Canada is Just a Rounding Error when Compared to the US

Reading the latest news on foreclosures from Lender's Processing Services, I'm amazed at the size of the US housing collapse when comparing it to Canada (via the Canadian Bankers Association).


US - 7,041,987 loans are either delinquent or in foreclosure
Canada - There are a TOTAL of 4,064,446 loans

US - 2,473,067 mortgages are more than 90 days delinquent
Canada - 17,090 mortgages are more than 90 days delinquent (or 0.69% of the total US mortgages more than 90 days delinquent and 0.42% of the total amount of Canadian mortgages )

Hence, Canada is just a rounding error when compared to US

Canada's mortgage collapse?

Here are some highlights from CAAMP Winter Report. The report highlights research done by the Federal Government:

- Bank of Canada simulations made predictions that the number of Canadians with high debt service rations (greater than 40%) could rise to as much as 9.6% by mid 2012, versus the average rate of 6.1% over the past ten years.
- 70% of Canadians own a home now, compared to 63.6% in 1996. At 70% Canada is looking a lot like the US before their housing crash.

So here's what CAAMP found:

- 86% of all mortgages in their sample were fixed rate (around 4%) vs variable (2.25%)
- 70% of all the fixed rate mortgages chose security of a rate that was fixed for 5 years or longer
- It is not true that buyers who take adjustable or variable rate mortgages are borrowing to the limits of what they can currently afford. For insured mortgages, for adjustable rate loans, lenders must “qualify” the borrowers (calculate affordability) based on rates for three year fixed rate mortgages, not on the actual contract rates. This inherently gives the borrowers
considerable capacity to absorb future rises in rates.
- The average total debt service ratio (“TDS”) is 32.8% (based on the qualifying
rates assumed by the lenders) and 32.3% (based on the actual contracted mortgage
interest rates). This is well below the 44% maximum allowed for borrowers with high
credit ratings and 42% allowed for others.
- On their own simulations, making assumption of a modest income growth and rates going to 5.25%, there will be marginal impacts to TDS ratios


Note: The CAAMP research was done 1/6th of the total expected amount of mortgages financed in 2009 (so it may not represent a true representation of the Canadian Mortgage market)

So in essence, CAAMP data is showing that Canadians are a very cautious...but is it a true representation?

Scotia Bank's Economist, Derek Holt, feels differently. In a recent Maclean's article, Holt says: “I have difficulty with the CAAMP report. It’s a very different picture than what I get from talking to people in the mortgage industry."

Holt says as many as "40 per cent of first-time buyers have opted for variable rate mortgages, while another 10 per cent chose fixed mortgages with just a one-year term." Macleans notes that means half of all new mortgages are heavily exposed to short-term rate changes.

“I think their study grossly underestimates mortgage rate sensitivities,” says Holt. “It doesn’t even really matter if they went variable rate or fixed rate, because pretty much all of the mortgage market in Canada resets in the next five years.”

Holt doesn't say how he came up with the 40% of first time buyers (is it a survey of his buddies at the branch?) but the Maclean's article highlights some nice anecdotal evidence of a credit counseling service indicating that their clients are in more debt problems than ever.

We no way expect a housing collapse...but we'll keep on eye on this

Mortgage Financing Nightmare – Why is it so hard to get Financing for my Investment Property (2 Properties on One Lot)?

Successfully securing mortgage financing is one of the most important and difficult hurdles that real estate investors are facing in today’s market. Our banks and other lending institutions have always been one of the most conservative in the world in terms of their lending practices. I have experienced this first hand.

Recently, I got a taste on how conservative and risk averse our banking system has become over the past year. Of course, this has been driven by one main factor – the financial credit crunch that has plagued the world economy.

A few months ago, I was looking at purchasing an investment property. This property has 2 buildings on one lot. I did my homework on the area, quality of tenants, neighbourhood prices and current/potential cash flow on the property. My researched showed that this property was a very attractive investment – the area was in transition, had good long-term tenants, selling at 10% below market price and very high positive cash flow. This was the perfect property. It met all of my investment my criteria. So I put in an offer and it got accepted.

This is when my problems started – financing my new found property. After submitting my mortgage application, one of my trusted mortgage brokers told me that CMHC (Canada Housing Mortgage Corporation) wanted to do a full appraisal on the property. For those unfamiliar with CMHC it is a government organization that provides mortgage insurance to anyone making a down payment of less than 20% of the property purchase price. So if you are putting less than 20% of the property purchase price as a down payment, you must be insured by CMHC. I was putting down 10% of the property price as down payment. I thought that this was unusual because I got mortgages and CMHC financing in the same area without an appraisal just 6 months ago. However, eager to close the deal, I asked CMHC and the mortgage people to move ahead with the appraisal. A few days later, I received an answer. CMHC declined to insured this property! This meant that I would have to put down 20% of the property purchase price as a down payment instead of 10% - doubling the cash required to close the deal!

At this point, I thought O.K., I can still close the deal; I just need to put more money down. Then my mortgage broker informed me that the banks will not finance this deal at all (even with 20% as a down payment)! I was shocked. Here I have a property selling significantly below market, great cash flow and tenants in place and the banks don’t want to finance the deal? Determined not to let this set-back stop me, I decided to speak to a few other financial institutions. In the end, I was able to locate a local mortgage broker who located a "B" lender that was willing to finance the deal.

After speaking with experts in the real estate investment and mortgage industry, I learned the following:

1. The banks were NOT saying no because of my personal financial situation or credit score. They all said that my financial situation was solid and that normally I would qualify for additional mortgages.

2. The issue was the property itself. Specifically, banks/financial institutions do not like to financing unique properties such as 2 properties on one lot.

The main reason they do not like 2 properties on one lot comes down to future saleability of the property. Banks always look ahead and assess how easily a specific property can be sold should the mortgagee default on the mortgage. The bank wants to be confident that they can sell the property immediately should they need to enter a foreclosure/power of sale situation. The fact is, the type of property I was perusing is not easy to sell as say a property with only one building on one lot.

This entire experience taught me a few valuable lessons:

1. Always stay well connected with your banker or mortgage broker. In real estate investing, you cannot close a deal without mortgage financing, except if you pay cash for the property or if you secure private funds.

2. Understand how banks and mortgage companies see property and real estate risk. Banks may see things differently than investors. For example, where I as a real estate investor saw a huge opportunity to generate amazing cash on cash returns, banks saw potential risk that they were not ready to accept.

3. Even if I somehow got financing for this deal, I would ultimately have trouble selling this property in the future. Potential buyers would run into the same problem I’ve had and may stop them from closing the deal.

4. Banks, mortgage companies and other financial institutions are more conservative than ever. This means that as a real estate investor, I will have to find deals that are nothing but solid in the eyes of the banks (built in equity, fully occupied, above average cash flow and in major markets, rather than smaller cities where banks assign a higher risk).

What to do if you own 2 Properties on 1 Lot:

File a Severance Application - You can file an application to severe the two properties with the city/municipality. Essentially, on paper, these properties will be treated individually and allow you to list each building as separate listing. This of course will overcome the whole issue of 2 Properties on 1 Lot and one Listing. However, there are substantial costs associated with this process. Make sure you carefully review this option with your lawyer, realtor and city official before making any application decisions.