Canada Mortgage Bonds 101

Enhance financing that reduces mortgage financing costs for Canadian homebuyers

Canada Mortgage Bonds (CMBs) are debt securities fully backed by CMHC, that provide investors with a return that’s better than government bonds. CMBs are important to the Canadian housing market, because they provide vital liquidity to keep the housing market moving.

The amount of debt outstanding under the CMB program has increased by 20% over the last year (mid-August 2009) to $168 billion and attracted international investor support, which suggests continuing investor confidence in the Canadian residential real estate market.

Here’s how the process works:

1. Lenders originate mortgages
2. Lenders aggregate a group mortgages (also known as pools) for the purpose of selling them to investors
3. Lenders sell these pools as mortgage-backed securities (MBS) to the Canadian Housing Trust (CHT), a CMHC-run entity
4. The CHT sells Canada Mortgage Bonds (CMBs) to generate funds to buy the lenders' mortgages
5. The CHT uses the MBS cash flows to make interest payments on these CMBs to investors.
6. The lenders take their proceeds and re-circulate them again as new mortgages

Because CMBs are fully guaranteed by the government, investors demand less interest on CMBs. That lowers the cost of funds for lenders and thereby lowers the cost of mortgage financing in Canada.

Courtesy of First National Financial

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British Columbia Enacts Significant Changes to the Strata Property Act

In December of 2009, the Province enacted several changes to the Strata Property Act (the “Act”). Some of the key changes which take effect January 1, 2010 include:

1. Special Levies: Strata corporations must account for funds raised by special levy, separately from other strata funds. The strata corporation must invest those funds in investments permitted by the regulations or in insured accounts with savings institutions in British Columbia. They may also charge interest on money owed and outstanding by strata owners per a special levy. As a result, the strata corporation will be able to register liens against a strata lot for interest owing due to late payment of the levy. Lastly, some special resolutions fail where a bare majority but not a ¾ super-majority of strata owners vote to assess a special levy to repair or replace common assets. In such instances the Act now permits the strata corporation to apply to either Provincial or Supreme Court, not later than 90 days from the vote, for an order authorizing the special levy be assessed and the repairs go forward, irrespective of the failure to achieve the requisite ¾ vote.

2. Rental Restrictions: Under the new provisions, new strata corporations would not be able to change rules about rental units that impact the rights of owners and purchasers or the marketability of the units. Owners would be able to continue to rent their units until the date the rental period originally defined by the developer in the Form J Rental Disclosure Statement expires. Existing strata owners do not benefit from these changes.

3. Age Restrictions: The Act now grants strata corporations the express authority to pass bylaws restricting the age of persons who may reside in a given strata lot.

In addition, look for the following provisions in the Act to be brought into force later in 2010:

1. Audited Financial Statements: The Act will require that the strata corporation’s financial statements be audited. Owners and purchasers reviewing the statements will know they are materially correct and conform to generally accepted accounting practices. This audit requirement may be waived by a ¾ vote of the strata owners.

2. Depreciation Reports: Strata corporations will be required to obtain regular depreciation reports (a “Report”). The Report must estimate repair and replacement costs for major items in the strata corporation, as well as the expected lifespan of those items. Owners may waive this requirement by a 3/4 vote. Strata corporations must disclose the Report in a Form B request made by owners or purchasers or their representatives.

3. Changes to Dispute Resolution: Under the former provisions of the Act most Strata disputes were required to be submitted to the B.C. Supreme Court for resolution. Under the new provisions, many of these same disputes may proceed in Provincial Court.

4. Form B Information Certificates: In addition to requiring that the Form B details the most recent depreciation report, the new provisions of the Act will require that the Form B detail which parking stalls and storage lockers are allocated to a particular strata lot.

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Make Sure you can afford your Dream Home

January 11, 2010
By Jim Adair

For first-time buyers in particular, it s a confusing time. Canada is just coming out of a tough recession that cost a lot of jobs and hurt consumer confidence. Everyone is aware of the troubled real estate market in the U.S. But since the spring, Canada s resale housing market has been booming, thanks to rock-bottom mortgage interest rates. So is now the time to buy and take advantage of the low rates?

While today s ultra-low borrowing costs represent a unique opportunity to purchase a property, home buyers need to proceed with caution and keep in mind that renewal rates will likely be substantially higher in coming years, says Sal Guatieri, senior economist with BMO Capital Markets.

Jan Yuen, a senior manager at BMO Capital Markets, adds: Stretching the limits of your budget by choosing the maximum amortization period and a minimum downpayment leaves you little wiggle room to deal with an unexpected financial challenge. A meaningful downpayment and shortening your amortization by making extra payments on your mortgage will save you tens of thousands of dollars in interest costs.

For example, Benjamin Tal of CIBC World Markets says that on a $250,000 mortgage with a five per cent rate amortized over 30 years, adding a full month of extra payments each year works out to a de facto shortening of the mortgage amortization period by five years. If interest rates have gone up, translating years into basis points means that by simply switching from an accelerated payment plan to a regular one means borrowers would be able to absorb the first 75 basic points on a rate increase, says Tal.

BMO advises borrowers to do a stress test on their budget to see if they can afford rate increases. For example, customers looking to renew a $250,000 mortgage currently priced at 2.25 per cent would see their monthly payment to increase by $260 a month if rates were to increase by two percentage points, says BMO.

BMO also suggests that mortgage holders make weekly or bi-weekly mortgage payments if possible. They should also take a close look at fixed versus variable-rate mortgages. While variable-rate mortgages have been a winning strategy over the long term, fixed-rate mortgages (currently at historic lows) come with the peace of mind of being insulated against rate increases and knowing how much of your mortgage you will have paid down at the end of your term.

It says total household costs, including mortgage payments, property taxes, heating and utilities, should not be more than one-third of household income.

The Bank of Canada says that 5.9 per cent of Canadian households are vulnerable to rising interest rates because their debt-service ratio is more than 40 per cent. It says that if rates rise by 300 basis points by 2012, that percentage of vulnerable households would rise to 8.5 per cent.

But in a recent report, Tal says that focusing on a borrower s debt-service ratio with no reference to the underlying asset (the equity in the house) can be misleading. He says when equity is added to the equation, the number of households that would be vulnerable to a rate shock is less than four per cent.

Another potential buffer to rate shock, says Tal, is the fact that most Canadian financial institutions limit their variable-rate customers to a mortgage that they would qualify for at today s three-year fixed-term rate, well above current variable rates. While all borrowers will face the impact of higher rates, most of them will therefore be able to absorb a 300 basis point rate hike and still remain within the qualification threshold.

Tal adds: Also note that in general, low-income Canadians tend to rely more heavily on fixed-rate mortgages -- the complete opposite of the situation south of the border where low-income Americans were heavy users of variable-rate mortgages. While even fixed-term mortgages will eventually be reset, the longer time frame for any hikes in their borrowing rates leaves them with more time to pay down principal and benefit from rising incomes before that hits.

Many analysts believe the housing market will slow down during the coming year, and that house prices will not appreciate as rapidly as in 2009. In the housing industry, everyone from the Mortgage Brokers Association of British Columbia to the president of the Building Industry and Land Development Association of Toronto is urging Flaherty to let the market settle down on its own before taking regulatory steps.

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Top 10 financial resolutions for 2010

Roma Luciw

From Monday's Globe and Mail Published on Sunday, Jan. 03, 2010 6:26PM EST Last updated on Monday, Jan. 04, 2010 4:18PM EST

With 2009 slated to go down as a tumultuous time for your money, 2010 could prove to be the year when Canadians put their financial house in order – provided they can get their balance sheets under control.

Heading into the new year, debt is the biggest financial hurdle for many families, says certified financial planner Bradley Roulston, a manager of the Nelson & District Credit Union in British Columbia.

“Household debt – mostly mortgages and consumer debt – has increased to record levels. And with interest rates bound to go up, people need to make sure they have enough cash flow to sustain a few percentage [point] increases on their payments.”

The debt-to-income ratio among households hit a record this year. The latest Statscan

report showed that for every $100 of personal disposable income, Canadians are carrying $145 in debt, up sharply from $88.60 in 1990. The ballooning debt comes at a time when the Bank of Canada is warning of higher interest rates.

Citing potential interest rate increases, Manulife Securities senior financial adviser Kurt Rosentreter is advising clients shopping for real estate in 2010 to take defensive measures. “Resist overpaying for a home, delay the purchase of secondary or recreational real estate, save for larger initial deposits and focus on debt repayment more than new, optional portfolio savings.”

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Know your Options

There has long been the belief that the “bank” was the best place to go when searching out a mortgage. That based on your long term banking relationship they will give you the best mortgage possible. The mortgage broker was the person you saw if you had less than stellar credit and your bank had turned you away.

In actuality it is quite the opposite. Mortgage brokers deal with all clients from the best credit to slightly bruised credit. There are many mortgage rates and products available from an array of lenders, and as you would a medical diagnosis, a second opinion on your mortgage offer is always in your best interest.

Where banks are limited to their own rates and products, Mortgage Brokers provide mortgages from a variety of lenders. This means many options are available, often with access to the same bank you may have visited but with a better rate. The Mortgage Broker works for you not for the lender. With one application and one check on your credit bureau, a broker can shop your mortgage. Working with a Mortgage Broker will help you avoid repeated checks on your credit bureau which could ultimately reduce your credit score. Best of all the services provided to you by a Mortgage Broker are free, with only a very few exceptions.

Situated at 2446 Beacon Ave. in the old “Candy Shop” you will find over 20 years of mortgage and real estate experience. Locally owned and operated, Mortgage Depot has been arranging mortgages for over 19 years. The Sidney Mortgage Depot is a family run office with Arlene Modderman, her daughter Sherri Brown and close friend Krista Lawless. Arlene Modderman is known as the Gulf Island specialist with offices in Victoria, Sidney and Salt Spring Island. Krista Lawless and Sherri Brown operate as the Lawless Brown Mortgage Team with offices in Victoria and Sidney. With various convenient locations and an interactive websites, the Accredited Mortgage Professionals (AMP’s) of Sidney Mortgage Depot are easily accessible.

These ladies believe that excellent customer service and the best mortgage products go hand in hand. They will make the mortgage process as comfortable and stress free as possible and while professionalism and privacy are top priority, it is important to know that they will find the lowest rates and best mortgage product suited for your individual needs.

Your home can be your biggest asset and is deserving of the best attention to make sure you have the most suitable products to maximize your investment.

Krista Lawless

Sherri Brown

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November numbers heat up housing bubble talk

Wednesday, 16 December 2009


With the Canadian Real Estate Association's release of November housing numbers Tuesday, talk of a bubble is heating up among economists and industry professionals.

The CREA report said existing homes sales in November increased by a whooping 73 per cent compared to a year ago and prices rose almost 20 per cent.

"We're on the bubble of a bubble," Bank of Montreal economist Doug Porter told The National Post, sharing his worry about a potential surge of home sales before the central bank raises rates and the new harmonized sales tax is introduced in B.C. and Ontario. "We could see a bit of a buying frenzy coming this spring...followed by a "pop" in 2011?"

But despite continued fears that skyrocketing numbers signal the formation of an asset bubble, some insiders said the dramatic rise is due to how low the market was at this time last year. The number of listings also went up by five per cent from October to November, which is expected to help ease price increases.

"The numbers look huge, but you are coming off such a bad year," TD Securities economics strategist Millan Mulraine told The Globe and Mail. "You're seeing big numbers in the recovery, but the pace and momentum has eased. You could definitely say it's not driving as fast as it was a few months ago."

Another argument against a bubble came from Genworth Financial Canada president Peter Vukanovich, who told The National Post that because more consumers have been switching into fixed rate mortgage products, they will be less exposed to expected interest rate hikes.


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CMHC’s Role in Canada’s Credit Crisis Recovery

Think back to the fall of 2008 … Banks failing … credit getting tight … the stock market crashing. Most of this was blamed on sub prime mortgages. What would you have thought if your pension manager or RRSP administrator had chosen that moment to invest your money into mortgages? You probably would have tried to have them arrested!

That’s the dilemma that banks and mortgage lenders faced. For the most part, the money that Banks lend as mortgages is raised from investors’ money in RRSP’s, pensions and non-registered investments. ALL those investors were justifiably refusing to put any new money into mortgage investments. No money … no new mortgages. No new mortgages and our housing industry would come to a complete halt … prices would fall and foreclosures would begin to rise.

The solution … the government of Canada expanded the role of CMHC (Canadian Mortgage Housing Corporation) to allow them to insure much larger numbers of mortgages. CMHC insurance protects the lender against a loss in the event the borrower fails to pay. Because CMHC is backed by the government, the lender is sure of recovering all funds. With that in place, investors can now allow their funds to be invested in mortgages safely. For a period of time, lenders were so careful about mortgages, that nearly all new mortgages were insured with CMHC, even mortgages that were for a small percentage of the value of the property. Naturally, this caused sharp increase in the number of mortgages insured.

Recognizing we were entering a recession, CMHC tightened the rules banks must follow for qualification, thus avoiding much of the trouble facing the USA, where loose lending practices were a big factor in triggering the whole mess.

The result? Today we have strong solvent banks, relatively low mortgage delinquency and a housing market that has cooled down without destroying millions of people’s lives and investments. Was it the right thing to do? Compare Canada to the rest of the world and the massive public bailouts that were necessary to save banks. CMHC’s increased role suddenly looks like an awfully good alternative!

Mortgage Depot

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