27 Jan

Canada Mortgage Bonds 101

General

Posted by: Rabinder Dhillon

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

20 Jan

High-profile Bay Street economist David Rosenberg is bucking the trend once again…

General

Posted by: Rabinder Dhillon

This time on the timing of the Bank of Canada’s first rate increase.
 
Whereas the market is pricing in rate hikes in July and September, the Chief Economist for Gluskin Sheff + Associates said central bank tightening won’t begin until mid-2011 “at the earliest.”
 
His reasoning emerged after analyzing the Bank of Canada’s latest interest-rate statement yesterday, which surprised some analysts because of its cautionary tilt. Rosenberg, a noted market bear, said the central bank’s economic forecast – of 2.9% growth this year and 3.5% in 2010 – is based on a starting point at which the output gap is 3.25%, as of the final three months of last year.
 
By applying these expected growth rates against the latest estimates of potential growth, his calculations suggest the output gap at a smaller level of 1.55% this year and then narrowing further to 0.25% in 2011.
 
Click here to read the full article in the Financial Post.

20 Jan

Bank of Canada Governor Mark Carney is entering a crucial phase for clinching the recovery

General

Posted by: Rabinder Dhillon

Having helped steer Canada’s economy out of recession, Carney and policymakers across the globe are carefully watching for signs that their economies are healing and trying to determine the right moment, and the right pace, at which to start withdrawing the unprecedented stimulus that helped counter the effects of the financial crisis.
 
While few believe there’s much chance Carney will abandon his “conditional” commitment to keep borrowing costs at a record-low 0.25% through the middle of the year or longer, every piece of economic data over the next few months will be parsed for indications of how quickly rates might rise in the second half of the year and beyond.
 
Timing is particularly important because no central banker wants a repeat of 1937, when the US Federal Reserve tightened prematurely, snuffing out a tentative recovery and, therefore, prolonging and worsening the Great Depression.
 
Click here to read the full Globe and Mail article.

13 Jan

Bank of Canada will not raise interest rates

General

Posted by: Rabinder Dhillon

The Bank of Canada won’t raise interest rates to cool the country’s hot housing market, a spokesman said Monday, preferring to leave any tinkering to the country’s Finance Minister.
 
“Some observers – those who see a housing bubble forming – have said that since low interest rates have stimulated housing market activity, the Bank should now raise interest rates to dampen that activity,” Deputy Governor Timothy Lane wrote in a speech delivered by an adviser on his behalf in Edmonton. “But that poses a problem.”
 
Existing home sales are up 73% year-over-year, while prices have climbed nearly 20% as buyers take advantage of historically low interest rates to finance purchases.
 
Those who fear a bubble worry that many people are taking advantage of cheap money to buy homes they wouldn’t be able to afford once rates rise, leading ultimately to a crash in prices.
 
Lane said the bank understands the concern, but it uses its lending rate to keep inflation in check for the whole economy and the housing market is “only one of several factors” that influence inflation.
 
Click here to read the full Globe and Mail article.

6 Jan

Private Investor Group acquiring AIG’s Canadian mortgage insurance business

General

Posted by: Rabinder Dhillon

A private investor group, in which Ontario Teachers’ Pension Plan is the lead sponsor, has entered into a definitive agreement to acquire American International Group Inc’s Canadian mortgage insurance business, AIG United Guaranty Mortgage Insurance Company Canada.
 

“We believe the mortgage insurance industry in Canada to be an attractive market, and that United Guaranty Canada is well positioned to grow its market position,” said Erol Uzumeri, Senior Vice President, Teachers’ Private Capital, in a statement yesterday. “The company has a strong management team, and Teachers’ is prepared to support the growth of the business.”
 
The transaction is subject to the fulfillment of customary closing conditions and receipt of regulatory approval. Terms of the transaction were not disclosed.
 
In announcing the deal, the pension giant said it had teamed up with Stephen Smith, a Toronto-based investor who is making the purchase through his private family holding company, National Mortgage Guaranty.
 
Smith is also President of First National Financial, which was one of the first financial institutions to offer AIG products after the company entered the Canadian marketplace in March 2006.
 
“We’ve spoken to a number of potential [bank] customers prior to signing this transaction, and we had good discussions with all of them,” said Uzumeri, adding that Teachers’ “has good relationships with all of them.”
 
Click here to read more about the deal in the Financial Post.