Consider a mortgage broker first

By Mark Kerzner, President TMG The Mortgage Group Inc.

So what comes first - the chicken or the egg? In the real estate industry that question gets turned into the following -- if I am going to buy a house do I speak with my mortgage broker or Realtor first?

First of all, kudos if you knew that it’s vital to speak with both a mortgage broker and a Realtor when you’re thinking about buying a home. Some will choose the simpler and often more ineffective path of trying to sell a house privately. Some will blindly walk into a bank branch to apply for a mortgage from a financial generalist.

TMG The Mortgage Group strongly encourages our clients to use a licensed Realtor for buying and selling real estate. They are experienced professionals who know your local market and can guide you through the processes of purchase agreements, deposits and conditions. TMG brokers work with many Realtors and will often refer clients to those who have proven to be exceptional and professional service providers.

As well, mortgage brokers often receive referrals from qualified and valued real estate agents and we are grateful for those relationships that we have developed. Those Realtors know that mortgage brokers are professionals, just like they are, and who are experts in their fields. Furthermore, they know that successfully removing financing conditions on agreements of purchase and sale are vital to completing the real estate transaction.

Consider your own experience with the professionals in your life and those you turn to for advice. In my own experience, I think the following:

• I trust my accountant implicitly. He understands my financial health and goals. From time to time I ask him if he knows a good life insurance broker, financial advisor, etc.
• I trust my circle of friends. Many of us went to school together, hang out, do business together, have fun, etc.. Some are lawyers, accountants, entrepreneurs, Realtors, teachers, and I refer people to my circle of friends whenever I can.
• I trust my referral sources and lender partners. They understand that our purpose is to provide access to choice and unbiased advice, leading to the most appropriate mortgage financing solutions for your unique situation.

What is still a little unclear to me though is why more home purchasers and sellers do not go to their mortgage broker before doing anything else. Just as Realtors are uniquely equipped to refer clients to mortgage brokers, so too are mortgage brokers with respect to Realtors.

 On HGTV’s Property Virgins, the host begins by confirming that the house hunters on the show have been pre-qualified for a mortgage so they can determine the price range of the houses worth looking at.  At that point they can start their housing search.

Even if you’re selling, consider speaking with your mortgage broker first. Here’s why it makes sense. If you’re selling you may be buying as well. If you’re “moving up” to a larger, more expensive home, then you will need to know what you qualify for. If you have a mortgage and wish to pay it off you will want to understand penalty and breakage costs. Alternatively, you may wish to port (transfer your mortgage) with an increase or decrease to the mortgage balance. A mortgage broker can assist in all of these scenarios. 

Know where you stand. Know what you can afford.  Start your next real estate transaction with a conversation with a mortgage broker first.

Buying a house doesn’t have to be stressful

Buying a house should be an exciting time but it can get pretty stressful, according to the Bank of Montreal’s Psychology of House Hunting report released on Thursday, May 2. The biggest worry is finding problems after moving in. The next worry is that prices will drop and the house won’t be worth the original purchase price.

The house buying process can be overwhelming for first time home buyers but also for move-up buyers as well. It doesn’t have to be if you put together a team of experts who will guide you through the entire process.

It starts with a mortgage professional who will take a look at your finances, including your credit score, to qualify you for a mortgage. A lot of information about you and your credit management abilities come up during this process. Having derogatory items on your credit report doesn’t mean you can’t qualify for a mortgage. Everyone’s situation is different and a mortgage broker is familiar with most situations and can offer options.

Once armed with a pre-approval, you can confidently work with a Realtor to find the right house for you. According to the report, on average, home buyer spend five months house-hunting and visit 10 locations before deciding to buy. It’s certainly a good idea to take your time to make sure to get the house that’s right for you. Interestingly, the report found that 33% of home buyers felt rushed into making a purchase and increased to 39% for first timers. Sixty-eight per cent were prepared to settle for a home that was less than perfect. Four-fifths of prospective buyers said they know a home is right for them as soon as they step inside.

Once the Offer to Purchase is made, working with a trusted lawyer is the best way to make sure there are no surprises at closing. The bottom line is to take your time, work with professionals and do some research.

Here are the top five mistakes new homebuyers make:

1. Not getting pre-approved. Without a pre-approval you’re actually going in to the home-buying process blind. You won’t know what you can afford or if you even qualify for a mortgage. 
2. No Home Inspection. This is a must, especially in older homes.
3. Not budgeting for the increased costs. Home ownership comes with additional costs that you don’t have when renting. In addition to mortgage payments, you will have property taxes, higher utility bills, home insurance and extra costs for maintenance and repairs.
4.  Not knowing the closing costs. A lot of buyers forget about the closing costs, which includes land transfer tax, title fees, the lawyer’s fee, etc. Don’t get caught short.
5. Forgetting about future needs. If the home you’re purchasing is a starter, then perhaps a two-bedroom will work for you. However, if you plan to start a family, you might want to look at a three bedroom. Or if you there any other possible living arrangement changes, make sure to factor those in.

Foreclosures: The Great Untold Story

by Chris Arnold
Guest Blogger

From time to time, Housing Perspectives features posts by guest bloggers. Today's post, written by NPR Housing and Economics Correspondent Chris Arnold, reflects thoughts from a panel he moderated at the Harvard Kennedy School on March 26, 2013. The panel was entitled "Foreclosures: The Great Untold Story" and included panelists Mike Calhoun (Center for Responsible Lending), Gary Klein (Klein Kavanagh Costello, LLP), and Bruce Marks (Neighborhood Assistance Corporation of America)


People know there’s a foreclosure crisis.  Yes, the housing market crashed and lots of people are losing their homes.  But most people don’t realize that about half of foreclosures don’t need to happen. 

That is, about half the time, when a homeowner falls behind on their mortgage payments, there is a better alternative that will keep the homeowner in their house and result in a smaller loss for the lender (often investors in RMBS).  

When president Obama came into office, in the spring of 2009, he started the Home Affordable Modification Program (HAMP.)  The goal was to prevent 4 million foreclosures by modifying the terms of people’s mortgages in cases where lowering a borrowers interest rate, and perhaps forgiving some principal, would be “NPV Positive” for the lenders.  In other words, the goal was to modify loans in cases where it made better business sense for the lender to keep people in their homes instead of foreclosing.  This also helps the housing market and the broader economy by reducing the overall numbers of foreclosures and the losses associated with them.

The problem is, while many economists thought that 4 million people estimate was a pretty good one, 4 years later the program has only reached about 1 million people.  There have also been 3.4 million non-HAMP mods over this period but data on the quality of these mods remains murky.

Meanwhile, according to recent data compiled by the JCHS (State of the Nation's Housing, 2012, Figure 20) there are still roughly 3 million seriously delinquent loans in (or heading into) the foreclosure pipeline.  

The JCHS recently hosted a panel of people working on the front lines to prevent foreclosures.  All are strong advocates for increasing the number of loan modifications in order to help housing markets.  They said there are still serious problems implementing the HAMP program, and that if some changes were made, there is still time to prevent tens, and perhaps hundreds of thousands of unnecessary foreclosures.  

The Panelists were (pictured above, right to left):

• Gary Klein, Partner, Klein Kavanagh Costello, LLP 
• Mike Calhoun, President, Center for Responsible Lending
• Bruce Marks, CEO, NACA (Neighborhood Assistance Corporation of America)

I hosted the panel, and these are the highlights of the recommendations from the group.  

Gary Klein has been suing the nation's largest banks for their alleged failure to provide loan modifications for people who should qualify for HAMP.  Often, he said, the major banks that “service” the mortgages on behalf of investors (the banks are responsible for qualifying homeowners for HAMP) drag out the process for far too long.  Homeowners can stay stuck in limbo trying to qualify for the program for 6 months, 9 months, sometimes for more than a year.  Klein says the HAMP agreement/contract documents signed by the banks and the homeowners state that the bank has 3 months to make a decision.  This agreement is struck when a homeowner begins the “trial period” of the HAMP program and starts making lower monthly payments.  Klein recommended that if a homeowner stays current, making payments, for those 3 months, and the bank has yet to make a decision, the homeowner should be automatically qualified for HAMP and receive a permanent loan modification through the program.  Currently there are more than 59,000 active HAMP trial mods according to the Treasury Department.  So Klein would like to see many of those automatically converted to permanent loan mods.  

Mike Calhoun has been studying the foreclosure crisis for years now at the Center For Responsible Lending.  He urged the regulator for Fannie Mae and Freddie Mac (the FHFA) to allow for loan modifications involving principal write-downs.  Loans not backed by Fannie and Freddie have been receiving principal write-downs more frequently as private investors calculate that it can make good business sense to avoid a foreclosure this way.  Calhoun urged Fannie and Freddie to follow suit.  

Calhoun also suggested expanding the administration’s HARP II refinancing program.  He’d like HARP II to permit delinquent borrowers (who are currently not eligible) to refinance into today’s low market interest rates.  In many cases, Calhoun said, just cutting a homeowner’s interest rate to what is currently available on the market can be enough to prevent a foreclosure. 

Bruce Marks’s organization NACA has been functioning essentially as an outsourced loan modification “qualifier” for all of the nation’s largest banks/ loan servicers.  Marks said NACA has enabled more than 200,000 homeowners to avoid foreclosure with a loan mod.  Like Calhoun, Marks would like to see more principal write-downs to avoid foreclosures.  Marks also said he wished that bankruptcy judges had been allowed to help rewrite the terms of mortgages (this was proposed by federal lawmakers in recent years but couldn’t get approval in Congress). 

One hopeful sign, Mike Calhoun said, is that the quality of the loan modifications done by loan servicers outside of the HAMP program appears to be improving.  But the panelists said the exact terms of many of those modifications remain unclear.  

Momentum Building for Home Improvement Activity

by Abbe Will
Research Analyst

Spending by homeowners on improvement projects is expected to accelerate as the year progresses, according to our latest Leading Indicator of Remodeling Activity (LIRA).  On top of the almost 10% growth reflected in U.S. Census Bureau figures for 2012, the LIRA projects strong gains in homeowner remodeling spending continuing throughout 2013, with some moderation in the pace of growth toward the end of the year.

Existing home sales were up almost 9% last year, and house prices are increasing in most markets across the country. This has increased the home equity levels for most homeowners, encouraging them to reinvest in their homes.

The strong growth that we’ve seen recently is putting pressure on the current capacity of the home improvement industry. Contractors and subcontractors are having more difficulty finding skilled labor, and building materials costs are unusually volatile for this stage of a recovery.

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Childless Households Have Become the Norm

by George Masnick
Fellow

In 1960 almost half of all households were families with children under 18.  Since then, the number has fallen to under 30 percent (Figure 1).  By definition, the declining share of family households with children exists because households withoutchildren have increased more rapidly (Figure 2).  There are many reasons for this trend: delayed age at marriage and later age at childbearing, smaller family sizes, higher divorce rates, and more couples choosing not to have children (Table 1).  The changes in each of these measures over the last few decades are quite striking. In 1960 the median age at first marriage was 22.8 for men and 20.3 for women, compared to 28.6 and 26.6 in 2012.  The share of households with four or more people in 1960 was over 40 percent, falling to just under 23 percent in 2012.  Women who were 25 in 1960 ended their childbearing years in the mid 1980s with only 8.5 percent of them remaining childless. Women born in 1960 finished childbearing in 2010 with nearly twice as many of them childless (16.3 percent). In 1960, only 13 percent of all households were single persons, but by 2012 that percentage had risen to 28. All of these trends result in households having fewer children and fewer households having any children at all. (Click charts to enlarge.)

Source: Current Population Survey March and annual Social and Economic Supplement, 2012 and earlier. Table FM-1.  Minor children numbers from Census Bureau's population estimates for July 1 of each year.

Source: Current Population Survey March and annual Social and Economic Supplement, 2012and earlier. Table FM-1

Source: Census Bureau Current Population Survey historical tables.

The interesting aspect of this long-term trend is that it continued in spite of the strong upswing in the sheer number of American children, which grew after 1990 (also Figure 1).  That increase is due to the largest baby boomers having their own children (the echo boom) and to childbearing by the flood of immigrants who arrived between 1985 and 2005.  (Note that in 2012, fully 87.5 percent of children under the age of 18 who have an immigrant parent were themselves born in this country.) 

To be sure, baby boomer and immigrant childbearing did increase the actual number of households with children.  For example, the number of households with children under the age of 18 increased from 33.3 million in 1985 to 38.6 million in 2012. This 5.3 million increase was far less than the 11.3 million increase in total number of children in the population over this period because many households with children contained two or more children under the age of 18.  More importantly, however, the increase in households without children surpassed the 5.3 million growth of households withchildren by a considerable margin.

Two key reasons for the recent increase in childless households have been the aging of the population and increasing longevity. The large baby boom generation (age 45-64 in 2010) is now entering the empty nest stage (at least regarding children under 18). Between 2002 and 2012, households with at least one child, headed by today’s 45-64 year old cohort, declined by 12.3 million. There are still 11.5 million 45-64 year old headed households with children, and most will become households without children over the next decade.  Furthermore, empty nest households headed by those over the age of 65 are surviving longer and longer, making it likely that the trend in the decline of households with children will continue well into the future.

Significantly, the decline in the number of households with children accelerated after 2007.  Much of the decline can be explained by the sharp drop in the number of births. Annual births rose from just over 4 million in 2001 to over 4.3 million in 2007, the highest on historical record, but then fell to just below 4 million in 2011.  The total fertility rate (births per 1000 women age 15-44) fell from 69.5  (a 17 year high) to 64.4, a decline of 7.3 percent over this same period. Both the decline in births and the drop in the fertility rate are linked to the decline in immigration that followed the Great Recession. Because newly arrived immigrants are concentrated in the childbearing ages, and because immigrants have higher fertility than the native born, the loss of immigrants has had a disproportional effect on declining fertility.  The effect of the Great Recession on lowering fertility among the native born is also of importance, but this decline could be temporary.  The echo boom generation began to turn 25 in 2010, and has most of its childbearing years yet ahead of it. A return to higher levels of immigration and/or a rebound in fertility could reverse the decline in number of births and ease the long-term decline in the share of households with children, but will not likely reverse it.

When will the housing market rebound?

This has been a week of reports – all confirming a cooler housing market. On Tuesday April 9, the Canada Mortgage and Housing Corporation (CMHC) reported housing starts were weaker than expected, although edging higher in March. A Statistics Canada report showed the value of Canadian building permits rose a weaker-than-expected 1.7% in February.

BMO Capital Markets senior economist Robert Kavcic sees the housing starts report as a “soft landing” he said in a Globe and Mail interview, noting that, “starts have receded to just above levels seen two years ago.”

In a Royal Bank poll, 15% of those surveyed say they’re likely to buy in the next two years, a drop from 27% from the previous year. Analysts suggest the reason for the delay is that Canadians are paying down other non-mortgage debts. This was proven correct in yet another report, this time from CIBC, that found homeowners are tackling other debts and don’t think they’ll be mortgage-free until they’re 57, which is two years longer than what they expected last year.

A year ago Canada was in the midst of a hot real estate market. Now the Canadian Real Estate Association (CREA) is reporting that actual activity has declined as much as 15.8% below last year’s levels.
We’re also seeing a wide variation in housing prices across Canada. A report by Royal LePage found that prices were up year-over-year nationally, with the exception of Vancouver, Victoria and Saint John, N.B., which had year-over-year price declines.

The once booming real estate sector has turned into a deep housing slump. Even the Spring market has not rebounded as expected. The International Monetary Fund still believes the market is somewhat overvalued, as do many economists. The new mortgage-insurance rules have indeed impacted the market, especially for the first time home buyers. Many analysts suggest the market was correcting itself,that the government’s rule changes were perhaps unnecessary, and may have been the tipping point.

There is no arguing that the market has cooled down. Any hopes of a big rebound this year seems unlikely. So the big question is how long this slowdown will last. For that answer we need to look at both the Canadian and U.S. economies.

Both countries are showing signs of weakness in job creation. Consumer confidence is down; manufacturing is weak. Both economies are expected to grow a sluggish pace of under 2% this year. The Canadian government and the Bank of Canada have consistently lowered their growth prediction as reports are released. The trade gap in Canada has widened and will likely get worse, given the weaker U.S economy – Canada’s major trading partner. There is, however, a bright light –new home construction in the U.S.is increasing -- which is good for our exports.

According to Benjamin Tal, Deputy Chief Economist with CIBC in a weekly Market Insight Report, the economy will remain sluggish until the end of 2013. Given that, like a big ship trying to turn in the middle of the ocean, we think it’s safe to say that it will take until well into 2014 for the economy and the housing market to come alive again.

How Much Did LTVs Actually Rise During the Housing Boom?

by Chris Herbert
Research Director

The rise in housing prices that appears to be taking hold in many parts of the country is an important sign of recovery in the market. Among the many ways the upturn in prices is helping the housing market heal is by turning back the tide on the 100-year flood of underwater mortgages.  Still, even as reports from CoreLogic and Zillow document the progress in reducing the inventory of homes with negative equity, these same reports remind us that despite recent improvements there are still millions of housing units saddled with mortgage debt exceeding the value of the home. These homes serve as a warning about the risks of excessive loan to value ratios (LTVs) that are assumed to have become commonplace among homeowners during the housing boom. However, a review of data from the Survey of Consumer Finances (SCF) from the last 20 years finds that there was actually relatively little change in the distribution of LTVs through the boom years.  While outstanding mortgage debt did increase substantially, it essentially kept pace with the rise in home prices. The flood of underwater owners was thus less the result of a greater share of owners having little equity cushion and more the result of the tremendous collapse in housing prices.

Figure 1 shows  trends in the distribution of LTVs among all homeowners between 1989 and 2010, based on a comparison of total outstanding mortgage debt to owners’ estimates of the value of their principal residence. As shown, there was a fairly substantial increase in the average LTV between 1989 and 1995 from 27 percent to 34 percent. This rise reflects a combination of factors, including the greater tendency of households to hold mortgage debt in the wake of the 1986 Tax Act that gave preferential treatment to mortgage interest payments, the sharp fall in house prices in some areas of the country, and an expansion of mortgage lending that occurred as the economic boom of the 1990s began. However, between 1998 and 2007 the average remained largely unchanged at about 37 percent. Average mortgage debt did increase sharply over this period, from $67,000 to $111,000 (in constant 2010 dollars) but the average house value also increased substantially from $185,000 to $317,000. Even at the peak of the boom, the vast majority of owners still had fairly low LTVs.

Source: Joint Center tabulations of Survey of Consumer Finances.

Of course, these averages include a large share of households that continued to hold little or no mortgage debt. The stable average may result from a rise in high LTVs among some owners that is counterbalanced by plunging LTVs for those who did not tap their growing home equity. But there was also little change in the level of LTVs at the upper end of the distribution. As Figure 1 illustrates, at the 75^th percentile of owners LTVs also remained largely unchanged between 1998 and 2007 at roughly 67 percent. Even at the 90^th percentile of the distribution LTVs held steady at 86 percent.  Thus, even at the height of the housing boom the vast majority of homeowners had at least a 15 percent equity cushion, as they had continuously since the mid 1990s.

The data in Figure 1 includes homeowners of all ages, but it might be expected that highly leveraged homeownership was becoming more common among younger households who were more likely to buy homes during the boom years and take advantage of more liberal lending. Figure 2 shows the same distributions of LTVs for homeowners under age 30. While there is more sampling variability for this subgroup, there does appear to be more of a rise in average LTVs among this group than is true of all households. Between 1995 and 2001 the average LTV was generally a little above 60 percent, but rose to more than 65 percent in 2004 and 2007. A similar increase was evident at the 75^thpercentile where LTVs reached about 90 percent during the boom years after having been closer to 85 percent during the 1990s. Still, the vast majority of young homeowners had at least 10 percent equity invested in their homes even when lending standards were most relaxed. There was more stability at the 90^thpercentile of the distribution, where young homeowners had LTVs of between 95 and 98 percent consistently since 1989. At this upper point of the distribution young homeowners did have little equity in their home, but this was no different during the boom than it was 20 years ago.

Source: Joint Center tabulations of Survey of Consumer Finances.

As both Figures 1 and 2 illustrate, when the bottom fell out of the housing market after 2007 LTVs among homeowners shot up.  According to estimates from the SCF, 9 percent of all homeowners were underwater on their principal residence as of 2010, with the rate more than twice as high among those under age 30. But this sharp rise in LTVs was the result of the unprecedented fall in house prices and not due to an expansion of excessively high LTVs during the boom.

Still, there is no question that homeowners took on much more debt than was prudent during the boom. While outstanding mortgage debt may have been keeping pace with house prices, the level of debt was greatly outracing trends in incomes. This great expansion of credit decoupled from borrowers’ incomes certainly played a role in helping to inflate the housing bubble. The new Qualified Mortgage (QM) standard is designed to avoid this problem in the future by establishing an ability to pay standard for mortgage lending. Notably, the QM standard did not include restrictions on LTVs. However, the still to be announced rules defining the Qualified Residential Mortgage (QRM) may introduce limits on LTVs. While it is true that a greater equity cushion would have helped both homeowners and lenders avoid losses during the housing crash, the housing market has long been characterized by fairly high LTVs at the upper end of the distribution. These higher LTVs were not problematic as long as house prices were not subject to extreme swings. Imposing more stringent LTV requirements are of concern as they will curtail the ability of young households to get a start as homeowners—particularly the growing share of young minority households who have not benefited to the same degree from having parents build wealth through homeownership. Given these concerns, it may be best to have regulatory efforts focus on ensuring that borrowers can afford their mortgages as a means of introducing more stability in the mortgage system, rather than on setting standards for LTVs meant to withstand the next 100-year flood.

Should we privatize CMHC?

Canada Mortgage and Housing Corporation (CMHC) is in the news again after Minister of Finance Jim Flaherty released the 2013 budget on Thursday March 21. New changes are coming that will, once again, limit the use of portfolio insurance by mortgage lenders.

Portfolio insurance, also known as bulk insurance, is a product which caused CMHC to eat up most of its $600-billion limit on the mortgages it insures. Anyone with less than a 20% down payment and borrowing from a financial institution regulated by the Bank Act, must purchase mortgage default insurance. Those with more than 20% do not have to buy that insurance but lenders have been purchasing it on behalf of these clients because the loans were more easily securitized with federal government backing.

CMHC, which controls about three quarters of the mortgage insurance market, is 100% backed by the federal government. The two private insurers, Canada Guaranty and Genworth Financial, control the rest of the market and are 90% backed by Ottawa. Their limit is $350-billion each.

The new rules introduced by Flaherty will gradually limit the sale of insurance on a conventional mortgage -- those with more than a 20% down payment -- which may cause lenders to, once again, tighten-up their mortgage approvals.

Perhaps it’s time to revisit the role of CMHC and consider privatizing the crown corporation.

For years, lenders have known that Canada Mortgage and Housing Corporation (CMHC) has had an advantage over private mortgage insurers since its policies are backed 100% by the feds, unlike the 90% guarantee given to private insurers.

In a report written in 2011 by  Jane Londerville , Associate professor and Interim Chair of the Department of Marketing and Consumer Studies at the University of Guelph, who also teaches real estate finance and appraisal, has recommended privatizing  the CMHC to level the playing the playing field.

“I’m not saying it’s the right answer,” Londerville said in an interview. “But if we want mortgage insurance that benefits the consumer, then we have to look at ways to make the insurance market more competitive. This would likely lead to lower mortgage insurance fees.”

Lawrence Smith, Professor Emeritus at the University of Toronto co-authored a Federal Task Force  Report in 1979 that discussed the role of CMHC and if there was a case for privatizing it then.  At the time, it was a radical idea, but an idea whose day may be finally coming.

“We clearly needed CMHC 60 years ago,” he said. “However, times have changed and the reasons it was created in the first place no longer exist.”

CMHC was created in 1946, and then known  as Central Mortgage and Housing Corp.  The mandate of CMHC was to administer the National Housing Act and the Home Improvement Loans Guarantee Act.  Essentially it was created to help soldiers returning home from the war access affordable mortgages.

By the 1950s, CMHC was in the affordable public housing business. The agency’s social policy portfolio expanded, with assisted housing and assisted home-ownership programs, on-reserve housing, and green energy and conservation programs. CMHC also grew its mortgage loan insurance program by requiring those with low down payments to purchase mortgage insurance.

Finn Poschmann, vice-president of Research at the C.D. Howe Institute wrote in the Globe and Mail recently that CMHC may be doing too much – that’s its role has expanded into territories where it may not belong. He asks these questions:  Why does the Crown Corporation do all of the things it does? Why aren’t social housing and related social programs part of a division of Human Resources and Skills Development Canada, where similar social programs reside? Why aren’t housing market data functions handled and financed by Statistics Canada? Why aren’t green energy programs parts of Natural Resources Canada?
With regard to mortgage insurance, Poschmann wrote, “This usually is a profitable business – people must buy the product, and to do so at the price CMHC sets. But why does the federal government hustle mortgage insurance, and not auto insurance?

Taxpayers have often raised concerns that backing mortgage insurers is risky business and can end up costing them as it did in 1979 when CMHC didn’t have enough in reserve to cover claims and needed government assistance. Since then, CMHC increased premiums and have been more cautious about maintaining its reserves.

“Having a competitive market for mortgage insurance greatly benefits homebuyers and would likely lower insurance fees,” said Londerville.

To foster a more competitive environment she recommends that CMHC be repositioned as an affiliated non-Crown public entity and ensure the government backing for this new company is equal to those terms available to private insurers. She also recommends the federal government set lending criteria.
Londerville, Smith and Poschmann all agree that CMHC should not be wound down but its role should change.

Statscan could take took over housing market data, and energy-conservation programs can migrate to other federal departments said Poschmann. CMHC’s financial market functions are already overseen by Finance and the Office of the Superintendent of Financial Institutions, which also inspects private insurers.
The mortgage insurance program, meanwhile, would be an attractive investment for a well-capitalized domestic financial institution, such as a pension fund -- the Ontario Teachers’ Pension Plan already owns half of one of the private insurers, Poschammn added.

Smith said the government should consider establishing CMHC as a reinsurer rather than a primary insurer as it is now. Reinsurance is the most common risk-transfer tool used by insurers to manage risk. Private mortgage insurers use it, as does Export Development Canada, a federal Crown corporation with a significant export credit insurance business.

Reinsurance is risk-sharing between the direct insurer and the reinsurer who agree to fulfill certain obligations under certain conditions, like any legal contract. In the case of mortgage insurance, it could be agreed that if there is default up to a certain amount the reinsurer will pay the difference, thereby sharing the risk.

“There are still many questions to answer about CMHC,” said Smith. “We may not need it as it exists today -- its role must be redefined.”

Are Renters Less Energy Efficient than Homeowners?

by Elizabeth La Jeunesse
Research Assistant

According to data from the Energy Information Administration, American renters use nearly a third more energy per square foot than homeowners. What accounts for this difference?

In part it’s because rental units are typically smaller, and are therefore more energy intensive. For example, a family in a small apartment needs a refrigerator, stove, and water heater the same way a family in a larger apartment (or a homeowner) does.  These things require a basic amount of energy, regardless of square footage.  Rental units also tend to be older; 75 percent of renters live in units built before 1990 while 68 percent of owners live in older units.

Source: US Department of Energy, Energy Information Administration, 2009 Residential Energy Consumption Survey.

That said, the above chart shows that the amount of energy used by renters can vary depending on whether their utility costs are fixed (built into their rent) or if they pay for utilities themselves.  As the chart illustrates, renters consume considerably more energy when some or all of their utility costs are fixed.  This shows the general tendency of people to consume more of something when there is no added cost for doing so. Such excess energy consumption drives up the amount of energy renters use overall, further accounting for the efficiency gap between owners and renters.  

Even so, renters who pay for utilities separate from their rent still use slightly more energy per square foot than owners.  This suggests a real, structural efficiency gap between rental and owner units. In fact, a recent study found that multifamily rentals in 2009 had 34% fewer energy efficiency features on average than other housing types. Consumer fuels and utility costs have risen over 50 percent over the past decade, outstripping overall inflation, which makes energy efficiency improvements (insulation, energy efficient windows, compact fluorescent lighting, HVAC upgrades, energy efficient appliances) appealing to people wanting to lower their energy bills.  But when tenants pay for their metered energy usage, a property owner’s incentive to perform energy efficiency retrofits is lower, since any cost savings will benefit the tenants, not the owner. Rental property managers also have less control over how their tenants respond to an energy retrofit (e.g. more efficient windows might still be left open in the winter).  These things can keep rental property owners from performing energy efficiency retrofits at the same rate as homeowners which, in turn, keeps energy usage by renters high.

The gap in energy usage between owners and renters suggests that there are real opportunities for savings through some combination of added incentives for property owners to make these investments in retrofits and greater incentives for tenants to conserve energy. Lowering energy use would have the additional benefit of bringing down the cost of rental housing at a time when more renters are paying very high shares of their incomes for housing as a new study by the National Low Income Housing Coalition shows. 

Many Canadians think getting a mortgage is complicated

A new survey commissioned by ING DIRECT found that 67% of Canadians who have had or currently have a mortgage felt the process was either complicated, confusing , or hard to figure out. Thirty-eight per cent of current or former mortgage holders say getting a mortgage is time consuming while one in five describes the process as annoying.

By comparison, a mere 7% of respondents feel the process is stress-free. 

The most stressful aspects of the mortgage process was negotiating for a rate, deciding on the right term and payment schedule and getting customer service help from the lender. Haggling for a rate was one of the more stressful parts of the process. Interestingly, over half of the respondents agreed that researching and comparing offers made the process more difficult.

There is no question the mortgage process can be complex and daunting but is doesn’t need to be stressful.  A mortgage broker can help by researching and filtering through numerous loans and a variety of products with a number of mortgage lenders. Brokers will review the best options with you, assist you with key decisions, answer all your questions at your convenience and in the comfort of your own home, if you prefer, and support you through the application and closing process.

According to the survey 20% of mortgage consumers feel the ability to get a mortgage from home would make the process easier. Mortgage brokers like to make it as easy as possible for you.
Here are some other findings of the study:

* Simplified language in mortgage contracts would make the process easier
* 16% of respondents felt that  getting a mortgage would be easier if they had access to more education about mortgages

Let a mortgage broker sweat the details for you so that all you  have to worry about is moving in. 

Nonprofits Play Key Role in Repairing U.S. Homes

by Abbe Will
Research Analyst

Private sector spending on improvements and repairs to U.S. homes is approximately $300 billion a year. Yet as a new Joint Center working paper shows, each year nonprofit organizations and public agencies are also investing resources into the rehabilitation and repair of the homes of America’s most vulnerable households—including the elderly, disabled, and those with low-incomes—who might not otherwise be physically or financially able to undertake critical home remodeling and repair projects themselves. Major nonprofits such as Rebuilding Together, Habitat for Humanity, Enterprise Community Partners, the Local Initiatives Support Corporation, and NeighborWorks America, as well as thousands of local community development organizations across the country, are filling a significant and growing need, largely unmet by the private sector, by investing considerable resources—financial, technical, and direct provision of services—to make homes safer, healthier, more energy efficient, and more accessible for disadvantaged households.

The recent foreclosure crisis and sluggish economy undermined years of efforts to stabilize and improve distressed neighborhoods in cities across the country, only adding to the need for nonprofit and public sector involvement. Until this past cycle, housing inadequacy—a measure of the physical condition of housing units—had been on the decline in the United States, largely due to the success of govern­ment housing policies and the growing affluence of the pop­ulation. Since the housing market bust, however, this trend has reversed with the number of moderately or severely inadequate homes increasing by 7% between 2007 and 2011 to 2.4 million units. Certainly the severe housing and economic downturn had a measurable impact on the quality of the nation’s housing.

While a comprehensive data source of home rehabilitation and repair activity by nonprofits and public agencies does not exist, this new Joint Center working paper provides some insight into the topic. Rebuilding Together, one of the nonprofits in the study, provides critical home rehabilitation and modification services to low-income homeowners through its extensive network of local affiliates. A member of the Joint Center’s Remodeling Futures Steering Committee, the organization provided support for an affiliate and homeowner survey that collected data on the various types of projects undertaken by their affiliates, as well as demographic and socioeconomic information about the homeowners served and their experience partnering with Rebuilding Together.

Recent spending on home repairs and replacements, as reported by participating households, suggests that many of the homes worked on by Rebuilding Together have seen significant under-investment over the years. While the average American homeowner spent $3,000 on home improvements and repairs in 2011, according to Joint Center analysis of the American Housing Survey, almost two-thirds of Rebuilding Together program participants reported having spent less than $500 on average in the past year—fully 80% less than the typical homeowner in the U.S. Indeed, according to estimates developed by Rebuilding Together affiliates and the Joint Center’s Remodeling Futures Program, the homes serviced by Rebuilding Together were so in need after years of deferred maintenance, that the average value of the rehabilitation and repair projects undertaken by Rebuilding Together was in excess of $6,000 per home, or twice the annual amount spent by the typical homeowner in the U.S.

Home improvement expenditures under the Rebuilding Together program in 2011 were heavily oriented toward exterior replacements and kitchen and bath improvements—projects that would produce the greatest gains in key program objectives such as health and safety concerns, accessibility, and savings in energy use. Typical projects included additions or replacements of steps, ramps, railings, grab bars, windows and doors, roofing, insulation, energy-saving appliances, as well as painting and plumbing and electrical repairs. In the end, Rebuilding Together participants reported significant improvements in health and safety concerns, improvements in accessibility, and energy use savings as a result of nonprofit involvement.

Source: 2011 Harvard JCHS-Rebuilding Together Household Survey

While a more precise estimate is unavailable, hundreds of millions of dollars are spent each year by nonprofits such as Rebuilding Together, community organizations, and public agencies. Their contributions not only improve conditions for residents, they also help preserve badly-needed affordable housing opportunities, stabilize and revitalize deteriorating neighborhoods—of special importance in recent years—and encourage neighborhood stability by helping long-term residents of the community to remain safely in their homes.

The competitive mortgage market- it’s not all about rate

The recent announcement that BMO has lowered its 5-year fixed rate from 3.09% to 2.99% has caused a flurry of speculation from market analysts and warnings from the federal government.

For the past year the Bank of Canada has been warning that high household debt levels, the bulk of which come from mortgages, are the largest risk facing the country’s economy. BMO’s recent rate cut prompted Finance Minister Jim Flaherty to issue a warning to the country’s banks that he expects prudent lending practices – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.

It’s clear that in our current market where homes sales have slowed and the spring buying market is kicking into gear, that competition is strong among lenders. Mortgage lending is a large part of their bottom lines.  Gord Nixon, CEO of Royal Bank of Canada, the country’s largest mortgage lender said in a conference recently, “There is no question that the Canadian banking industry is facing slightly slower growth as a result of slower mortgage demand.”

Lower rates could interest more buyers this spring, and might encourage some buyers to take out larger mortgages than they otherwise would. So, despite the government’s rule changes this past year, and despite its urgings to lenders, growing market share triumphs.

According to Canaccord Genuity analyst Mario Mendonca, BMO has been seeking to bolster its mortgage sales since it stopped using mortgage brokers about four years ago. It still has the lowest mortgage market share among the five largest banks.

The interesting part of all this is that some lenders’ fixed rates are actually lower than what BMO has advertised – the difference is that BMO actually announced it. For the past month or so mortgage brokers have had access to rates trending down from 3.04% to 2.89% for 5-year fixed to 2.69% for 3-year rates.

Mortgage consumers should also look at BMO’s product and read the fine lines because there are restrictions, which, of course, are not advertised. They include the following:

1.  You only get 10%/10% prepayment privileges. many other lenders give homeowners the option to increase their monthly payments by 20% or more each year, as well as make lump-sum payments on the original mortgage in that same percentage range.
2.  You can’t skip a payment or access a mortgage cash account. Skipping a payment, should you need to, is not an option.
3.  You can’t transfer your mortgage to another lender until your term is up. Throughout your 5-year term, the only way you can refinance, transfer or payoff the balance of your mortgage, is if you stay with BMO while doing so, or sell your home. It’s not uncommon for homeowners to break their mortgages early.

While 2.99% offer may seem attractive at first, the product may not be the best one for your situation. Mortgage brokers can offer consumers similar and even lower rates, in a mortgage product that best serves the client.

A Surge in Hispanic Household Growth? The Challenge of Interpreting Short-Term Trends in Datasets that are Occasionally Adjusted

by Dan McCue
Research Manager

Interpreting year-to-year changes in annual surveys from the Census Bureau can be a tricky business, especially around decennial censuses.  Because it is the largest and most comprehensive count of the population, after each new decennial census is released, the smaller but more frequently issued surveys available from the Census Bureau, such as the Current Population Survey (CPS), Housing Vacancy Survey(HVS) and American Housing Survey (AHS), are updated, or “re-benchmarked” based on the findings from the new decennial census.  Prior to this, these surveys were controlled to extrapolations based off of the prior decennial census. While it is inevitable that ten years of extrapolation can lead controls to drift off course, failing to recognize when and how datasets are re-benchmarked to correct for this drift can lead to misinterpretations about short-term trends.  The danger is that the re-benchmarking adjustment can be misinterpreted as an actual trend that occurred in a single month or year, rather than what it really is: a discontinuity in the data due to an adjustment made to correct the net sum of ten years of extrapolation errors that had accumulated in the dataset since the last decennial census.

Take for instance, the following data overview in a recent online article:

"The latest U.S. census figures, for June, show year-over-year Hispanic homeownership increased by 7.3 percent, from 6.2 million to 6.7 million. For black-owned households during the same time, the numbers dipped by 1.3 percent, from 6.3 million to 6.2 million. Likewise, whites' homeownership also saw a slight decrease of about 1 percent, from 58.4 million to 57.8 million." - National Journal

On its face, this data leads us to conclude that the number of Hispanic homeowners surged from June 2011 to June 2012, while at the same time the number of homeowners among both blacks and whites dropped significantly, and therefore without growth in Hispanic homeownership the overall number of homeowners in the US would have dropped significantly over the past 12 months instead of growing slightly as was reported.

However, the Census Bureau’s Housing Vacancy Survey (HVS) showed that both Hispanic and non-Hispanic homeownership rates dropped during the June 2011 to June 2012 period, a time wherein Hispanics also suffered higher than average unemployment rates. At first glance, the divergence in the two reports is puzzling. However, on the Census Bureau’s HVS website, there is a short but significant sentence under the “Changes in 2012” section of the Source and Accuracy of Estimates web page:   

“Beginning in the first quarter 2012, the population controls reflect the results of the 2010 decennial census.”  - HVS Source and Accuracy of Estimates

This note is important, because the distribution of occupied households by tenure, race, and ethnicity of households is based on these population controls.  Therefore, any changes in the number of homeowners by race and ethnicity that spans across the first quarter of 2012 is also incorporating change due to the shift in the distribution of households by age, race, and tenure that occurred with the re-benchmarking of the survey..

The adjustment to Hispanic households due to the re-benchmarking appears to be significant. Looking at the Hispanic share of households in HVS before and after Q1 of 2012, we can see that the re-benchmarking in that quarter led to a significant upwards adjustment that forms a discontinuity in this series (Figure 1).  The existence of a discontinuity is corroborated by data from the Current Population Survey, which re-benchmarked to the 2010 Census in 2011. The CPS Table Creatorallows us to see the impact of the re-benchmarking directly by comparing the Hispanic share of households in 2011 under both 2000 and 2010 Census weights.  It shows that the 2010 census weights raise the Hispanic share of households a full percentage point, from 11 to 12 percent, compared to the 2000 census weights.  In short, this all suggests that results from the 2010 Census found that the 2000 Census-based population extrapolations had been underestimating Hispanic household growth in the 2000s, and therefore these household counts needed to be shifted upwards in 2012 as a correction.

Figure 1:  The Shift to 2010-Based Population Controls in Q1 of 2012 in the HVS Coincides with an Apparent Discontinuity in the Hispanic Share of Householders

Source: JCHS tabulations of US Census Bureau, Housing Vacancy Survey data.

With the change in population controls in the HVS in Q1 of 2012, the amount to which the shift in the distribution of households towards Hispanic households was underestimated incrementally over the last ten years gets corrected all at once, and gets attributed as change measured between Q4 of 2011 and Q1 of 2012.  And as we see in Figure 2, the quarterly change recorded in Q1 of 2012 has a huge influence over our view of the recent trend in household and homeownership growth by Hispanic ethnicity. 

Figure 2: Concurrent with the Switch to Census 2010-Based Population Controls, The First Quarter of 2012  Has a Large Influence on the Recent Trend in Hispanic and Non-Hispanic Household Growth 

Source: JCHS Tabulations of the 1995-2011 AHS

Without the ability to compare alternative HVS household counts for Q1 of 2012 under both 2000- and 2010-based population controls, it is difficult to determine exactly how much of the change in Hispanic and non-Hispanic households and homeowners in 2011 to 2012 was due to the re-benchmarking and how much was due to actual change measurable in the survey.  We refrain from presenting alternative scenarios here, but because the quarter is such an outlier, most assumptions to smooth or discount that quarter of data would conclude with much lower Hispanic household and homeowner growth and much higher growth among non-Hispanics over the past year.  

Recession or stability for Canada

Throughout the Global Financial Crisis, when the world economies slowed down, Canada held onto economic growth. This was due, in large part, to the approach taken by the Bank of Canada and the Government.

It has been a long, slow process for other countries to catch up. While we are starting to see signs of life in our largest trading partner, the U.S., other parts of the world, especially Europe continues to struggle.  Now, however, Canada is feeling the effects of the economic slowdown. It’s true that some sectors, in particular housing, as been impacted by the government rule changes to mortgages and home equity lines of credit. Other sectors such as manufacturing and exports for example, arefeeling the fallout from countries which normally bought goods deal with their own struggling economies

For an economy to function, money needs to keep moving. A quick look at the stats shows an economy growing at its slowest pace since pre-recession 2007. The use of consumer credit has dropped to levels not seen since the 1990s. The pace of retail sales is mediocre at best. Already, it has dropped 1.2 percentage points below the long-term average. Fewer people are accessing their lines of credit. Personal loans remain stable, however, largely due to the demand for auto loans.

We still hear about the rising debt-to-incomes ratios. Yet it is rising at the slowest pace we’ve seen in more than a decade. Interest payments on consumer debt are the lowest since 2009.

Consumers seem to have slowed their spending, for now. It could be the media’s emphasis on household debt, on gaps in retirement savings, on gaps on overall savings, or on the amount of credit card debt. It could be news of lost jobs,or maybe people are just tired of hearing the news.

Credit card growth is soft but maybe that’s a good thing. Insolvencies are falling, slowly, yet falling nonetheless. A sharp rise in the unemployment rate can lead to an increase in insolvencies but that’s not happening either. Yes, there have been job losses but employment increased by 1.6% or 286,000, all in full-time work, year-over-year in 2012.  Over the same period, the total number of hours worked rose 1.7%. In January, employment declined in Ontario and British Columbia. At the same time, there were increases in Alberta, Saskatchewan and New Brunswick.

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Economic indicators such as GDP, employment, investment spending, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. While we are living in a slow down, we are not seeing high job losses or increases in bankruptcies.

Economic stability refers to an economy that experiences constant growth and low inflation. Our inflation rate is the lowest it’s been in three years. And while the pace of economic growth has slowed, there is still growth.

Recession or stability? We believe stability.