On December 11, 2015 the Office of the Superintendent of Financial Institutions Canada (OSFI) released a letter notifying stakeholders that it is planning to update the regulatory capital requirements for residential mortgages and home equity lines of credit. It is one component of the broader attempt on the part of the government to mitigate risks associated with rapid rise in house prices and high ratio of debt to income borrowing. The letter was released on the same day that Minister of Finance, Bill Morneau, announced rules that increase the minimum down payment for newly insured mortgages from 5% to 10% on the portion of house prices above $500,000 and Canada Mortgage and Housing Corporation (CMHC) announced changes to its securitization programs.
The regulatory capital requirements are in place to mitigate the risk that federally regulated financial institutions face in loss scenarios. Currently, in recognition of the government backstop on mortgages, federally regulated deposit-taking institutions are subject to very low capital holding requirements on mortgages.
The planned changes will affect the deposit-taking institutions using internal models for mortgage default risk, which include Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, HSBC Canada, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank. For these banks, OSFI plans to implement a risk-sensitive floor for losses in the event of default that will be tied to increases in local property prices and/or to house prices that are high relative to borrower income.
The planned changes will also affect private mortgage insurers, Canada Guaranty Mortgage Insurance Company and Genworth Financial Mortgage Insurance Company of Canada, using standardized capital requirements. For these insurers, a new standardized approach that updates the capital requirements for mortgage guarantee insurance risk will be introduced. Both planned changes are devised to provide increased protection to depositors, policyholders, and unsecured creditors.
OSFI has not yet released any guidelines in this respect, but expects to have final rules in place no later than 2017. Prior to any such changes and keeping with usual practice, OSFI will engage the federally regulated financial institutions and other stakeholders in a directed consultation followed by a broader public consultation in 2016.
Mortgage rates rose this week as the Federal Reserve finally raised the federal funds rate from its near-zero level, where it had been for exactly 7 years.
Fed funds rate gets boost
The central banks Federal Open Market Committee increased the benchmark interest rate from a target range of 0%-0.25% to 0.25%-0.5%. However, the committee didnt outline any subsequent rate hikes.
The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, the committees statement reads. The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
Theres a prevailing thought that since the Fed has now implemented a rate hike that mortgage rates may fall, rather than rise, says John Stearns, senior mortgage banker at American Fidelity Mortgage Services in Milwaukee.
It will be interesting to see what happens, he says.
A look at this weeks rates
Interest rates on mortgages mostly nudged higher this week, as the effects of the Federal Reserves initial increase of the federal funds rate seem to be fairly low-key.
Rates have virtually stayed where they were before the rate hike, says Bryan Sullivan, executive vice president and chief financial officer at loanDepot in Foothill Ranch, California.
I think part of it is driven by everybody anticipating December being the month when the (federal funds rate) was going to increase from its (near) 0 level, he says.
Brett Sinnott, vice president of capital markets at CMG Financial in San Ramon, California, agrees: Everybody did a really good job of building that into their models.
The Fed is expected to raise the federal funds rate by 25 basis points once every quarter throughout 2016, Sinnott adds.
A look at this weeks rates
On November 6th, the FDICissued an advisory letterdiscussing risk management practices that FDIC-supervised banks should implement with regards to purchased loans and loan participations. While the FDIC acknowledges the benefits accruing from the purchase of these loans and loan participations, such as achieving growth goals, diversifying credit risk, and deploying excess liquidity, the FDIC also recognizes that purchasing banks have oftentimes relied too heavily on lead institutions when administering these types of loans. In such a case, over-reliance on the lead banks has resulted in significant credit losses and failures of the purchasing institutions. Thus, while the FDIC reiterates its support for these types of investments, the FDIC also reminds banks to exercise sound judgment in administering purchased loans and participations.
A summary of the key takeaways from the FDICs advisory letter follows below:
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The 30-year fixed mortgage rate on Zillow Mortgages is currently 3.75 percent, down five basis points from this time last week. The 30-year fixed mortgage fell throughout the week before settling at the current rate.
“Mortgage rates fell last week despite the Fed’s decision to raise short-term lending rates,” said Erin Lantz, vice president of mortgages at Zillow. “The announcement, which had largely been priced in, contained few surprises and signaled a slow upward path for rates moving forward. This week we expect rates to be flat as markets will be quiet for the end-of-week holiday.”
Zillow’s real-time mortgage rates are based on thousands of custom mortgage quotes submitted daily to anonymous borrowers on the Zillow Mortgages site and reflect the most recent changes in the market. These are not marketing rates, or a weekly survey.
The rate for a 15-year fixed home loan is currently 2.95 percent, while the rate for a 5-1 adjustable-rate mortgage (ARM) is 3.00 percent.
Below are current rates for 30-year fixed mortgages by state. Additional states’ rates are available at: http://www.zillow.com/mortgage-rates.
Rising home prices in Sonoma and Napa counties are triggering a change in federal housing rules that will help home buyers in both counties obtain larger mortgages and make smaller down payments.
The Federal Housing Finance Agency is raising conforming loan limits in both counties on Jan. 1, which will allow entities like Fannie Mae and Freddie Mac to buy or guarantee bigger mortgages in both counties.
Loan officers and real estate officials characterized the increase as a modest but positive step that will reduce the cost of buying homes in Sonoma and Napa counties.
“It certainly is going to help,” said Leslie Appleton-Young, chief economist for the California Association of Realtors. “It’s not a huge increase, but every little bit helps.”
Higher-income buyers will benefit the most from the changes. Appleton-Young said the increased loan limits could prove a factor in roughly 6 percent of local housing sales, or nearly 300 of the more than 4,700 single-family homes expected to be sold in Sonoma County this year.
In Sonoma County, the conforming loan limit will increase by 4.5 percent to $554,300. In Napa, the limit will climb 1.7 percent to $625,500, the maximum allowed and the same amount as in pricey markets such as San Francisco.
Along with the increase in loan amounts, borrowers next year will be able to qualify with only a 5 percent down payment, significantly less than the previous minimum of 10 percent.
Increasing the size of loans that can be backed by Fannie Mae and Freddie Mac will make them more affordable. Loans that exceed the conforming loan limit typically come with higher interest rates and stricter underwriting standards because they are not backed by the federal government.
Higher costs, in turn, make homes less affordable and shrink the pool of potential buyers.
In Sonoma County, buyers next year who obtain the maximum loan amount with 5 percent down would need an annual income of nearly $120,000 a year in order to qualify, said Kris Anderson, a senior loan consultant for Allstate Mortgage in Santa Rosa. Their monthly payment, including taxes and insurance, would total nearly $3,800.
Under the new rules, such buyers would need about $30,000 less for their down payments, Anderson said. That means they could more quickly become home buyers.
FILING Bankruptcy is a serious decision for most people. Most don’t have a clue about how the process works until they actually consult with an attorney. Confusion often results from hearing conflicting personal opinions from people they know. Sad to say, well-meaning friends and family often give the wrong advice and the results can sometimes be disastrous. Remember that as much as your friends and family care about you, nothing takes the place of professional advice.
Filing right away may not be the best thing to do in some situations. In other cases, however, it is necessary to file immediately in order to protect property, wages, bank accounts and other assets from being taken by creditors. An experienced Bankruptcy attorney should be consulted without delay when important legal rights are at stake. This is especially true when you have assets that may be at risk if creditors file lawsuits, repossess or foreclose. Judgment creditors may proceed to place a lien against property that you own, garnish your wages or levy on your bank accounts.
If you are honestly doing your best to pay your creditors but simply can’t, the law provides a remedy for your situation. I am not saying that bankruptcy should just be a quick way out of debt in every situation without regard for personal responsibility. What I am saying is that being bankrupt is not often a conscious choice that people make. Rather it is simply a consequence of poor financial decisions that have already been made in the past. But the past is gone and the decisions are irreversible. Life must go on. Of course, in a lot of cases, it can also be the result of events in life that are beyond our control. But in those situations where it is not, the willingness to accept responsibility for where we are and the acknowledgement of the fact that where we go from here depends on us 100% are the first steps to financial recovery. Be willing to forgive yourself for any wrong decisions you may have made while putting your past where it belongs.
Filing for Bankruptcy relief by wiping out debts you can no longer pay or maybe consolidating all your debts into one affordable monthly payment can be a turning point in your life if you find yourself in a seemingly hopeless financial situation. When appropriate, Bankruptcy may be just what you need to turn your situation around quickly and help you get your life back on track. Never lose hope. Like most problems in life, this too will soon pass.
As we start a brand new year, it’s time to reflect on where you are at the moment and what you need to accomplish to achieve whatever financial goals you have. If your debt problems are stopping you from having the kind of life that you want for yourself and your family, only you can do something about it- whatever solution you choose to get you out of the financial mess you may be in. For a free consultation, call my office at 866-477-7772. I have offices in Los Angeles, Pasadena, Cerritos and Valencia.
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None of the information herein is intended to give legal advice for any specific situation. Atty. Ray Bulaon has successfully helped thousands of clients in getting out of debt. For a free attorney evaluation of your situation, please call Ray Bulaon Law Offices at TOLL FREE 1 (866) 477-7772. (Advertising Supplement)
Marty van den Bosch was working a low-pay, entry level job 15 years ago.
Like a lot of young men, he was terrible with his money.He was a bachelor. And he partied hard.
One payday came along and the party went on a little too long, but he hadn’t yet paid his rent in full.
He needed a loan, he didn’t have good credit at any bank, so he went to Money Mart, one of the many payday loan businesses around at the time. He got a loan for $300, and that’s when the trouble started.
As he remembers it, that $300 payable two weeks later came with a $30 charge, a rate that may seem reasonable to the desperate and those who aren’t well-versed in financial matters. But $30 on $300 over that time period is an annual interest rate of 260.7 per cent, which, in the payday loan world, is relatively low.
Some payday loans charge fees that amount to as high as 1,200 per cent interest.
Next pay period van den Bosch rolled the loan over for another $30 fee. Then again. And again. And again.
“You keep slipping back just a little bit more and that fee starts to compound,” he said. “Then I thought, Money Mart lent me money, maybe Moneytree can lend me some more. The situation got worse and worse and this went on for two years.”
Van den Bosch eventually had to declare bankruptcy.
Charging a rate of interest higher than 60 per cent is considered criminal in Canada, but payday loan companies were given an exemption by Conservative government in 2006 thanks to Bill C-26.
“Some payday loan companies appear to be charging interest in excess of 1,200 per cent per annum,” according to a report on Bill C-26 prepared by Parliament.
Part of the bill was meant to dump the responsibility for regulation to the provinces, and what it did was legalize what was already happening.
“These are loan shark rates,” said Coun. Sue Attrill, who is chair of the city’s Public Safety Advisory Committee (PSAC).
“It really puts people that are in a situation where they are already low income and marginalized already and it puts them at greater risk. . . . The reason they are popping up all over the place is because they are a licence to print money.”
While regulating the financial industry is a federal area of responsibility, the ramifications end up at city hall’s door. Municipalities face the daily public safety challenges that come with homelessness, crime and also usurious interest rates.
“Every social issue in the city becomes an issue for us,” Attrill said.
At Tuesday’s meeting, council voted to send a letter to the new federal Minister of Justice Jody Wilson-Raybould to reduce the maximum amount of interest allowed to be charged on loans.
“The pay day loans industry is a very aggressive sector,” the letter signed by Mayor Sharon Gaetz says. “Pay day loan companies are competing for the business of a vulnerable group of Canadians who are desperate for short-term loans but do not have the credit rating necessary to deal with a bank.”
The city also approved a resolution to present at the next Federation of Canadian Municipalities conference.
At the meeting Tuesday, Coun. Jason Lum added an amendment to the motion to send the issue back to PSAC to see what the city could do to help stop “predatory payday loans.”
Long-term problem of short-term loans
Local financial adviser Terrence Brown teaches people how to be better with their money. He also believes education at the school level is key.
“It doesn’t surprise me that these loan businesses are flourishing,” Brown said. “Many Canadians are living beyond their means, aren’t saving, have no emergency fund, and are taking out high interest loans as a last resort. It’s a sign of the times.
“Education is the key to fixing this problem. I would love to see the education curriculum revamped to include basic financial literacy. If not, trends show that the problem will keep getting worse.”
There is widespread criticism of the payday loan industry, some comes from ex-employees.
In a discussion on social media, one local individual told the Times she used to work at a payday lender and it isn’t just paycheques people can borrow against, but pension cheques as well.
“Seeing 80-plus-year-olds coming in and knowing that by the time they paid it back they would need it again in a vicious never-ending cycle made me ill,” she said.
“I thankfully got out of it exactly a year ago,” said another person. “Will keep my fingers crossed that I never have to use it again.”
“Good topic! My brother destroyed himself financially by defaulting on ONE payday loan at Christmas time last year,” said yet another.
But others point to other more established financial institutions and arguably unethical lending there, too.
Chilliwack resident Cherie Lynn told the Times she has rented a room to an individual who is receiving $570 a month in social assistance who was given a credit card with a $3,000 limit.
“Payday loan places you kind of expect them to be sharks, but our chartered banks are far worse,” she said.
As for van den Bosch who was nearly destroyed by them, he doesn’t disagree that payday loans are problematic but he sees them as symptoms rather than the real problem.
“I don’t think the interest is the biggest heartache,” he said. “That $300, I borrowed that. That $30 added insult to injury but I shouldn’t have borrowed that. I should have sucked it up.”
As for the city’s move to pressure the government to make changes to the industry, van den Bosch thinks it’s over-reaching.
“How much are we trying to bubble-wrap people’s lives?” he asks.
And while no one wishes debt, poor credit let alone bankruptcy on anyone else, his hitting rock bottom was the best thing that happened to him.
He stopped partying, stopped recklessly spending and turned his financial life around.
“My pay and my career level jumped and jumped and jumped, I started earning more and more income, changed my mindset and got to the point where my $40,000 student loan was gone. Then I started dumping into RRSPs and before long I had enough to put a down payment on a house. I’ve now been working in IT for 15 years.”
Canadian Payday Loan Association president Stan Keyes did not respond to an emailed request to comment on the subject.