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. 

Renters are eager to purchase a new home

It’s not all bad news in the world of real estate and home buying. Despite gloomy headlines about Canada’s slow recovery and talk about housing bubbles, a new online study conducted by our company, TMG the Mortgage Group, has found that renters are eager to get into their own homes and there is potential for an increase in homeownership demand by 12%. Not only that, they are looking at home ownership with a new attitude and that’s good news for the financial stability of the country. 

Renters are looking at two areas: mortgage rates and mortgage features.  Flexibility in repayment terms is high on the list of what first time home buyers look for. That says a lot – they want to pay off their mortgages quickly. That would potentially free up a lot of capital to be used in other areas such as consumer spending and investing.

With the Bank of Canada holding its prime rate at an historic 1%, which will likely stay there for most of 2012, coupled with the recent news that the U.S. Fed is leaving their rates unchanged until 2014, bodes well for new home owners.  The economy is set to grow at a very modest pace of 2%, which will keep inflation low. Consumer confidence has risen with many believing that the economy will be stronger in the next six months.

Low fixed rates have created an interesting market. Where once variable rates ruled the day, fixed rates are now so attractive, and are trumping variables, that the decision to lock into a mortgage is an easy one. These rates will continue to a fuel the Canadian housing market, with housing prices expected to moderately increase along with an increase in the number of properties sold.

Not only is it a good time to buy but renters can also get started planning for that buy by working with a mortgage broker who can tailor a mortgage loan to a client’s particular need. TMG’s study found that renters like the idea of working with mortgage professionals who can show them options, thereby saving both time and money.

You can read more about the study here: http://www.mortgagegrp.com/site/bc/news.asp?id=731

Record low fixed rates and what to do about them

It’s been hot news these past few weeks. The Bank of Montreal announced a five-year fixed rate of 2.99% -- the lowest advertised rate for such a popular mortgage term by any major Canadian bank, ever. Other lenders followed suit by offering the 2.99% on four-year terms. Some lenders also lowered their fixed rates for seven-and-10-year terms.

So what's driving all these rate plunges? And should consumers lock in?

First of all, fixed rates are directionally based on bond markets and bond yields have been plunging lately, which means there is more cash available. With shaky stock markets and highly volatile commodity and currency markets, investors have been putting their money into Canada bonds, which drives up the prices and lowers the yields.

Variable mortgage rates have not been affected since they are based on the Bank of Canada (BoC) overnight lending rate, or the rate they charge banks and other lenders. Last week, the BoC’s governor Mark Carney kept the rate at 1% for the 16th straight month.

So what does this mean for variable rate mortgage holders and the estimated three million Canadians who currently have a fixed-rate mortgage? 

Well for variable rate clients, it’s hard to not to consider locking in at these low fixed rates, unless you are one of the lucky ones who were able to get a highly discounted variable rate mortgage. Those homeowners are smiling because some of them are paying anywhere from 2.1% to 2.6% and are in a good position even when Prime starts to go up, which some economists suggest will be later in 2012 or 2013.

However, lenders stopped discounting their variable rates late in 2011 so many new buyers were looking at variable rates of approximately 3%. For these mortgage holders it may make more sense to lock in to these lower fixed rates. One very attractive product is the 10-year rate currently at 3.89%.

It’s another story for fixed-rate mortgage holders. For one thing, there's the penalty you pay if you do want to make a change if you have a closed mortgage.

The cheapest fixed-rate mortgages are closed mortgages – meaning you can't escape the interest rate you agreed to pay for five years unless you pay the lender compensation for the interest it would lose by letting you switch from a higher interest rate mortgage to a lower one. 

There are two main variables that determine the prepayment penalty to get out of a fixed-rate mortgage early:

• The difference between your higher-rate mortgage and the current mortgage rate, known as the interest rate differential penalty; and
• The amount of time remaining in your mortgage's term. The longer the time, the bigger the penalty.

It’s not an amount that’s easy to figure out because each lender has its own way for calculating it. Some base their calculation on the posted rate (the current posted rate for a fixed five-year mortgage, for example, is 5.29 per cent – far above the actual 2.99 per cent lenders are now charging.) Some lenders, though, use their discounted rates to do the calculation. 

And the penalties can be huge. The only way to know for sure whether you'd be further ahead is to ask. Once you have that number it’s fairly easy for your mortgage professional to figure out whether it's worth your while to make the switch. 

The Canadian Association of Accredited Mortgage Professionals estimated recently that the 1.35 million mortgage holders who renewed their mortgages in the past year saved an average of $2,000 a year in interest costs – or $2.7 billion a year in total.

That’s something to think about.

New Year’s Habits

Today's blog is written by a guest writer, TMG's own Dan Pultr, Director of Sales for British Columbia.

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New Year’s Habits

Every year, the vast majority of us set out creating lofty New Year’s Resolutions for ourselves.  We enjoy extra time with family, eating, drinking too much, and exercising too little.  Then on New Year’s Eve, someone asks you, “Hey, so what’s your New Year’s Resolution?”  Some of us truly have a whole laundry list of goals for the new year and others say, “Why bother?  I’m just going to forget about the list by the middle of January.”  Don’t worry; you’re not alone!

A quick scan of a few top 10 lists on the top resolutions for 2012 and you get the following top 5.

1.     Spend Less, Save More, Payoff Debt

2.     Get Fit

3.     Enjoy life to the Fullest and Stay Happy

4.     Learn Something New

5.     Organize and plan everything

Now, it doesn’t take a rocket scientist to figure out that New Years resolutions rarely work.  This simple science experiment may prove my point:  

Go to any gym the first week of January around 5:30pm, it will be the busiest place you’ve ever seen, one may say too busy for a decent workout.  Now, visit that same gym the first week of March on the same day and time, and I can promise you there will be far fewer people.   In fact, a study in 2007 showed that 88% of those who set New Years resolutions for themselves failed. 

Now, I don’t want to sound all dreary about this because there is a way.  The same study from above also showed that the likelihood of success was higher if one had a plan with measurable goals.  So in order for your resolution to be successful you must turn it into a habit.  Ok, but how?

1.     Create an activity schedule

Create a realistic list of activities and goals you can achieve for 21 days.  Most psychological studies show that it takes 21 days to create a habit and a lot longer to break them, which of course is great news if you want it to stick

2.     Write it Down

Take the time to create a well thought out realistic set of habits you’d like to use to reach your goals, and keep it somewhere you can see it 

3.     Share with those you care about

Share what you’d like to achieve with your loved ones.  They will help you achieve your goals, support you and positively reinforce you when the going gets tough.

4.     Celebrate Milestones

That’s right, more positive reinforcement as you cross those hurdles.  You’ll be on a high of your own success.

5.     Leave Procrastination at Home

Pretty self explanatory really, but the truth is, we are our own worst enemy.  You’ve built the road map, now you just need to walk the walk.

Now I know I haven’t reinvented the wheel here, but you can use this simple formula for business, diet and any personal goals you may have.

I am looking forward to seeing you in the gym the first week of March.

Why Canadians think we are in a recession

Blame it on the conflicting headlines. For the last six months media reports, more specifically, media headlines have been rife with messages of doom and gloom, which have dominated over any positive financial reports.  While it’s true there has been much volatility in the world when you look at what has been happening in the US and Europe, that by no means is a reflection of what has been happening in Canada. By reading past the headlines we can get a better picture for what’s truly happening. 

Has the Canadian economy fully recovered? No; and yes, that is a reflection of what has been happening around us. But the economic news for Canadians is pretty good. Strong economic policies, a strong banking system and overall financial conservativeness have helped us weather the storm and continues to do so.

Economists, Statistics Canada and the Bank of Canada have said we are out of a slump but Canadians don’t believe it, choosing instead to buy into the gloomy headlines and the opinions of a few. According to an annual tracking poll by Pollara Strategic Insights, released on January 5, Canadians are the most pessimistic they’ve been in over a decade – and fully 70 per cent believe the nation is in a recession despite the economy’s relative strong health.  There really is no good reason for this pessimism.

Consider these factors:
* On average, economists expect Canada will realize a 2-per-cent gain in gross domestic product in 2012, according to the survey firm Consensus Economics. This is moderate growth despite the turmoil in the world, which is affecting our exports and manufactured goods.
* The Bank of Canada prime rate is holding steady at 1% and will likely continue well into 2012, which keeps us ahead of inflation.
* 17,500 jobs were created in December – reversing two previous months of declines. In the US the unemployment rate fell to 8.5 per cent in December, its lowest level in almost three years, adding 200,000 non-farm jobs in December.
* Still on jobs: The government’s Labour Force Survey, released on January 5 reported the manufacturing sector added 30,000 jobs in December after losing almost 80,000 in the prior three months. 

Let’s take a look at the debt-to-income ratio which has been in the new s lately. Curiously, the rise to 151% has happened despite a slowed pace of borrowing. A recent report by CIBC’s deputy chief economist Benjamin Tal, determined that it is not a debt problem now but an income problem. The pool of Canadian households with debt was divided into three categories: heavy borrowers, medium borrowers and light borrowers. Heavy borrowers are defined by those with a debt-to- gross income ratios of more than 160%. The age of this group is 45+ and they account for only one-third of total borrowers but have over 70% of the total debt.

The report also found that the number of heavy borrowers is rising. In addition, their net financial position has worsened because the growth of their assets has not kept pace with those in the medium and light borrower categories.  So the biggest financial burden and the largest part of that 151% debt-to-income ratio belongs to heavy borrowers aged 45+. The medium and light borrowers have reasonable debt loads.

Another poll just released on Monday, January 9, found that consumer confidence in the economy has risen. The Nanos Economic Mood Index found that about 19 percent of those surveyed said the economy will be stronger in the next six months, up from 16 percent, while the share who said it will be weaker declined to 31 percent from 39 percent.

The poll also showed more consumers said their economic situation had worsened over the past year than in the third quarter, while optimism about the future increased and 34 per cent said their personal debt will decline in the next six months.

What will have a more profound impact on the economy is the business community and what they see for 2012. The Bank of Canada’s Business Outlook Survey was released on Monday, January 9 and the mood of the business community is cautious but not overly negative. They plan for modest investment increases and intend to slightly increase employment. This, despite the fact they are also seeing an increase in borrowing costs and will continue to tighten their budgets.

So which headlines to believe? I would suggest taking a news break. If that’s not possible, read past the headlines – it’s not all bad.