As reported in today's Toronto Star, Canadians received more proof yesterday of the global credit crunch hitting home after this country's biggest banks began hiking their residential mortgage rates in an effort to recoup higher funding costs from their customers.
The interest rate increases follow days of forewarning by financial experts, who predicted Canadians would feel the pinch of the financial crisis through higher borrowing costs on consumer loans.
TD Canada Trust was the first of the big domestic lenders to increase mortgage rates both on its' fixed rate mortgage product and its' variable interest rate mortgage. TD Canada Trust claims that the increase now is reflective because the bank has been holding on, that all of the industry in fact has been holding on, trying not to pass the increased costs to the customers, but says that it can't do this anymore.
Banks are grappling with higher funding costs in the wake of last year's subprime mortgage market meltdown in the United States. With the ensuing global credit crunch now in its second year, banks remain wary of lending to each other. The bank says that all mortgages, variable rates mortgages in particular, have become money losers because of the cost of funds due to all the challenges that are going on in the world right now.
Another factor affecting rates is the bond market which has been in a flux ever since the United States announced a $700 billion US bailout plan for American banks. The interest rates on mortgages and other short-term borrowing are set based on the price of bonds. With lower demand for bonds, and fears of inflation, rates have to rise to lure investors.
Warmly,
Mary Wozny
Friday, September 26, 2008
Tuesday, September 9, 2008
US Mortgage Market Bailout!
U.S. Treasury Secretary Henry Paulson is counting on the weekend seizure of mortgage lending giants Fannie Mae and Freddie Mac to help lower stubbornly high mortgage rates and lure more buyers back into real estate.
But the plan on its own is unlikely to spell the end of the deepest housing slump since the Depression. That's because the rescue is aimed largely at the supply side of the equation, by unfreezing the mortgage bond market that banks tap to make new home loans.
The plan could lower mortgage rates - now at roughly 6.4 per cent for a 30-year mortgage - by as much as a half to a full percentage point, analysts said. Unfortunately the demand side of the equation remains largely untouched.
Americans' appetite for buying homes is likely to remain weak as the U.S. economy slides nearer to recession, weighed down by the deteriorating job market and waning consumer spending.
Mortgage applications in the US have fallen steadily this year and now stand at a seven-year low.
The Feds move to rescue Fannie Mae and Freddie Mac, which together own or guarantee half of all U.S. mortgages, does nothing to address weakening employment or that banks are increasingly tightening underwriting standards. Many lenders, for example, are demanding higher credit scores and larger down payments. And that isn't likely to change with Fannie Mae and Freddie Mac in government hands.
Clearly, the housing market is in a deep rut. Home values have already tumbled 18 per cent across the U.S. Even then, homes are less affordable now than they were before the price bubble emerged in 2004. There is an expectation by analysts that prices will fall another 10 per cent, a lever that would make homes affordable again to most Americans.
There is still months worth of unsold homes on the market. And foreclosures, stuck at an all-time high, continue to glut the market.
In recent months, Wall Street has virtually abandoned the mortgage bond market, leaving troubled Fannie Mae and Freddie Mac as the only players. So while the two lenders controlled roughly half the market, they had become responsible for nearly three-quarters of all new credit.
But that wasn't enough to counter the incredible pressure in financial markets. Worried that Fannie Mae and Freddie Mac would collapse, investors have demanded an unusually large premium for the companies' bonds in recent weeks - nearly 2.5 percentage points higher than government Treasury bills. That's a full percentage-point higher than normal.
The result had a cascading effect through the mortgage market, keeping mortgage rates high in spite of efforts by the U.S. Federal Reserve Board to push them lower.
Also worrying economists is that the takeover is temporary, and the structure of the mortgage finance market in a year or two remains uncertain. Mr. Paulson has made it clear he and the Treasury don't intend to be in the business of being a market maker in mortgage bonds indefinitely.
In the end, the next U.S. president, his treasury secretary and the Congress will have to rethink what the two entities are all about, and what role government will play. The Bush administration is leaving that quandary to the two presidential hopefuls - Democrat Barack Obama and Republican John McCain.
This is a good time for investors to be building their portfolio of buy and hold rental properties.
Warmly,
Mary Wozny
But the plan on its own is unlikely to spell the end of the deepest housing slump since the Depression. That's because the rescue is aimed largely at the supply side of the equation, by unfreezing the mortgage bond market that banks tap to make new home loans.
The plan could lower mortgage rates - now at roughly 6.4 per cent for a 30-year mortgage - by as much as a half to a full percentage point, analysts said. Unfortunately the demand side of the equation remains largely untouched.
Americans' appetite for buying homes is likely to remain weak as the U.S. economy slides nearer to recession, weighed down by the deteriorating job market and waning consumer spending.
Mortgage applications in the US have fallen steadily this year and now stand at a seven-year low.
The Feds move to rescue Fannie Mae and Freddie Mac, which together own or guarantee half of all U.S. mortgages, does nothing to address weakening employment or that banks are increasingly tightening underwriting standards. Many lenders, for example, are demanding higher credit scores and larger down payments. And that isn't likely to change with Fannie Mae and Freddie Mac in government hands.
Clearly, the housing market is in a deep rut. Home values have already tumbled 18 per cent across the U.S. Even then, homes are less affordable now than they were before the price bubble emerged in 2004. There is an expectation by analysts that prices will fall another 10 per cent, a lever that would make homes affordable again to most Americans.
There is still months worth of unsold homes on the market. And foreclosures, stuck at an all-time high, continue to glut the market.
In recent months, Wall Street has virtually abandoned the mortgage bond market, leaving troubled Fannie Mae and Freddie Mac as the only players. So while the two lenders controlled roughly half the market, they had become responsible for nearly three-quarters of all new credit.
But that wasn't enough to counter the incredible pressure in financial markets. Worried that Fannie Mae and Freddie Mac would collapse, investors have demanded an unusually large premium for the companies' bonds in recent weeks - nearly 2.5 percentage points higher than government Treasury bills. That's a full percentage-point higher than normal.
The result had a cascading effect through the mortgage market, keeping mortgage rates high in spite of efforts by the U.S. Federal Reserve Board to push them lower.
Also worrying economists is that the takeover is temporary, and the structure of the mortgage finance market in a year or two remains uncertain. Mr. Paulson has made it clear he and the Treasury don't intend to be in the business of being a market maker in mortgage bonds indefinitely.
In the end, the next U.S. president, his treasury secretary and the Congress will have to rethink what the two entities are all about, and what role government will play. The Bush administration is leaving that quandary to the two presidential hopefuls - Democrat Barack Obama and Republican John McCain.
This is a good time for investors to be building their portfolio of buy and hold rental properties.
Warmly,
Mary Wozny
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