As Goes the U.S. So Goes North America

U.S household debt levels are starting to improve after a few years of deleveraging. This bodes well for the U.S. economy and for the rest of the world, despite the financial crunch in Europe. As you know Canada weathered the financial crisis well but because the U.S. is one of this country’s major trading partners and its economy tanked, Canadian manufacturers have had to seek new markets in Europe and Asia.

While that has kept the Canadian economy buoyant, the news coming out of the U.S. bodes well for the future of the Canadian economy.

 An economic update by Benjamin Tal, deputy chief economist for CIBC, found that the deleveraging the U.S. has been living through  since 2009 has resulted in consumer debt less than 15% below its peak in 2008. Although much of that has been due to bank write-offs, American households have also adjusted the way they view debt by reducing their reliance on credit. But now, it looks as if American consumers are willing to try on new credit. As Tal wrote, “The surprise will be how quickly debt will start oiling the rusty domestic U.S economy – just in time for big fiscal drag of 2013.”

Since 2009, consumer non-mortgage debt in the U.S. was increasing by close to $200 billion a year. Then in 2009 and 2010, due to the high number of defaults, banks started tightening their lending and consumers stopped borrowing altogether. For an economy to function, money needs to keep moving.

There has been a rise in credit enquiries recently – a strong signal that consumers are testing the credit waters again. And now with defaults back to normal, the banks are more willing to extend that credit.
It means that American consumer confidence is rising and that Canada is well-positioned to benefit financially from the increase in consumer spending.

The U.S. and Canada are strong trading partners and a recovery in the U.S. is key to improving our economy. Canada exports 30% of its gross domestic product and almost 70% of Canadian exports are to the U.S. and this relationship supports millions of jobs each year. The news on the job front has been good for the U.S. as well with the unemployment rate down.

This is all good news for Canadians. We have survived and managed to thrive through the worst of the financial crisis, even when economies in countries around us were, and in the case of some European countries, continue to falter.  We can look forward to continued economic growth for the next few years.

Mortgage lending to self-employed in jeopardy

Recently there has been a disturbing rumour circulating with regard to a report issued by the Office of the Superintendent of Financial Institutions (OFSI). That report suggests that lenders are too loose with their guidelines with regard to the Business for Self “stated income” programs. Because of that report the Ministry of Finance is watching the housing market closely to see if changes are warranted.

There have already been a number of changes to mortgage lending rules over the past two years to ensure that Canada does not experience a housing meltdown similar to what occurred in the U.S. New rules were also put into place to protect homeowners in the event of interest rates rises, which is not a bad thing. However, changing the rules for the self-employed may not be a prudent move.

Consider this: There are 2.7 million self-employed workers, representing 15.7 per cent of all workers in Canada or put another way, one-in six workers is self-employed, according to Statistics Canada.  The number of self-employed workers increased by 12 per cent over the past decade, while the growth of the overall labour force was 18 percent. Slightly more than one-third of them are female, who account for 35% of all self-employed individuals.

In 2011 the number of self-employed Canadians rose by 2%, double the rate of growth seen in paid employment according to a report by economist Benjamin Tal. Clearly this is a growing trend.

These are people who work on commissions – auto salesmen, insurance brokers, real estate agents and mortgage brokers. Others work for large and small companies contracting out their services. And others start their own bricks and mortar businesses. This type of non-traditional work doesn’t come without its challenges. Imagine starting a project not knowing if it would ever pay you or going through each day not knowing your salary. Or not knowing when your work day will end. Entrepreneurs work without pension plans or safety nets, yet they are considered one of the backbones of Canada’s economy.

Prime Minister Stephen Harper himself said in a speech to kick off Small Business Week, "Through their hard work, dedication and vision, small business owners are generating the jobs and economic growth that are making Canada a competitive and modern economy. They are helping to ensure that our economy emerges from the global economic recession stronger than ever.

Yet, the self-employed face an uphill battle when purchasing a home. Accountants typically offset as much of their self employed clients' earnings as possible to reduce tax liabilities. The resulting low net income can make it virtually impossible for a mortgage to be approved based on mainstream lenders' traditional requirements. So mortgage insurers and lenders developed “stated income” programs that allowed business for self clients to qualify for high ratio mortgages.

Now those programs are at risk. No one knows what the rule change might be or if there will, indeed, be any rule changes at all but already a couple of lenders have eliminated its program. It’s likely other lenders will follow. That means, on top of all the other challenges business for self clients face, it may be tougher to get a mortgage. It’s unfortunate that the government would consider penalizing a sector that plays a vital role in the growth of the Canadian economy.

It’s already tough now get a mortgage. Lenders require sufficient documentation to prove income and further documentation to prove self-employment for a number of years. Businesses for Self clients sometimes need a higher down payment and their credit score is also factored in.

This does not mean that programs won’t exist or that business for self clients won’t be able to get a mortgage – it means that it may become more difficult. And when the rules tighten up, then the services of an experienced mortgage agent becomes even more vital. If you have any questions about the business for Self programs or any other mortgage questions, please contact your mortgage professional. Find yours here: www.mortgagegroup.com.

 

Why Canada isn’t a NINJA?

Guest Blog by Dan Pultr, Director Sales, B.C.

Once again, the headlines in the past few weeks have been focused on the mortgage market. The most recent are about the sub-prime market and programs for the self-employed, which some are seeing as the no income, no job, no assets (NINJA) scenario as described in the United States.

Here are just a few examples: Looser lending standards by Canadian banks raise concern;
Increasingly liberal’ mortgage standards worry regulator; and  Flaherty concerned by mortgage lending

We have heard for weeks that the Big 6 banks have been talking about reducing amortizations on mortgages to combat some of these market concerns.  Then, on January 31, one mortgage lender made a somewhat surprising announcement that they would be eliminate all “stated income” programs.  This unprecedented change came just days after a news release from the Office of the Superintendent of Financial Institutions (OFSI) noted that Canadian lenders had loosened their qualifications standards. There was a concern that these lending practices were mimicking the U.S. subprime market.

Let’s consider this comparison.  The sub-prime meltdown in the U.S. was not caused by one factor alone, but rather a combination of them:
1.      Loans were given to individuals with no income, no job and no assets (aka NINJA)
2.      Loans were approved at over 100% loan to value, thus eliminating any equity.
3.      Teaser rates were the craze. Home buyers qualified on low rates and payments reflected that. However, when interest rates were adjusted to a higher rate, payment became unaffordable.

This lethal combination was made worse by the fact that 50% of mortgage loans were these sub-prime loans. The recent Canadian headlines are suggesting that this is now happening in Canada.

Business for Self Programs

Business for Self income means individuals, usually the self-employed can state their income to qualify for their mortgage with certain caveats. The reason for this practice is because the tax returns of the self-employed do not always accurately reflect their total income since they are able to write off a number of items to reduce their taxable income.

However, there are also protections in place to make sure that in the event of rising interest rates, mortgage payments are still affordable.

1.      Self-employed, stated income programs require at least 10%, and sometimes higher, down payments from own sources, no gifted down payments are allowed.
2.      High-ratio variable rate mortgages, which is a mortgage with less than 20% down, requires borrowers to qualify at a benchmark rate, which is currently 5.29%, almost 2.5% higher than the lowest variable rate today.
3.      Mortgage insurers use a reasonability test when judging stated income, meaning that the line of work, the amount of assets, credit and business statements, are reasonable for that industry.
4.      If income and net worth are not a consideration, then an individual must have either 35% in equity or from their own resources.

Since the OFSI has suggested that lenders have loosened up there rules, we are now seeing the beginning of the end for these stated income programs, which is unfortunate. Stated income is an important part of a healthy mortgage market, and elimination of this product could dampen the housing market.

Self-employed individuals account for 15.6% of the Canadian workforce and 10.6 million people work for privately owned enterprises in Canada, with 48% of them working for a small business. Penalizing entrepreneurs for creating businesses and employment is not beneficial to the health of our mortgage market, or to our economy.

The Broker Value Proposition

Guest Blog by Dan Pultr, Director of Sales for British Columbia

On a recent ski trip to Whistler, a few of us started to discuss reasons why consumers should use a mortgage broker. We asked, “What is a mortgage broker’s value proposition?” 

The individuals I talked with knew about mortgage brokers and had used them in the past, but I don’t think they fully understood our value.  So I asked them this question. “Why did you use a mortgage broker?”  They said it was to get a lower rate and have someone shop the market for them. 

I then asked them, “If you had $500k to invest for the next 25-30 years, would you consult an investment professional?  So why not consult a mortgage professional, when you are borrowing $500k for the next 25-30 years? “

Let’s consider the rate debate. Mortgage brokers and banks sometimes switch places as to who can get you the lowest interest rate. While rate is an important factor when making a decision about a lender, more importantly is making sure you get the right product for your particular situation. A mortgage broker will explore those questions with you – your lifestyle plans, and your financial goals for example and will make sure you get a mortgage that fits. The wrong product can end up costing you thousands of dollars.

So what else can a mortgage broker do for you? Well, I’ve come up with the Power of Five:

1. A mortgage broker will babysit the transaction to make sure it goes smoothly so the client doesn’t lose sleep over it. It’s the mortgage broker who sweats the details.
2. A mortgage broker will answer all questions and address all concerns for the life of the mortgage
3. A mortgage broker works to ensure a client knows everything about their mortgage, their credit, and their budget.
4. A mortgage broker ensures that a mortgage matches a client’s specific needs and goals.
5. A mortgage broker works closely with respected lending institutions to ensure there are no issues with a client’s mortgage. If there is, they work to ensure any issues get resolved.

I want to mention one more concern expressed by the group I was with. Because a mortgage broker makes money from the transaction, they might not have the client’s best interest in mind. It’s true that brokers work are on commission and for that reason alone they want to make sure a client’s experience is a good one. If it isn’t, then clients won’t return and will not refer their friends and family members. A person who is on salary may not be fully vested in ensuring you are 100% satisfied your mortgage, but a person who is 100% on commission and builds their business from referrals sure is.