Have A Chair

Yesterday saw the unveiling of the Liberal’s Fall Economic Update ,and while there was a lot of talk – it amounted to the re-arranging of the deck chairs on the Titanic.

While major news outlets will give you the run-down on the entire non event, lets focus on what it means to mortgage brokers.

As leaked before the update, there is a crackdown on STR’s. Basically if you operate an STR in a Province or Municipality that bans STR’s, you cannot deduct the expenses. So, if every Province decides to ban STR’s, then no one in Canada can deduct any expenses on STR’s. The feds are also spending money ( shocker I know ) to help local municipalities enforce STR violations. Add it all up, and the days of STR’s are pretty much done. Sure, there will be some here and there, but as an asset class, STR’s are a thing of the past.

Housing played a large role in the update, although I am somewhat pessimistic on what any of the announcements will accomplish. Let’s take a look.

“Allowing temporary extensions of the amortization period for mortgage holders at risk”

Okay, so we have a word salad on our hands. How do we define the word temporary and risk? Who decides what is a risk, and what is not? How long is temporary. In the words of Milton Friedman ” Nothing is as permanent as a temporary government program”. My issue with this is that when you extend an amortization, by say adding 5 years to help a borrower, you have now added 5 years. How is that temporary? 5 years is 5 years. So the ‘temporary’ extension could run for 5 years, 10 years etc? If someone is struggling to pay their mortgage, extending the amortization ‘ temporarily’ automatically defaults to a life-long impact. If you add 5 year, or 10 years to your mortgage, then you will pay for that temporary change for the rest of your mortgage life.

“Waiving fees and costs that would have otherwise been charged for relief measures”

Okay, so basically we will call this the ‘ Can’t kick a man while he is down clause’. I like it, but it adds a few more questions for me. Does this include the $95.00 NSF fee to bounce a mortgage payment? Most of the lenders fees that are charged after funding are for measures related to non payment, or relief. If you read the fees banks charge on a mortgage after funding, most of them are in relation to items that surround arrears, default etc. Again, how the banks interpret the wording will be key. However, let’s assume that banks completely eliminate all of the fees regarding people who cannot pay. Do you really think the banks will simply take that hit to their revenue? Of course not, they will simply find other ways to make it up. All they would need to do is add 3 bps to rate and that would cover off any expected drop in fees they would ‘forgive’ on relief measures. So again, we all will pay to help those who got in over their heads.

“Contact homeowners 4 to 6 months in advance of their renewal to inform them of their options”

Ah great, so now banks have the early jump to try and lock borrowers into ridiculously high posted bank rates EVEN earlier. Super. Lets use right now as an example. If the bank reached out to lock in a mortgage that is renewing say April 15th 2024, ( about 5.5 months away ) and the client thinks they are winning. Well, lets say fixed rates slowly decline over the next 4 months. Is that bank going to reach out, do a rate drop, and continue to rate drop up until the maturity? We all know the answer to this one. Add in to the mix that banks already do this in a lot of cases to try and lock in the client before the competition gets there 120 days prior to maturity.

“Give homeowners the ability to make lump sum payments to avoid negative amortization with penalty”

Ah yes, we all have so many clients that are struggling to pay their bills, feed the families, but happen to have large wads of cash laying around to make pre-payments. Of course, the main concern on these clients is the pre-payment penalty. GIVE ME A BREAK. How out of touch with reality is this government? Most mortgages in Canada have some form of pre payment ability up to at LEAST 10% of the principle. The average mortgage in Canada is somewhere around $450,000.00, so that means that under already existing mortgages, the average Canadian could deposit around $45,000.00 on their mortgage as a pre-payment without penalty. Again, I don’t know many people who are ‘ struggling’ that have an extra $45,000.00 kicking around. However, this does make it look like they care, doesn’t it?”

“Not charge interest on interest in the event mortgage relief measures result in a temporary negative amortization period”

Ah, there is that word temporary again. So banks would not be allowed to charge interest on interest. How nice. I was under the impression that banks were already not allowed to charge interest on interest, but I must have been mistaken. Again, if they were allowed, and did so, any reduction in interest income on this will simply be made up in other areas. It may help those select few homeowners in a targeted manner, but it will simply raise the general cost of admission for everyone else.

“Not require insured mortgage holders to requalify at the stress test rate when switching lenders at maturity”

Finally!!! This should allow lenders to get competitive and really try to win business, as opposed to allowing current holders to absolutely lay the screws to people coming up for maturity. This is great for competition in the marketplace, and has the ability to actually help the average ordinary homeowner. Great call by the Liberals on this one.

Another great thing that I absolutely loved though was it calls for the removal of pre-payment penalties if the borrower has to sell due to financial hardship. I am 1000% in favour of this. A person who is struggling, and is forced to sell their family home is already going through enough – let’s not pour salt in the wound with a massive IRD penalty. Anyone who has been in the business long enough has witnessed first hand how a deal can fall apart at the lawyers because the sale price isn’t enough to cover off the massive Big 5 bank IRD penalty. However, once again, if the bank can’t make it here, they will simply collect it somewhere else.

However, all of these changes announced fall under the a new government program called the Canadian Mortgage Charter. Cool name eh? While the name sounds cool, and a lot of these programs might at the margin help some people – the Charter is completely voluntary by the big banks. They are not required to participate, nor even enrol in it. This means that the entire program really has no teeth to it. Sure, some banks and credit unions will pick and choose what parts they want to use, or allow, and I am sure it will help some people out, however, the intended results will never be achieved.

If crap were to hit the fan in Canada from an economic perspective, and the banks needed some fiscal help from our government, I am sure the trade off would be that the government help the banks with bond buying, QE, etc, but they would make participation mandatory in the Mortgage Charter, but until then, there is simply no reason for banks en masse to join. And of course, if we have a new government program, I am sure we will have to hire thousands of government employees to oversee this new ‘ Charter’ .

Of course the Liberals confirmed they will still run a deficit of 40 BILLION for the year, which is acting exactly against the BOC trying to bring down inflation. For some contrast the Bank of Canada’s QT process ( removing bonds from circulation ) is removing around 80 BILLION a year in funds from the money supply, so 50% of their work is counter acted by the Federal Government adding 40 BILLION in stimulus spending through a deficit.

I am certain there will be some loop holes discovered, and some fine tuning to how we interpret these new changes, but it looks like we will need to get out, hit the pavement, talk to our clients, and ensure they are getting what they need. Know the new rules, know how it will impact your client, and be ready to help. My guess is 80% of mortgage brokers won’t know the rules, won’t be able to explain the rules, and won’t be able to articulate how the changes will affect their client. People are hungry for knowledge, and they will deal with someone that knows. Be the broker who knows! Bew the broker than can explain! Be the broker who helps the client out!

If you can’t be the broker that helps your client with what they really need at the time, than you will just be re-arranging your office chairs instead of deck chairs…..