your bank loans officer has no conflict of interest, because he or she has NO DUTY OF CARE to the borrower at all. His obligation is to meet bank policy and write loans that fit bank rules. If a borrower doesn’t fit the bank criteria, well, then it's just too bad, and the borrower will be declined, in a manner that will leave the borrower feeling less than satisfied with the outcome, and without any assurance that any alternatives have been considered or presented.
By the way, shopping the mortgage as it were, putting up a deal for bidding by multiple lenders is not permitted by most lenders. Brokers are expected to submit deals to one lender at a time, only submitting it elsewhere after a reasonable period of time for the lender to respond.
There are many issues related to getting a mortgage for the average person, and despite the potential for conflict of interest by a broker, a person is far better off getting advice and support from an Accredited Mortgage Professional (AMP).
Choose a professional broker who has earned his Accredited Mortgage Professional accreditation from the Canadian Association of Mortgage Professionals, and ask questions. Is he or she really interested in you and your needs as a borrower? Or is he or she simply in a rush to get your mortgage done quickly, without being particularly concerned about the details of your situation.
Comments on The Mortgage Investor: Why Use a Mortgage Broker?
Wednesday, December 31, 1969
I recently came across your blog and have been rea...
Susan
http://pay-dayadvance.net
Thursday, August 6, 2009
Summer Outlook - August 2009
Real Estate Sales in Greater Vancouver hit highest sales level ever!
There can be no doubt that the real estate market is returning to a sellers market in the Vancouver marketplace and that values are beginning rise significantly, up 10% in price since January of this year, and now down only about 5% from the peak of the market prior to the recent downturn.
One of the hazards of the new confidence in the markets, however, is that there is still signficant bad news out there on the jobs front as well as continuing instability when it comes to lenders and mortgage finance. Bonds are still suspect, and alternative lending is fragile where it exists at all because of the US experience and lack of confidence in the secondary mortgage markets that used to exist.
Citizens Bank withdraws from retail banking.
Citizens Bank was a noble experiment in the retail marketplace by its owner VanCity Savings. However, it was badly capitalized from the get go, and their value proposition never really took off with Canadians. The irony to me is that the owner, VanCity, is a high touch extremely human oriented company, and yet Citizen's Bank was the furthest thing in the world from high touch, not matter how good their corporate intentions were in the beginning.
CAAMP says new home buyers are more likely to use brokers than banks to finance new home in Canada.
Mortgage brokers seem to have a made a major impact on new home purchasers in Canada with 48% of new home mortgages obtained through mortgage brokers in the past year. However, until we can make inroads into renewals (10%) and refinances (15%) brokers will still continue to be marginalized with the majority of consumers.
Comments on The Mortgage Investor: Summer Outlook - August 2009
Wednesday, December 31, 1969
RBC Bank President Gordon Nixon - Salary $11.73 M...
$100,000 - MISTAKE (FISHERMEN'S LOAN)
I'm a commercial fisherman fighting the Royal Bank of Canada (RBC Bank) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. Help me fight this corporate bully by closing your RBC Bank account.
There was no monthly interest payment date or amount of interest payable per month on my loan agreement. Date of first installment payment (Principal + interest) is approximately 1 year from the signing of my contract.
Demand loan agreements signed by other fishermen around the same time disclosed monthly interest payment dates and interest amounts payable per month.The lending policy for fishermen did change at RBC from one payment (principal + interest) per year for fishing loans to principal paid yearly with interest paid monthly. This lending practice was in place when I approached RBC.
Only problem is the loans officer was a replacement who wasn't familiar with these type of loans. She never informed me verbally or in writing about this new criteria.
Phone or e-mail:
RBC President, Gordon Nixon, Toronto (416)974-6415
RBC Vice President, Sales, Anne Lockie, Toronto (416)974-6821
RBC President, Atlantic Provinces, Greg Grice (902)421-8112 mail to:greg.grice@rbc.com
RBC Manager, Cape Breton/Eastern Nova Scotia, Jerry Rankin (902)567-8600
RBC Vice President, Atlantic Provinces, Brian Conway (902)491-4302 mail to:brian.conway@rbc.com
RBC Vice President, Halifax Region, Tammy Holland (902)421-8112 mail to:tammy.holland@rbc.com
RBC Senior Manager, Media & Public Relations, Beja Rodeck (416)974-5506 mail to:beja.rodeck@rbc.com
RBC Ombudsman, Wendy Knight, Toronto, Ontario 1-800-769-2542 mail to:ombudsman@rbc.com
Ombudsman for Banking Services & Investments, JoAnne Olafson, Toronto, 1-888-451-4519 mail to:ombudsman@obsi.ca
http://www.pfraser.blogspot.com
http://www.corporatebully.ca
http://www.youtube.com/CORPORATEBULLY
http://www.p2pnet.net/story/17877
"Fighting the Royal Bank of Canada (RBC Bank) one customer at a time"
Friday, March 27, 2009
New home prices fall more than expected
The problem I have with the article is that it doesn't say higher than whose expectations. From all the negativity in the news lately about housing, particularly in the Metro Vancouver area my own expectations were that housing starts would be down substantially and new house prices even more so. In the last few months everyone has become aware of the sale going on in presale properties finally reaching completion and occupancy. The impression all these stories have given is that prices would be down anywhere up to 25% to 30% for product now coming into the market.
It turns out that prices are down, but a small fraction of that amount. In fact new housing prices are down .8% year over year from last year. Significant in that it is the first time since 1997 that this number is actually lower than the previous year, but hardly large enough to justify the headline. .8% is a whole lot smaller than 25%.
The news media keeps trying to find evidence that Canada is following the US example in housing declines, only with a delay of maybe eighteen months. There is no evidence to support this but all the negative reporting is driving an atmosphere of anxiety unsupported by hard facts.
Investors need to be cautious about declining markets, indeed hopeful about them, as revenue properties could become cost effective if price decline enough. But in a market where rental vacancy rates are under 2% of the market, and there is less than six months of inventory of new home product based on demographicly demanded housing, investors should also be cautious about missing out on opportunities to make investments in the current market place.
House prices generally are lower than a year ago, whether 10% or higher, they are lower. Lenders need to be sure that any appraisals used are current, which in today's environment probably means within 45 days of the loan advance date. But the bottom has not fallen out of the market, at least, not yet.
Demand is lower than previously, which basically means that you might have to wait for a while to find a buyer. Instead of being able to get your price in three months it might take six months, and in rural markets even longer.
Comments on The Mortgage Investor: New home prices fall more than expected
There are no comments
Monday, February 23, 2009
Conflict of Interest
There are any number of ways that a conflict of interest may arise for a mortgage broker, any of them significant to the potential victim of the conflict of interest.
I will define a conflict of interest as follows, "A confict of interest is the result of an imbalance of power created by an advisor's ability to gain the trust of a client, when in the present of that trust, the client relies on information provided to the client that fails to disclose relevant information known to the advisor but not to the client, such information causing potential harm to the interests of the client."
Another way to put this, is to say that, "anything known which may have a tendancy to cause a client not to engage in a contract, must be disclosed prior to the client completing the contract. This is particularly true when an advisor acts as an agent for the client, and using superior knowledge or skill on a client's behalf."
For brokers there is certain information they are expected to provide as a part of their normal due diligence, and while the precise information required depends upon the specific details of a given mortgage arrangement, due diligence is required of a broker. It is not enough for a broker to say, "I didn't look, so I therefore didn't know."
In the day-to-day lives of mortgage brokers there are several situations which commonly occur, particularly when a broker is representing a borrower and a lender in the same transaction. It is a rule of ethics, and of law, that the broker fully disclose any compensation he is receiving from either party to the other party, and that there be no secret commissions or compensation, as the party not in possession of this information may conclude that the broker is being influenced by such an undisclosed payment.
There are other potential conflicts of interest, such as when a borrower client tells a broker confidential information, which if disclosed to a lender would result in a mortgage loan being declined, such as information that the borrower is just about to lose a job. In such a situation, where the right to confidentiality of one party potentially violates the right of the other party to full disclosure the broker may very well find himself in a position of having to withdraw entirely from the file and cancel the application for the mortgage prior to completion, as this situation would result in an improper outcome if the information is withheld. On the other hand the borrower has a legitimate right to have his or her confidentiality preserved.
In such a no-win scenario a broker has no choice but to withdraw from the transaction altogether because there is no way he can legitimately balance the rights of both parties.
Many times a potential conflict of interest arises because the lender is paying the broker's commission or finder's fees while the broker is simultaneously acting for the borrower. This is the most common conflict of interest experienced by mortgage brokers acting to place mortgages with institutional lenders such as the banks, who generally pay all of the broker's fees. Just because the bank is paying the freight does not mean that the broker has no obligation to the borrower, on the contrary. The broker must balance his duties to the two parties carefully, to ensure that he fulfills his fiduciary responsibility to his borrower while at the same time ensuring full disclosure of all relevant information to the lender.
In most provinces there is legislation mandating specific forms of disclosure of this last type of conflict of interest, which allows the broker to deal with the potential confict of interest, and the harm it could cause a borrower, by fully disclosing that conflict of interest in the course of the transaction.
Although much more could be written about the potential conflicts of interest arising out of a brokers responsibilities to both borrowers and lenders, the bottom line is full disclosure of all material information to both parties at the time of any transaction. Any deficiency in disclosure, either statutory or ethical, is unacceptable as it has the potential to harm the financial interest of either the lender or the borrower.
Ultimately, both lenders and borrowers (ie: investors) need to accept personal accountability for their own lending and borrowing decisions, something only possible if they are in possession of all relevant information.
There are severe potential financial, legal and regulatory consequences for the financial advisor who does not takes his duty of disclosure seriously or his obligation to his clients to balance fairly the interests of both the borrower and lender.
In the context of investing in mortgages or mortgage investments generally it is critical that investors read the disclosure documents closely whether the Mortgage Investment Disclosure Form as defined by the Form 9 in British Columbia, or by an Offering Memorandum for an investment in a mortgage investment corporation. It is extremely important to review all documents provided by your broker or other investment advisor in order to satisfy yourself that everything needed for you to make a decision is present.
Thursday, February 12, 2009
MORTGAGE UNDERWRITING CRITERION
I was asked the other day to provide one of our larger investors with an outline of the basis on which loans are made by private investors, and what type of returns may be earned on different levels of riskiness of the mortgage loans.
The following is a discussion for the purpose of providing general information to mortgage investors without attempting to be comprehensive in its description of all potential risks involved in mortgage lending for private individuals.
In broad terms Trillium-Accessible Investment Fund (MIC) Inc. is focused on residential first and second mortgages placed on properties located in British Columbia and Alberta. Trillium – Accessible Mortgage Corp. also manages private mortgages for investors in the same jurisdictions and beyond throughout Canada. Lending criteria varies according to the objectives of the individual private lender, mortgage pool, syndicated lender or Mortgage Investment Corporation.
There are certain underwriting requirements that vary only slightly from one type of lender to another, regardless of their investment objectives, and these pertain primarily to the due diligence undertaken by the mortgage broker and mortgage broker manager for pooled funds or syndicates.
- Full disclosure of all material information pertaining to a mortgage application. This includes:
- Mortgage application
- Employment and/or income details and verification by way of job letter, pay stuff, bank accounts or other third party verification of income
- Telephone interview by the mortgage broker or manager of the borrower regarding in particular any details contained in the application including use of funds, employment expectation, special circumstances and any conflicting information arising out of the due diligence review process.
- Credit Reports - our firm uses Equifax for Canadian credit information, taking the time to use the credit report as an independent source of verification of current and past employment, address and trade accounts; international borrowers credit scores and other references are obtained and checked by the broker
- Formal Investor Disclosure – each mortgage funded by a private investor, whether pooled or not, is provided with a complete investor disclosure document that conforms with the regulatory requirements in the jurisdiction where the mortgage is registered.
- Full disclosure of any and all conflicts of interest. It is not unusual for the broker or broker manager to represent both the lender and the borrower in a transaction and there is a special duty of care of full disclosure to both parties of any and all conflicts of interest.
- Independent professional verification supporting property valuations in all transactions:
- Appraisers must be members in good standing of the Canadian national appraisers association – the Appraisal Institute of Canada. There are exceptions when full appraisals may not be required due to the low loan to value of the proposed loan against the provincial assessed value, or where actual value can be verified by a purchase through a Multiple Listing Service sale. Any special circumstance pertaining to a sale will result in a full appraisal being ordered.
- Property Inspectors or Engineers must be certified members of their provincial association in good standing
Conveyance law firms – Lawyers acting for the lenders provide disclosure regarding a full list of required information including property tax status, strata fees, contingency obligations of a strata corp., standing and balance of any mortgages in priority to the subject mortgage.
TRILLIUM-ACCESSIBLE INVESTMENT FUND (MIC)
The lending practices of the Manager of the MIC involve preparing the same level of disclosure for the MIC as are provided to private investors in second mortgages. Mortgages are funded on the basis of equity – no more than 85% of the value of a property based on an appraisal; on ability to pay, based on a review of the credit record of the borrower and his job situation; and on various other intangible factors – primarily the assessed risk of losing capital on an investment in a mortgage always assuming the worst case analysis, collection of the interest and principle by way of foreclosure.
Borrowers of funds from a MIC are generally people who do not obtain bank financing for a variety of reasons – credit problems, income verification, business for self, ownership of too many separate properties, etc. For this reason second mortgage based MIC’s are riskier than 1st mortgage loans, insured by CMHC or Genworth but at a similar level of risk as institutional loans from Finance companies such as HSBC Finance or Well Fargo. Rates charged to borrowers range between 10% and 16% based on various factors, but influenced by perceived risk and competitive factors in the market place.
In addition to second mortgages as discussed above, the MIC will from time to time and for a portion of their portfolio invest in other types of Mortgages within the rules and guidelines set out under the income tax act. Ultimately the decision to fund mortgages will be based primarily with the view to acceptable levels of income consistent with preservation of capital under the provisions of the offering memorandum.
Thus as covered in the Offering Memorandum:
We invest in investments permitted of a MIC under the Income Tax Act. The Tax Act provides that a MIC may invest its funds as it sees fit, provided that a MIC must not invest in mortgages on real property (land and buildings) situated outside of Canada or any leasehold interest in such property, debts owing by non-resident persons unless secured by real property situated in Canada or shares of corporations not resident in Canada.
The Tax Act also provides that at least 50% of the cost amount of a MIC’s property must consist of debts secured by mortgages or otherwise on “houses” or property included within a “housing project” (as those terms are defined by section 2 of the National Housing Act (Canada)) and money on deposit in a bank or credit union. No more than 25% of the cost amount of a MIC’s property may be real property, including leasehold interests in real property (except for real property acquired by foreclosure or otherwise after default on a mortgage or other security).
We are in the business of investing in mortgages granted as security for loans (the "Mortgages"), to builders, developers and owners of commercial, industrial and residential real estate located in the provinces of Canada.
Investment Practices and Restrictions Our investment guidelines are consistent with our articles of incorporation, the provisions of the Tax Act and real estate legislation that applies to us. Our investment activities will be conducted in accordance with the following investment practices and restrictions:
(a) Our only undertaking will be to invest funds in accordance with the objectives, strategies and restrictions of our investment guidelines;
(b) We will invest in commercial, industrial and residential Mortgages;
(c) All Mortgages will, following funding, be registered on title to the subject property in the Corporation’s name;
(d) All Mortgage investments will be made in established or developing areas in the provinces of Canada;
(e) Generally, we will only invest in Mortgages on properties for which we have reviewed and evaluated an independent appraisal and, with respect to environmentally sensitive properties and on commercial loans we will generally receive an evaluation of the property subject to the Mortgage in the form of a Phase I Environmental Audit;
(f) We will not invest in a Mortgage or loan any funds to be secured by a Mortgage unless at the date the Mortgage is acquired or funds are initially advanced (as the case may be) the indebtedness secured by such Mortgage plus the amount of additional third party indebtedness of the borrower in priority to us, if any, generally does not exceed, on a property by property basis, 85% of the appraised value of the real property securing the Mortgage, provided that the appraised value may be based on stated conditions including without limitation completion, rehabilitation or lease-up of improvements located on the real property which activities we will monitor on an ongoing basis;
(g) If the independent appraisal reports an appraised value for the real property securing the Mortgage other than on an ''as is basis", we will advance funds under a loan by way of progress payments upon completion of specified stages of construction or development supported by receipt of reports of professional engineers, architects or quantity surveyors, as applicable, or upon completion of other specified milestones;
(h) We will not make any investment, or allow an investment mix, that would result in our failing to qualify as a MIC;
(i) Subject to subsection (p) below, we will not invest in securities, guaranteed investment certificates or treasury bills unless such securities, guaranteed investment certificates or treasury bills are issued by an arm's length party and are pledged as collateral in connection with Mortgage investments or obtained by realizing on such collateral;
(j) We will not invest for the purposes of exercising control over management of any issuer;
(k) We will not act as an underwriter;
(l) We will not make short sales of securities or maintain a short position in any securities;
(m) We will not guarantee the securities or obligations of any person;
(n) We will not loan money to or invest in securities of the Manager, or the Manager's affiliates;
(o) To the extent that, from time to time, our funds are not invested in Mortgages, they will be held in cash deposited with a Canadian chartered bank or Trust Company or will be invested by the Manager on our behalf at a Canadian chartered bank or Trust Company in short term deposits, savings accounts or government guaranteed income certificates or treasury bills so as to maintain a level of working capital for our ongoing operations considered acceptable by the Directors.
PRODUCT DEFINITIONS AND REQUIREMENTS FOR LOANS
• Terms of mortgages – generally one year terms although longer terms are available upon special request.
• Interest only – borrowers pay interest only on mortgages, although amortized mortgages may be made available under special conditions.
• Pre-payment penalties – the company charges a prepayment penalty for the early payout of a mortgage, equivalent to Three months interest charge by way of liquidated charges as opposed to a penalty payment
• Rates are set based on market conditions – current rates are higher than previously due to reduction in competitor product due to USA mortgage meltdown.
• Loan to Value ratio – maximum loan to value available is 85% based on appraised value subject to review by underwriter. If the loan is made on an equity basis alone, without substantial evidence of either credit worthiness or income stability, then the loan to value will be reduced to the lesser or 75% or 65% based on an evaluation of current borrower situation.
• Beacon score is not used to evaluate credit worthiness, but is used to assist in determining Loan to Value. Beacon scores lower than 550 will result in a maximum loan to value of 80% in urban markets.
• Rural market loan to values will be reduced to reflect local market conditions, with the practical application reducing the loan to value to 75% maximum in many markets, and 65% in more remote areas. The company will not lend in communities with less than 5,000 residents with 30 minutes driving time.
• The company requires loan committee approval of any loan representing more than 10% of the loan portfolio.
• The company will make no loans to officers, directors or other management of either the MIC or its manager. It will make no loans to the manager.
TRILLIUM – ACCESSIBLE MORTGAGE CORP.
The lending practices of private lenders or syndicates involve preparing the same level of disclosure as are provided to the MIC. Mortgages are generally funded on the basis of equity – no more than 85% of the value of a property based on an appraisal; on ability to pay, based on a review of the credit record of the borrower and his job situation; and on various other intangible factors – primarily the assessed risk of losing capital on an investment in a mortgage always assuming the worst case analysis, collection of the interest and principle by way of foreclosure.
Borrowers of private funds are generally people who do not obtain bank financing for a variety of reasons – credit problems, income verification, business for self, ownership of too many separate properties, etc.
For this reason second mortgages are riskier than 1st mortgage loans, insured by CMHC or Genworth but at a similar level of risk as institutional loans from Finance companies such as HSBC Finance or Well Fargo. Rates charged to borrowers range between 10% and 16% or even higher based on various factors, but influenced by perceived risk and competitive factors in the market place.
Brokers who work with private lenders recognize that the criteria applied by each lender will be slightly different and the lender’s criteria determine the exact elements applied to each private mortgage loan. Most private mortgage investors seek to preserve capital while maintaining the highest level of interest earned possible without undue risk. The very definition of undue risk is a high personal one, which is why mortgage lenders have vastly difference lending experience and outcomes. Higher risk mortgages typically have higher levels of default, while lower risk mortgages typically earn less return on Investment when calculated over a pool of investment mortgages.
PRODUCT DEFINITIONS AND REQUIREMENTS FOR LOANS
• Terms of mortgages – generally one year terms although longer terms are available upon special request.
• Interest only – borrowers pay interest only on mortgages, although amortized mortgages may be made available under special conditions.
• Pre-payment penalties – the company charges a prepayment penalty for the early payout of a mortgage, equivalent to Three months interest charge by way of liquidated charges as opposed to a penalty payment
• Rates are set based on market conditions – current rates are higher than previously due to reduction in competitor product due to USA mortgage meltdown.
• Loan to Value ratio – maximum loan to value available is 85% based on appraised value subject to review by underwriter. If the loan is made on an equity basis alone, without substantial evidence of either credit worthiness or income stability, then the loan to value will be reduced to the lesser or 75% or 65% based on an evaluation of current borrower situation.
• Beacon score is not used to evaluate credit worthiness, but is used to assist in determining Loan to Value. Beacon scores lower than 550 will generally result in a maximum loan to value of 80% in urban markets.
• Rural market loan to values will be reduced to reflect local market conditions, with the practical application reducing the loan to value to 75% maximum in many markets, and 65% in more remote areas. The company will not lend in communities with less than 5,000 residents with 30 minutes driving time.
POOLED INVESTMENT CRITERIA
I have been asked to provide an outline of two separate types of pools for investment in mortgage investments.
POOL A – CONSERVATIVE
Targeted yield 8-9%
Blend of first and second mortgages Loan to value typically between 65% and 75%
Properties Urban, communities over 10,000 in BC and Alberta
Credit Scores Beacon Scores over 550, with score below 600 resulting in lower LTV
Mortgage Interest Rates First mortgages at 8% – 10%
Second mortgages at 12% – 14%
Employment and Income Qualifications Full time jobs – verified
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Use of Funds Purchase or Refinance
Property Tax and Strata Fees must be current at the close of the mortgage.
Cash
POOL B – MODERATE RISK
Targeted yield 12%-14%
Primarily second mortgages Loan to value typically between 65% and 85%
Properties Urban, communities within 20 kilometers of BC and Alberta towns and cities over 5,000
Credit Scores Beacon Scores reviewed, but common sense review of Credit information, all collections, legal actions and outstanding mortgage related debt on the property to be paid out of proceeds.
Mortgage Interest Rates First mortgages at 8% – 10%
Second mortgages at 12% – 14%
Employment and Income Qualifications Full time jobs – verified
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Use of Funds Purchase or Refinance
Cash
POOL C – HIGHER RISK
Targeted yield 14%-16%
Primarily second mortgages Loan to value typically between 65% and 85%
Properties Urban, communities within 20 kilometers of BC and Alberta towns and cities over 5,000
Credit Scores Beacon Scores reviewed, but common sense review of Credit information, all collections, legal actions and outstanding mortgage related debt on the property to be paid out of proceeds.
Default management and payouts of defaulting and foreclosure mortgages, other defects or charges such as outstanding income taxes owing… all to be resolved from proceeds of the mortgage
Mortgage Interest Rates First mortgages at 12% – 14%
Second mortgages at 16% – 20%
Employment and Income Qualifications Primarily equity lending without reliance on employment – prepayment of interest for the term of mortgage included as part of loan to value calculation.
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Should have a plan that allows the borrower to end up better off than prior to mortgage.
Full assignment of rents
Use of Funds Purchase or Refinance
Payment of mortgage default or legal demands on accounts
Marital settlements
Child support payment remedies paid
Cash
COSTS TO THE LENDERS OR SYNDICATES
As a mortgage originator and mortgage administer Trillium-Accessible Mortgage Corporation acts as an agent for the lender(s). Fees are charged to borrowers, in the main, rather than lenders. In syndicated mortgages there may be administration charges not passed through directly to the borrowers, where the managers are responsible for various administrative responsibilities including underwriting and placement of mortgages.
Some syndicated funds are held in trust with interest payments, and other income paid directly to the trust. Trusts may be operated entirely by the management of Trillium-Accessible Mortgage Corp. and registered as trusts with the Financial Institutions Commission with annual audits conducted and filed with FICOM. Some trusts are actively held by third parties, and managed by professionals responsible for investment or reinvestment decisions. In general, fees related to the operation and management of the trust are charged against the income and capital of the trust, whereas expenses related to the lending of funds to borrowers are charged directly to borrowers.
Trillium-Accessible Mortgage Corporation is a full service mortgage administration company and charges borrowers a variety of fees, penalties and charges related to the administration of mortgages. Costs of collection, default or foreclosure are charged against the borrower to the extent covered by the value of the property upon foreclosure or conduct of sale. Any shortfall in the value of a property at the time of foreclosure is a cost to the lender, and such potential costs must be considered when determined the nature of the mortgage to be approved, and the risk profile of the borrower(s).
High potential returns and interest also mean a higher degree of risk, including a higher risk of loss of both income and capital.
This blog is for informational purposes only. Information is intended as a summary and expansion on specific sections of an Offering Memorandum rather than an offer for the sale of any securities. Interested parties should review the Offering Memorandum and seek independent financial advice Prior to making an investment. Private investors or syndicated investors should speak to their broker and receive appropriate disclosure documents before investing in any mortgage or mortgage syndication.
Comments on The Mortgage Investor: MORTGAGE UNDERWRITING CRITERION
There are no comments
Tuesday, January 27, 2009
Budget Day In Canada
So what's going on?
The truth is, both the country and the world economies are at a place unseen by anyone alive. The major financial institutions all around the world are in deep trouble, due to collapsing confidence in financial instruments, mostly brought about by the US subprime collapse, but certainly exacerbated by a serious of other financial failures, the likes of which haven't been seen since the Crash of 1929.
What governments all of the world are trying to do is to replace private spending, which is almost at a dead standstill, with government spending, to trigger a rebirth of economic confidence in consumers, (and probably more importantly, in bankers).
Seldom before during my lifetime have I seen such evidence of the transient nature of what we know of as "the real world" or how vulnerable that world is to a collapse of belief. Students of economics will always tell you that the "real" value of anything is what a willing seller and a willing buyer agree it is. The logical extension of this is that there is no "objective" value to anything, all economic values are relative, and depend upon the confidence of buyers and sellers in the marketplace. Once confidence is seriously damaged, or even destroyed, it is extremely tough to restore it to its proper place.
But this is precisely what governments are trying to do with massive deficit spending and building programs. The whole economy of the world is somewhat based on a house of cards supported ultimately only by our belief in it. If that belief is fundamentally flawed, then we really are in for a serious collapse. If the system merely needs to be "tweaked" by better regulations and public policy, then it may perhaps come back sooner rather than later.
What does this mean for investors?
It means a rough ride is getting rougher all the time. There's little point in trying to say that the stock market will be volatile... that would be more than a little redundant after the past couple of years. Real estate values will continue to slide... but nobody can tell you with any confidence how much they will slide.
I still believe that your best investment bet is in mortgages against residential property.... because no matter what happens in the world economy real people still need to live in real property, and will pay to keep their homes. Even if there is double digit unemployment the vast majority of people will continue to be employed, and will continue to pay their mortgages to stay in their homes.
We are recommending lenders be more cautious than ever in their second mortgage investments, with the result that the absolute maximum loan to value in private mortgages these days is 85% for people with otherwise excellent credit, and 65-75% for so called equity loans. This isn't a reflection of paranoia, but rather of useful prudence given the uncertainty surrounding property values in the near future.
In other words, if we have to foreclose we need to be aware of the potential for loss created by the current market conditions, and therefore lend more cautiously than in a strongly expanding marketplace, such as existing in the past five years or so.
The balance to this is that we receive far more applications these days from people with better credit scores than ever before... because if private lenders are being more cautious, institutional lenders are as well. The range of risk represented by private lending is much less exposed today than it was previously, simply because there is less competition for the loan opportunities.
So if you want to maintain a good return on investment, then invest in debt... residential mortgages.
And returning to the budget... let's hope that the Finance Ministers from around the world are able to right the ship and get the world economy back on track.
Thursday, December 18, 2008
Bank Lending Policy Initiative by MOF
OTTAWA (Reuters) - Canadian Finance Minister Jim Flaherty delivered a blunt message on Wednesday to the country's banks, telling them to loosen their purse strings and summoning them to a meeting to press the point.
"There is evidence now of a constriction in credit in Canada, not only for smaller businesses and for families, but for larger businesses. So this is something that we are going to continue to address with our financial institutions. In fact a meeting is being set up now," he told CTV television.
"We expect our banks to make lending available, to have credit available and affordable in Canada. We're acquiring a lot of their mortgages ... up to C$75 billion worth. We've given a guarantee with respect to some of their obligations. So this is a two-way street. We expect credit to be available through our financial institutions."
I have had many borrowers ask me why it seems so difficult now to obtain mortgage financing, despite the fact that the official policies regarding loans haven't really changed very much over the past few months - yet loans seem virtually unavailable no matter what the applicant presents in terms of qualifications.
Anecdotally I have been told by a loan manager for a local community credit union that the credit union hasn't made a new mortgage loan since May of 2008, six months in total. The real estate market in that community is completely dead,and last month there were only two sales in the entire community.
So do you think that these items are related? You bet they are. Banks and Credit Unions claim that their lending policies haven't changed... but they aren't lending money.
What the Minister of Finance isn't saying, is that the banks are actually directly creating the current economic crisis in Canada, even though there was no crisis until they made one! The real crisis in confidence is NOT the consumer but rather tha corporate elite at the banks, who no longer trust each other or their institutions. Bank Paper is not considered worth the paper it is written on, or the electrons used to count it. The feds have done their share all around the world. It is time for the banks, worldwide, to get over it... and do what they need to do to begin lending money again.
If they don't this recession will go from a serious recesssion to a full blown world wide depression, the end of which will be uncertain at best.
And it will have been created almost entirely by bankers, because they don't trust each other. At some point these people need to be held accountable for their completely irresponsible behavior. It may be bad banking to make loans in an environment of uncertainty, but it is bad citizenship to withhold credit from the entire world because of corporate cowardice.
Comments on The Mortgage Investor: Bank Lending Policy Initiative by MOF
There are no comments
Friday, October 31, 2008
Mixed Messages
In addition, of course, I also had to serve Jury duty in a trial in BC Supreme Court, which was interesting, if you consider "interesting" to be a pejorative. Twelve ordinary people come together to decide the fate of one of our fellow citizens, whether or not he is guilty of the crime of which he is accused. Human nature being what it is, I was amazed that we all managed to agree on a verdict, despite much discussion about the merits of the case during deliberations. I hate the jury system, but I still think it is better than allowing the experts to decide our fate as citizens.
Now, back to mortgage investing.
2009 will go down as the year of the great world-wide financial crisis, the likes of which few of us have experienced in our lives. According to all the economists there really has been nothing like it since the great depression.
This crisis was triggered by the US sub-prime mortgage collapse, and, quite frankly, incredibly incompetant lending practices south of the border. Unfortunately it didn't end there, as the underpinings of whole international financial system have ended up coming under assault as a direct result of a profound lack of trust in the system itself by the very people in the heart of the system.
When banks won't or can't lend money to other banks, financial liquidity dries up in a hurry. Much of the efforts of the various national governments and central banks around the world are doing everything they can to restore faith in the system, not so much in the minds of ordinary investors but rather in the hearts and minds of the major players in the industry.
There has been a lot made lately of the failure of the US regulatory agencies to control the conduct of US Banks, and there is probably a significant amount of truth to the criticism. However, the challenge is not merely about regulation and control, but rather more fundamentally - if nobody understands the investment products they are buying or selling, how can faith and trust ultimately be earned and maintained. A significant part of the failure of the international financial system has been the undermining of sophisticated financial products like derivatives.
This should not be taken to suggest that more sophisticated products shouldn't be bought or sold, but rather there needs to be more transparency and a better job done of disclosure of these complicated financial products. The banks who rely on these instruments to provide fundamental security for their loans need to be able to rely on the ratings assigned and on the disclosure filings as to the nature of the risks being undertaken when they invest in those instruments.
High risk investments are not necessarily bad investments, they are simply investments that require a risk premium appropriate to the amount of risk and type of risk. They should also represent only a portion of a balanced portfolio rather than a primary portion.
I've never criticised my relative who goes to the horse races ever Thursday and "invests" fifty bucks in his favorites of the day. Some days he wins, although mostly he doesn't. So this investment is extremely high risk, but once in a while he wins enough to make the whole exercise worth every dime. Those nights are great.... we all go out to dinner to celebrate his success as a gambler. However, if he started to gamble his nest egg, set aside for his retirement, I would be most concerned.
Of course, I found it equally perterbing when I realized that his investments in blue chip mutual funds were almost as risky as the race track.
Years ago I began to move out of stock market based investments into secured investments or real property. Yes, real property does go up and down. Just like stocks in the public markets. But there is a fundamental difference - real estate will always retain real value over the long run, as opposed to the stock of any given company, which has at least as good a likelihood of disappearing completely in 15 to 25 years as it does of thriving.
You want proof? Check out the names and positions of the top 1000 US listed companies in 1990 and see how many of them have completely disappeared in 2009. There are no properties that have fallen into the sea since 1990, and most have increased in value at a pace at least equal to the rate of inflation in the intervening period.
Real property and security based on real property, if managed with a degree of caution, will protect an investor for the long run. In the short run you can easily lose your shirt if you make a bad investment, or leverage your capital at the wrong time and in the wrong market. However, in the real estate world, time is generally your friend.
Just remember this - subprime mortgages in Canada have a default rate of less than one half of one percent. A portfolio made up of Canadian mortgages, even subprime mortgages, will have made money during the past twelve months during this market meltdown. There is few other investments that can make the same claim.
There are few guarantees in the world, especially in the investment world. But there are reasonable ways to mitigate risk, including lending in strong real estate markets in a stable country with good prospects.
And being persistent and patient enough to see the investment through.
Wednesday, October 1, 2008
Final Mortgage Insurance Guarantee Parameters
The following is extracted from an email delivered to me by the Canadian Association of Mortgage Professionals in regards to this issue which answers a number of these issues.
On Friday, September 19, 2008 the Department of Finance issued its final
mortgage insurance guarantee parameters and accompanying explanatory notes.
The final guidelines follow the initial announcement on the
financial
guarantee for mortgage insurance providers issued July 9, 2008 by
the Department
of Finance.
There are two noteworthy changes from the draft parameters:
1. Elimination of reference to a Total Debt Servicing (TDS) number, replaced
by a
principles based approach;
2. Reduction in minimum credit score to 600 from 620. Three percent "basket"
for flexibility remains;
These modifications follow discussions with stakeholders, including CAAMP.
CAAMP through its submission focused its comments on the minimum credit score
and welcomes the decision by the Department of Finance to adjust the credit
score. For more information on the mortgage insurance guarantee parameters click
here for Schedule A and click
here for Schedule B. All of these changes come into effect October 15,
2008.
If you have any questions please contact jmurphy@caamp.org; 416-385-2333 ext. 31Jim Murphy, AMPPresident & CEOCAAMP/ACCHA
This is an example of how concerted effort on behalf of an industry can help to protect the public from a poor legislative or regulatory change.
More importantly, it leaves the job of evaluating credit risk in the hands of the industry as a whole, justifiably in my opinion, given the record of the Canadian credit granting industry in maintaining stability while the rest of North America goes to hell.
Comments on The Mortgage Investor: Final Mortgage Insurance Guarantee Parameters
There are no comments
Wednesday, September 17, 2008
Stormy Weather - Any shelter in a storm?
Well, the world economy is certainly going through a major storm these days, with the storm centred in the US Financial services meltdown as a result of the mortgage crisis.
Some investors are choosing to move to cash investments, others to precious metals, like gold. Both of these strategies are a little like adding ballast to the boat, stabilizing it but not really helping you get where you want to go. Holding cash or near cash investment is a sure fired way to go backwards against inflation and shrink your capital base. Holding gold is probably as high a risk as holding stocks right now... after all stocks are at historically low values and gold is at the top of its cycle of prices...
Actually the ballast in the case of gold might actually sink your ship... to carry the metaphor further.
Anyone who follows this blog knows that I am a big believer in mortgages and Mortgage Investment Corporation investments, because of their inherant stability and underlying security. Like all investments mortgages do require diligent review and careful allocation of funds, in addition to common sense lending (something not practiced in US backed subprime mortgage market previously).
But mortgages do represent a relatively safe harbour in an economic storm, with security based on something that every investor can understand... a home where the borrower has something real to lose in the way of equity.
Comments on The Mortgage Investor: Stormy Weather - Any shelter in a storm?
There are no comments
Wednesday, September 17, 2008
AIG Bailout - Will they sell AIG Canada?
Both McCain and Obama are promising to increase regulation of the financial services industry after this mess.... sounds all too familiar... the leaders promised the same after the Savings and Loan screw up... leading to this???
I think it is unlikely that the US government will make sensible changes in the rules... in an environment with such strong state rights... including the right for any state to make stupid.
Comments on The Mortgage Investor: AIG Bailout - Will they sell AIG Canada?
There are no comments
Friday, September 5, 2008
Price and Volume Changes in Canada
Excuse me. One of the things that drives markets, of course, is media speculation about the current trends in the market. Sometimes it seems to me that there are those in the media determined to create a real estate crisis even in the absence of one. New statistics from the Canadian Real Estate Association indicate a decline in the volume of sales from last year to this year, along with a significant increase in new listings. But the numbers hardly indicate a crash in the market across Canada, or even in British Columbia, with an increase in average sale price to the end of July of about 8% over the past twelve months.
I caution anyone thinking of buyer or selling to be careful and think for themselves.
Anyone who thought that the real estate boom of the past few years would continue indefinitely, without pause, hasn’t been around very long. It has already been a very long positive market, and it is time for a market pause or even correction. The question at the end of a long boom is how severe the correction might be.
I leave you with this thought. Residential vacancies in Greater Vancouver are less than 1%. Unemployment is at just over 4%, and is stable, despite rapidly increasing populations. Does this sound like a bubble? So when prognosticators tell you that the market here is going to hell, take their opinions with a grain of salt.
Comments on The Mortgage Investor: Price and Volume Changes in Canada
Wednesday, December 31, 1969
Of course there are some media that wish for a cri...
Friday, August 15, 2008
Issues in Mortgage Underwriting for Mortgage Investors
One of our brokers approached me the other day with a question about a self-managed strata corporation in Richmond –
“I have a client with a Strata Townhouse in Richmond who wants to take a mortgage. But they have one of those 'self-managed' strata committees, ran by all of the owners themselves. Is this insane? Is it legal?? There are strata minutes available, but no financial statements. There is also no contingency reserve. Dumb question - Is this safe for a private lender to lend against a building built in 1984 that has proper insurance but no contingency fund? How can they protect themselves? “
The broker obtained a legal opinion on the deal, after verbally discussing it with me, and this is what the lawyers said,
…Self-managed stratas are more common than I would like… As for the Contingency
fund (CRF), the Strata Property Act requires them to keep one, and for good reason. Insurance covers some catastrophic situations, but a myriad of others would leave the owners (and more importantly, the lenders) high and dry - from the basic replacement of pipes, to the building envelope issues we see so much of. Add to that that some lender, or owner might get antsy that there is no CRF and petition to court to appoint an administrator to run the strata, effectively putting control in the hand of a bureaucrat.I would strongly recommend against such a loan.[i]
This got me thinking more generally about issues related to strata corporations, and the implications for lenders, investors and underwriters. A recent report by the Vancouver Island Strata Owners Association (“VISOA”) raises a number of issues arising out of current legislative deficiencies, and proposes remedies in a new Act or Acts governing various aspects of the issues.
There are a large number of issues addressed by the VISAO report, and I’m not going to attempt to address all of them, especially since a number of the issues are primarily related to deficiencies in the Acts that relate to the owners of the strata units or bare lots, not all of which directly impinge on a mortgage interest. Unfortunately most of them do, as the legal interests of a lender are derivative, that is, they are derived from the rights of an owner established under the various acts.
Strata or condominium ownership has grown to 25% of taxable properties across British Columbia, with there now being 460,000 individual strata units. In several large urban areas, strata homes now account for 50% of all taxable properties. Growth in strata homeownership is expected to continue as land prices increase and efforts are made to reduce the “environmental footprint” of new housing.[ii]
In many urban areas such as the Lower Mainland and southern Vancouver Island strata ownership is becoming the de facto standard form of housing for most new homebuyers, indeed the vast majority of home ownership in the next twenty-five years will likely be strata titled property. Increasingly, for lenders, there will be little choice but to invest mortgage dollars into strata properties, as there will be few opportunities otherwise, especially for private mortgage lenders who tend to lend in situations where banks are unwilling to do so.
The Strata Property Act (SPA), the Real Estate Development Marketing Act (REDMA) and the Real Estate Services Act (RESA) affect strata homeownership. Although the RESA and the REDMA are relatively recent (2004) creations in response to concerns of the real estate industry, no public review of strata legislation to address homeowner concerns has occurred since 1998. In the meantime, other provinces have moved ahead with legislation to address emerging concerns in strata (or condo) homeownership. In 2003 the BC government recognized there were significant issues with the SPA and committed itself to a review. This review has not occurred.
VISOA has identified many deficiencies in transparency and accountability under current legislation and has categorized them under the topics of:
A. Strata Governance,
B. Strata Management Licensees,
C. Disclosure,
D. Strata Development Approvals,
E. Property Taxation,
and
F. Strata Fee Equity.
The areas which primarily are of immediate concern to lenders are: Strata Governance, Strata Management Licensees, and Disclosure. Although there are serious issues related to Property Taxation and Strata Fee Equity are also of some concern to ownership, they are of less relevance to the vast majority of mortgage lenders as they do not directly affect the quality of the security on a mortgage loan placed on a strata title.
Strata Governance
The complexities of shared ownership and mutual obligations among individual owners and their corporate body require relevant knowledge of the Strata Property Act and simple, direct and affordable access to due process for enforcing the Act and resolving disputes. Current legislation provides for only cumbersome, intimidating and expensive judicial, arbitration or mediation processes to administer the Act. It effectively indulges irresponsible actions and leaves disputes unresolved.
The main concern for a lender here is the derivative consequence of unresolved or irresolvable conflicts related to the maintenance and/or repair of common property held by a Strata Corp. Because there are requirements that a Strata Corporation must obtain 75% approval for any significant expenditure, including substantial maintenance or repairs, a council with reluctant participant with over 25% of the votes at an annual meeting may find itself unable to make corrective investments or even to repair serious damage to a building. The owners may have a remedy, by suing the corporation, to force necessary repairs, but there is no efficient mechanism by which an owner can enforce responsible conduct by a strata council, especially one where irresponsible members form a substantial minority of the votes (ie: over 25%).
The mortgage interest in a property can be seriously damaged if the quality of a building declines through deferred maintenance or damage that is not repaired. The lender has little or no leverage on the owner to force the strata to take action. To whatever degree the owner is handicapped in enforcing responsible behavior by a strata corporation, the lender is even more vulnerable in that the lender has even less in the way of access to due process than does the owner.
And while the law requires the strata corporation to maintain a contingency fund to pay for repairs and other liabilities of the strata corporation, in the event that a strata council doesn’t set fees high enough to ensure an adequate fund, there is little that an individual owner can do to force the council to do so.
This is one of the reasons that a lawyer would be doubly concerned about a self-managed strata corporation. In the absence of a professional management company there is very little way for an owner (or the lender) to even know that there is a problem regarding the strata council and its conduct in maintaining and protecting the ownership interest.
There is no requirement for audited annual financial statements from the strata corporation so there is no way to know how adequately they have been reported. The preparation of Form 9 disclosure statements by self managed strata corporation is necessarily a function of the elected executive of the strata council. There are no consequences of misreporting or under reporting of potential liabilities against a strata property. The law provides a form of disclosure that requires certain behavior but does little to enforce it.
Lenders (and their lawyers) are understandably nervous about disclosures from self managed strata corporations. Even when there is a professional management company responsible for the strata management, there can be no guarantee of fair, plain, and true disclosure necessary for the registration of a proper security interest. Strata corporations rank with governments in obtain position on title for any obligations of a unit holder to the corporation. Failure to fully disclose potential liabilities to a lender may open a manager to legal consequences for failure to disclose, but practical remedies that do not include suing third parties for negligence do not exist.
Lenders also have no way of knowing when a strata corporation is getting into trouble, either as a result of deficient property management practices and deferred maintenance, or as a result of structure problems, i.e.: leaky condo syndrome.
These problems, and others, which arise out of a fundamentally flawed set of legislative Acts, can ultimately only be resolved by legislation designed to address them. Lenders, on the other, can’t wait for a pie in the sky solution but rather have to take measures to protect themselves.
Which is one of the reasons why many lenders, including private lenders, are seeking independent inspections on all strata mortgages where the strata is self managed, as well as on any strata mortgage where there are any alarm bells at all arising out of an appraisal or an investor interview done at the time of loan approval prior to loan advance.
While issues related to deferred maintenance, structure deficiencies, environmental hazards are potentially present in all real estate transactions and therefore all mortgages, where title is more complicated and processes for resolutions of disputes more difficult, the risk is exacerbated.
Therefore it would be prudent to obtain a higher level of disclosure on Strata Titled properties during underwriting.
Conclusions and closing thoughts
In regards to private investors making direct or indirect investments in strata mortgages, it is important during the review of an investment opportunity to comfort yourself as to whether or not a strata is managed by a professional management team, or self managed; and, either way, that there is an adequate contingency fund as well as a well planned and self-evident maintenance program for the whole strata building. Look closely at the appraisal for any evidence of deferred maintenance or potential deficiencies arising out of the design or execution of the design of the building in the first place. Have your broker talk to the borrower, and see if they have any concerns about the property.
At the end of the day, if investors are going to invest in mortgages, which are still one of the safest and most secure investments available in the marketplace, it is important that investors be aware of any potential risks, and the scale of those risks.
In the case example given at the beginning of this blog, clearly the lawyer is correct. Not only is the property self managed (an alarm bell all by itself, not necessarily fatal, but still of concern) but in the minutes of the strata meeting the disclosure of no contingency fund and some deferred maintenance, combined with an unwillingness to increase strata fees to cover necessary repairs would disqualify this strata unit owner from obtaining a second mortgage. It may also prevent the unit owner from refinancing if these deficits are not remedied within a reasonable period.
[i] This initial quotation is a quotation from an email exchange between a broker and our office.
[ii] All other references in this blog are to a report - Ensuring Transparency and Accountability in BC Strata Developments May 2, 2008, Vancouver Island Strata Owners Association - http://www.visoa.bc.ca/static/VISOA%20Report%20on%20Strata%20Legislation%20Issues%20-%20May%202,.pdf
Comments on The Mortgage Investor: Issues in Mortgage Underwriting for Mortgage Inves...
There are no comments
Wednesday, August 6, 2008
More Trends for BC Real Estate and Mortgages
Beyond obvious sales figures and average sales prices being obtained in any given marketplace over the short term there are a number of things to consider. Market trends pertaining to mortgage investments should also take into account some underlying trends such as:
- Rental levels and vacancy rates in rentals
- Absorbtion rates of new properties being released into the market
- Net migration into market areas
- Employment and unemployment statistics
On the first item, rental and vacancy rates, the news is pretty positive for owners of residential real estate, and for lenders in rental housing markets, especially in BC. The rental report from CMHC ending in June for the first half of 2008 indicates a powerful demand for rental housing that has kept vacancy rates below 1% in the major markets of Vancouver and Victoria, as well as in the secondary markets in the southern part of the Province.
If you own market housing in BC you can rent it for a pretty fair price as well, with rental prices rising steadily across all markets except for the northern areas of the province.
On the second item, absorbtion rates of new housing, the results aren't quite as clear cut, although it appears that urban rates are still extremely high, despite a lot of new product coming on the markets. If I were an owner of a presale unit in anywhere other than Vancouver or Victoria I would likely be considering trying to sell it without a gain, or hold it for rental. Any speculative increase in value is probably moot at this point.
Vacancies in new housing coming into the market are still at historic lows, and given the extreme shortage of rental housing in virtually all markets in BC except for logging towns in the north, any surplus presold vacant property will tend to be absorbed into the rental pool. Investors in presold properties should hope that they own units in buildings that permit rentals, as resales next year may be a little slow.
As far as net inmigration into the Lower Mainland and British Columbia is concerned it will likely continue for the foreseable future, given the historically low levels of unemployment and high levels of jobs available. Again, with the exception of the logging industry, job growth is strong throughout the province, but particularly in Vancouver area. No pressure here for any reduction in migrations to the area. Given falling employment in Ontario and Quebec as a result of declines in manufacturing, inmigration to BC may in fact increase in the next part of this economic cycle.
BC, especially urban BC, continues to be a place where you probably want to invest your money in real estate and mortgage investments. In addition to being one of the best places on earth to live, it also still continues to be one of the best places on earth to invest your money in real estate, especially if you always maintain a long term view.
Comments on The Mortgage Investor: More Trends for BC Real Estate and Mortgages
There are no comments
Tuesday, August 5, 2008
Trends without a direction
Several things jump out at me.
- Everybody is trying to figure out whether or not Vancouver is going to have a major price correction in the next few months, and if so, how deep, and if so, how long before it turns around.
- People are worrying about changes in the mortgage environment as a result of (a) the US housing slump and mortgage crisis or (b) the government of Canada's reaction to (a) above, and whether those changes are going to be good or bad for the mortgage investor.
For example, a recent headline in a mortgage industry blog referred to a comment by the chief economist of the Export Board of Canada, where he refers to an excess of building stock and a potential for a collapse in the housing market because of a surplus of new housing.
I went to the read the report and discovered that the economist made a passing comment about this possibility while directing his main comments at declines in European and Asian housing, basically stating that while Canada isn't in the same condition Yet, it soon could be, if these early indicators are true.
The housing market is not as torrid as it has been, and selling properties now requires a little more common sense than it did at the peak of the markets a year ago. However, in the Lower Mainland prices are still up, and sales are still pretty strong.
I remember the 1990's when you couldn't sell something to save your soul in Vancouver, and the whole Province had the Asian flu. Stats Canada still says that net inmigration to the Lower Mainland will continue at a high level for the foreseable future. Unemployment rates continue to be excruciatingly low!
Boy! Things in BC are really going to Hell! Not.
So, be careful what you read or you could completely miss the boat in terms of making good investments.
Comments on The Mortgage Investor: Trends without a direction
Wednesday, December 31, 1969
The ending advice is great. Thumbs up on the whole...
Saturday, August 2, 2008
Credit Scores - Arbitrary and Unfair
I have a number of problems with the new federal policy changes for mortgage insurance, but my biggest concerns is with the Harper government now deciding to make hard and fast rules on subjects previously open to discretion on the part of the insurance companies and the lenders.
To me it doesn't matter if the hard number for a Beacon score is set at 620, 580 or even 680. What matters is that the government has given over control of the mortgage insurance industry and insured lending to private companies, Equifax and TransUnion, that are only accountable to their own shareholders.
Credit Scores are an arbitrary and unfair tool to be used to determine eligibility for mortgage insurance, and therefore for prime mortgage loans.
I have many problems with these unaccountable private agencies who have godlike powers already, without seeing them gain even more influence in the credit granting marketplace.
One of my complaints is that a person's single largest debt, a mortgage, is generally NOT reported to the credit bureau, which means that the Credit Score is based on how a person deals with a minority of their personal debts - indeed even a perfect mortgage payment record is not referred to at all.
In fact, a person can have a flawless mortgage record and haveCredit Score at all, unless they have trade credit, ie: credit cards or installment loans of other kinds.
Errors or misfilings on consumer reports are also not corrected except by a persistent and determined consumer who can prove that they are NOT guilty of an offense. There is no presumption of innocence here... even any collection effort, justified or not, is a black mark on a person's credit score without reference to the merits of the collection case at all.
Even if someone wins relief from a collection, the collection report still is a negative on the Credit Bureau report reducing a consumer's credit score.
And the federal government has now given these organizations an absolute power to destroy an individual's ability to borrow money for a prime mortgage.
Comments on The Mortgage Investor: Credit Scores - Arbitrary and Unfair
There are no comments
Friday, August 1, 2008
Opportunity Knocks - Private Investor Alert
What is new, however, is the imminent elimination from the government backed insured marketplace of the so-called ALT -A and ALT B markets. It means that a whole range of borrowers will now no longer qualify for insured mortgages, especially those who previously would have done so. Borrowers will a Beacon Score of between 580 and 620 previously would have qualifed for insured loans from a number of lenders under both Genworth and CMHC policies, with certain provisos.
For the immediate future, what this will mean to private lenders is a HUGE opportunity to improve the quality and yield on their mortgage investment portfolios, as well as a major opportunity for making investments in Mortgage Investment Corporations (MICs) on a highly profitable basis.
On a quick survey of Canadian MICs yesterday I determined that on the basis of my relatively unsophisticated and nonscientific survey, most Canadian MICs across Canada are performing pretty well already, with returns ranging between 7% (in Saskatchewan) and 13% (in British Columbia) per year for the past couple of years, with longer term results being in the average range of about 11% to 12%.
For most investors, even in equities, these returns should be startling! An investment in a MIC is similar to an investment in a mutual fund in the sense that it requires little or no hands-on management by the investors, but the advantage of the MIC investments is that there is little or no volatility in the capital value: a dollar invested is always a dollar redeemed except in the circumstance where the MIC actually loses money - a rare event in Canada, it turns out. The variability in the MIC investment marketplace is in the rate of return to be earned.
Even investing in the worst performing of the MICs I surveyed yesterday an investor would have earned 7% in the last year, not bad at a time when the equities markets are down 20% to 30% in both major and minor markets.
This mortgage crisis has relatively few silver linings for the average person, but it has created a significant improvement in mortgage investment returns, both Private and in MICs. Astute investors should be seeking opportunities to invest in this alternative marketplace, and move both RSP and non registered investments to a more stable and more profitable investment than currently available in any other part of the marketplace.
Comments on The Mortgage Investor: Opportunity Knocks - Private Investor Alert
There are no comments
Wednesday, July 30, 2008
Broker or Bank - The Borrower's Dilemma
Brokers should have no loyalty to a particular lender, although it would be disingenuous to suggest that bonusing arrangements have no impact on mortgage placements with different lenders.
Also, commission rates vary from one lender to another, and from one product to another, which means that some brokers measure their income from a deal before they figure out what the best deal for the borrower could be.
These things mean that brokers are inherently in a conflict of interest with a prime "A" borrower because the placement of the loan can have a huge impact on how much the A broker will earn.
In British Columbia the Financial Institutions Commission recognises the potential for conflict of interest, and requires brokers to sign a disclosure of the conflict of interest, as well as a disclosure form which details any fees paid by the borrower directly to the broker. However, fees paid by the lenders to a broker are not disclosed in any required forms in BC, something that probably should be remedied in due course.
This is not only an issue for mortgage brokers. All consultants who make their living by being paid for the placement of products or services to their clients are also generally in a conflict of interest, and are to some degree driven to sell products based on what they earn from doing so. So the main difference with mortgage brokers is that the service we sell is fundamentally different in that we represent vendors of the single largest expense in most of our clients' lives - their mortgage.
Undisclosed differences in payments by different vendors of loans drives some brokers to make recommendations based almost entirely on how much money they will make by placing the deal with one lender or another.
The thing that protects the public from being abused by the conflict of interest is that the mortgage brokerage industry is incredibly competitive - any broker who acted contrary to the client's best interest would probably soon find himself out of business with no clients.
It is one of the distinctions that separate private loan brokers from A lender brokers. When someone borrows money from a private lender through a broker there is no failure to disclose. All brokers fees, appraisals, inspections, etc. are paid for directly by the borrower and the borrower is fully aware of any and all out of pocket costs, which include all payments made to the brokers.
So while most "A" brokers tell you that you will pay no fees for their services, what they don't tell you is that the method by which they earn their fees may be inherently contrary to the borrower's best interest.
At the very least the rules of the industry should require that these fees be fully disclosed, so that the borrower may make a fully informed decision about the relative merit of the advice he or she is receiving.
As for the conflict of interest a borrower encounters by going directly to a bank - there is no conflict of interest: the bank employee represents the best interests of the bank, only the bank and always the bank.
So a borrower has to make the best of two choices, one with the potential for a conflict of interest (the broker) or the one with no conflict of interest (the banker) since the bank always acts in its own self interest.
Comments on The Mortgage Investor: Broker or Bank - The Borrower's Dilemma
There are no comments
Monday, July 28, 2008
I am attaching the following article from Merix completely because it provides a comprehensive explanation of how mortgage insurance actually works for most consumers.
Clearly, based on what Merix is saying, the changes to government policy regarding mortgage insurance may have a significant effect on mortgage investors, if they are relying on Home Lines of Credit secured by mortgage insurance, whether provided by CMHC or by a private insurer.
However, most mortgage and MIC investors who are using leveraged funds are not borrowing money under the terms of insurance mortgages, nor do they tend to use extremely high ratio mortgages for investment purposes, so the change may not actually have as big an impact as one might otherwise imagine.
MERIX Comments on Changes to Government Guaranteed Mortgages
There has been lots of discussion in the news about the recent changes to government guaranteed mortgages announced by the Minister of Finance.
However we believe the majority of Canadians do not understand what exactly it means to remove the “government guarantee” from some of these lending programs.
We’ll explain…
Many Canadians generally understand how mortgage insurance works. We’re not talking about mortgage life and critical illness insurance, we’re talking about mortgage default insurance. This is the premium that is applied to your mortgage amount and is paid to a mortgage insurer, who in turn agrees to insure your mortgage with your lender in the event you default. In other words, it is protection for the lender incase their customer cannot make their payments. This is a mandatory insurance for mortgages higher than 80% of the home value.
Well that’s great, but what happens if a lot of people all of a sudden can’t make their payments and the insurer who is supposed to protect the lender is unable to cover their insurance obligations?
Enter the government guarantee.
The Canadian government will guarantee up to 90% of the mortgage amount against insurer default. So, this is security for the lender in the event the insurer defaults. This Government Guarantee is in place for CMHC (Crown Corporation) as well as the private insurers, such as Genworth Financial Canada.
The government guarantee is also a criterion for high ratio loans to be sold into the Canada Mortgage Bond program, which is a relatively new cost-effective funding source for banks and mortgage lending companies. These Bonds are bought up by investors all around the world due to their higher yield than Government of Canada Bonds combined with their “government guarantee”.
So what has changed?
Well, the Finance Minister looked to our southerly neighbours as well as across the pond and noticed some pretty dire scenarios which begged the question: Are we guaranteeing mortgages that are a little too risky? After an analysis of the mortgages that fall within their guarantee, recent trends, and industry consultations, the Minister of Finance decided to cease guaranteeing high ratio mortgages with the following characteristics:
- LTV ratios in excess of 95%
- Amortizations in excess of 35 years
- Non-amortizing mortgages (Interest-Only Mortgages).
- Applications where the beacon score of both borrowers is less than 620.
How does this affect me?
If you are a current homeowner, who is happy in your home and have no intentions of moving in the near future than this probably doesn’t affect you. However if you are a prospective homebuyer, looking for 100% financing and a 40 year amortization then your financing options are becoming a little more limited. Most of the big chartered Banks and many lenders have already pulled the above products. Other lenders, such as MERIX are offering these products until October 13, 2008 (please speak with your mortgage originator concerning rules around this deadline).
Let’s take a closer look at the 40 year amortization phenomenon:
Why is it appealing when borrowers know they are paying many thousands of dollars in interest over the life of their mortgage? Well there are a couple of predominant reasons:
New homeowners are increasingly concerned more with their payment amount than the house price or the interest cost over the life of the mortgage. It’s a decision made largely on cashflow.
The vast majority of people who take 40 year amortizations actually qualify for 25 year amortizations but choose the former and accelerate their payments, which reduce their amortization to 32 years. Registering their mortgage with a 40-year amortization helps protect them in the future should they need to decrease their payment.
From a purely mathematical perspective, according to the Ministry of Finance:
“Reducing amortization from 40 years to 35 years on a mortgage loan of $200,000 with a 6 per cent interest rate results in a $41 increase in a borrower’s monthly payment, but the borrower will save $49,000 in interest payments.”
Looking ahead…
If the decision to take 40 year amortizations is based on cashflow, then we’d suggest $41 per month on its own will not cause any major disruptions in the housing market. The reality is that new mortgagors will have to spend a little more in their monthly mortgage obligations but the impact to the housing market will be isolated to those who needed the 40 year amortizations and 100% financing to qualify for their mortgage. As a replacement for 100% financing, we may see the increase in popularity of Cashback mortgages once again. The 100% financing programs have all but made CashBack offers obsolete, however they may be a decent option for some people once again - even if the interest rate is higher.
In the short term, we may see a small spike in homebuying and refinance activity as people try to accelerate their timelines in order to take advantage of these fleeting offers. This may keep the market relatively strong through 2008. In the medium to long term, we don’t expect these changes to have much of an impact to the housing market. 35 year amortizations are still available and for that matter 40 year amortizations will still be available by some lenders, such as MERIX, for those customers who have the minimum 20% down payment for conventional financing.
For more information about 40 year amortizations, we encourage you to read “Why 40 Year Mortgages Aren’t 40 Years Long”, by Peter Vukanovich, President, Genworth Financial Canada. This article can be found here: http://www.genworth.ca/mi/eng/downloads/HT_April_2008.pdf
Sincerely,
The MERIX Financial Team
And Your Mortgage Originator
By partnering with professional mortgage originators, our customers can be confident they are receiving the knowledge they require to make the right decision. And this is the advantage of dealing with MERIX Financial.
MERIX FINANCIAL KNOWLEDGE IS ADVANTAGE
Comments on The Mortgage Investor: I am attaching the following article from Merix c...
There are no comments
Thursday, July 17, 2008
40 Year Amortizations and Zero Down Mortgages
I've had a number of my clients inquire recently about the 40 year amortization mortgage and zero down mortgages, and what the recent news about changes in government policy and mortgage insurance mean in the context of current real estate trends, particularly in BC and Alberta.
The first thing to remember is that the changes to the rules were relatively minor, reducing maximum amortizations only five years, from 40 to 35 years, and from 100% financing to 95% financing. While the changes do represent a significant policy initiative by the feds, it is more what they aren't doing rather than what they are doing that is significant to most investors in real estate.
So far the federal response to the credit crunch in the United States markets has been remarkably measured, considering the near hysteria across the border. There may still be some serious shakeups in the Canadian banking industry as a spill-over from the US problems, with Canadian chartered bank CIBC appearing to be in some potential trouble, although I suspect that CIBC will survive as an independant bank even after all of this is over.
The main thing that investors should consider is that real estate markets go up and down, but mostly they go up over the long run. In the short run this is not much comfort, especially for anyone committed to a property they have purchased at the top of the most recent hot markets. The changes to the purchase rules by the insurance companies, stricter credit rules or more stringent application of existing credit rule, may all have some impact on the markets by reducing market demand somewhat. But my bet is that the reduction in market demand for housing will be "normal" in the Canadian sense of that word. In other words, be patient and the real estate market will eventually reward your patience. If you panic, then you probably will get hurt, just as when you panic when swimming in the ocean. If you are looking to acquire a property with nothing down, it might just be a little more difficult than previously, but that may also be a good thing if it means that people aren't going to get stuck with property they really can't afford.
Comments on The Mortgage Investor: 40 Year Amortizations and Zero Down Mortgages
There are no comments
Wednesday, July 16, 2008
Real Estate Outlook and Interest Rates
The Bank of Canada yesterday left interest rates alone. Based on the performance of the real estate markets in British Columbia currently they probably should have done exactly that... BUT! in the ROC property values are in the dumper and the economy is slowing rather quickly! The need to keep inflation under control is what is balancing the demands of the economy for liquidity, and with the rapid run up in the cost of energy and other commodities over the past couple of years, who can argue that inflation isn't a problem.
So, we have stagflation.... something totally familiar to those of us who survived the late 1970's only to go in to the crash of 1981. Anyone who lived through the crazy inflation of the late 1970's never wants the government to allow that level of devaluation of the monetary system to occur again.
So it sound like I'm endorsing the current policy by the BOC of doing nothing. Hmm... maybe I am, after all. It could be worse, we could have inflation threatening double digit inflation, or perhaps US style declines in house pricing. As it is, what we have is a bit of the economic flu, with a touch of stomach upset.
Take a couple of pills, roll over, and sleep until morning (or until 2009). Things should look better by the later half of 2009.
In the meantime, invest in mortgages and MIC investments to protect your income and your capital, and leave the volatility of the real estate markets to someone else.
Comments on The Mortgage Investor: Real Estate Outlook and Interest Rates
There are no comments
Wednesday, July 2, 2008
Big Brother is watching YOU!
The government claims that all of these regulations tracking the flow of money are about getting on top of organized crime and terrorist organizations, and preventing the laundering of the proceeds of either type of crime.
I say its all about income taxes and tracking the flow of money, in an attempt to get control of the "grey", ie: underground economy. Over the past twenty five years, with the radical increase in various types of taxes there are an ever increasing numbers of individuals who are actively hiding their income and attempting to become invisible to CRA.
So if the government is having a hard time tracking all the various ways of masking income, they then have a need to figure out how to track the proceeds of that income. Thus, FINTRACK which gives the government enormous powers of investigation, and recruits everyone who works in the financial services industry, and now the real estate industry, into helping to enforce taxes on those who would try to avoid paying them.
Now, don't get me wrong. I think that everyone should pay their fair share of taxes, after all, we all use government services when we need to and nothing justifies someone trying to get out of their obligation, so my concern is not about the need to assess and then to collect outstanding taxes.
Rather, my concern is that governments have been using the terror attack on the World Trade Centre in 2002 as an excuse to increasingly invade what used to be considered private information and confidentiality. Not everyone is comfortable with the government having access to every nook and cranny of our private lives. Internet invasions, email scrutiny, etc. have all increased by the government in the past five years, and the agents of the government have also increased their surveilance of financial transactions.
It used to be that cash was a time honored way to pay for things. I remember in the 1970's paying the down payment for a house in cash, literally in one hundred dollar bills. Today it would be assumed that those were illegal or illegitimately obtained. In my cash the one hundred dollar bills were saved from years of doing yard work as a teenager, and yes I did file income taxes even as a teen.
My point really is that Big Brother really is watching you, and they have just increased their army of eyes by the number of realtors in the country. Should we be concerned? You tell me.
Friday, June 27, 2008
Real estate boom
The reality of real estate investing is that if cash flow isn't KING it should be. And although the value of real estate tends to increase over time, there is no rule that says it will always go up in the short run. It may even go down, which is what has happened in the US markets, leaving a whole bunch of folks with properties worth less than the amount they borrowed against them.
Ouch, that's gotta hurt!
Unfortunately, this isn't new news. If you buy something you can't afford, on the basis that it will be worth radically more in the near future, you are doomed to crash and burn, if not in the near future, then today.
Because, according the Canadian Real Estate Association, the Canadian marketplace has crashed or at least has stopped going up significantly. Hmmm..... I'm not sure that I buy what they are trying to sell.
But the point is.... buy what you can afford to pay for... either from rental income or from income from your estate or work or ???? If you can afford to hold on to your purchased property for the long term, it will probably work out ok, even if you have to hold it until the mortgage is paid off someday. If you can afford to hang in there.... eventually the mortgages will be paid off, eventually rents will rise and make the place worth more .... eventually prices will go up, and allow you to recover your investment or make the returns you hope to make.
My son and I purchased property in the Lower Mainland of British Columbia in the early 1990's. A decade later it was still worth basically what we paid for it, and not in inflation adjusted dollars but in real dollars, so it actually went down in value between 1992 and 2003. During that period it was always rented out, and although there was small shortfall in our costs over and above the amount we collected, it was affordable.
If we had sold prior to the end of 2003 we would have potentially lost money on the property. And yet, in the next four years the property increased by more than 50% in value, at which my son and I sold and took our profits.
Brilliant! Well, maybe not. It was ok, but we could have done better if we had bought slightly differently, but we still did fine. But we only did fine because we could afford to ride out the lousy real estate market in BC from the early 1990'2 to 2002.
Market timing is no easier in the real estate market than it is in the stock market, but the real estate market does tend to be more forgiving to those with patience and time on their side.
Atom