Credit conditions easing, banks no longer struggling to raise funds to make loans
From Tuesday’s Globe and Mail
March 17, 2009 at 2:00 AM EDT

Canadian banks are turning down some of the funding that the government is making available to them, a sign that they are recuperating from the financial crisis.

The banks have stopped selling the government the full amount of mortgages they could under Ottawa’s $125-billion mortgage purchase program, the centrepiece of the federal government’s plan to help the industry.

“We actually don’t need a lot of funding right now,” a senior banker at one of the big five banks said yesterday. “All of the Canadian banks are pretty flush right now with cash.”

That’s not to suggest they aren’t facing problems, with consumers increasingly losing their jobs and unable to pay off their debts. But the banks are no longer struggling to raise funds to make loans – at least for now.

Credit conditions for Canadian banks have improved since late last year, as Canadians jittery about the stock market have left more of their money in bank accounts, giving them a ready pot of cash to fuel lending. At the same time, global credit markets have eased slightly as central banks have pumped billions of dollars into the financial system.

Federal Finance Minister Jim Flaherty announced the creation of the mortgage purchase program in early October, when it was extremely difficult for banks around the world to fund their lending operations.

He originally said Ottawa would buy up to $25-billion of mortgages from the banks, through Canada Mortgage and Housing Corp., to free up capacity for them to make new loans.

The purchases take place in periodic auctions that actually turn a profit for the government. Ottawa tells the industry how much it is willing to buy – for instance, $5-billion worth of mortgages held by the banks on their balance sheets – and then the banks each say how much they would be willing to pay, in the form of interest, to sell mortgages to the government. CMHC accepts the most profitable bids.

Bankers have been griping that the program, which is projected to earn billions of dollars for Ottawa, is expensive. But until last month, that hadn’t stopped them from selling all of the mortgages that they could into it, and pressing Mr. Flaherty to buy even more. Well into the new year, banks continued to have trouble raising medium-term funds.

Ottawa boosted the size of the program twice, most recently announcing in the federal budget that it would buy a total of up to $125-billion worth of mortgages. The program has been successful in leading to a reduction in mortgage rates for Canadians, with banks passing on their lower funding costs.

But in the last couple of auctions, the banks have not sold the full amount of mortgages Ottawa was willing to buy. The most recent one took place on March 11, when CMHC told the banks it would buy up to $4-billion worth. Banks sold it about half that, $2.1-billion.

That followed the Feb. 20 auction, when banks sold CMHC $2.3-billion worth after it said it would buy up to $7-billion from them.

There are a couple of reasons why the banks have lost some of their appetite for the government aid.

More Canadians are pulling their cash out of mutual funds and riskier investments and parking it in deposits, such as chequing accounts and GICs. Deposits are the largest source of funding for the banks. If stock markets recover, and customers shift their money back into mutual funds and equity investments, the banks could find themselves in need of funding help again, notes Toronto-Dominion Bank chief economist Don Drummond.

At the same time, the growth of banks’ loan portfolios is slowing. The soft housing market led to very weak mortgage originations in January and February, Mr. Drummond said.

Still, the slackening demand for government help does suggest that credit conditions have eased. The lack of take-up on the mortgage auctions “seems to point to the fact that the Canadian banks are not in a big liquidity crunch themselves,” said Marlene Puffer, a managing director at Twist Financial Corp.

That means the banks’ lending operations are not being held back by an inability to raise financing, she added: “Any constraints in terms of the banks lending are coming more from inside the banks than any constraints they’re facing in terms of raising capital.”

The Canadian Bankers Association said in an e-mailed statement that the mortgage purchase program is still an effective tool, noting that it’s already injected more than $53-billion worth of liquidity into the marketplace so far.

A spokeswoman for CMHC declined to comment yesterday, noting that the details of the auctions are confidential.

Buying a home should be a rewarding and enjoyable process, but only if you’re prepared and know how to avoid the most common home financing mistakes.

Get pre-approved
Pre-approvals are one of the easiest ways for home buyers to start off on the right foot. A pre-approval takes very little time and helps buyers establish a maximum spending limit. With that information, they can shop with confidence knowing what they can offer on a property. It isn’t necessary to use the whole pre-approved amount.

Know how long things take
Some steps in the home-buying process can’t be rushed and others need to be researched in advance. For example, you should have a real estate agent, lawyer and mortgage lender well in advance of making an offer. And some documentation may take time to gather and prepare.

Know your options
There are lots of mortgages, each with unique features. Investigate alternatives ahead of time so you don’t have to make a rush decision later. The pre-approval meeting is usually a good time to gather information and start exploring options.

Come prepared
Ask your mortgage representative for a list of all the documentation you’ll need and plan to get it well in advance. For example, you’ll need confirmation of your income and down payment, the MLS® listing and more. You will also need a copy of the Agreement of Purchase and Sale.

Ask for a list of closing costs
Closing costs are all the legal and administrative charges that accompany any real estate transaction. The most common are lawyer’s fees and land transfer taxes. And in some cases, home buyers are asked to reimburse the seller for prepaid property taxes or other household expenses.

- Courtesy of TD Canada Trust www.tdcanadatrust.com.

Mortgage Wise: Your Down Payment

Figuring out how much you can afford to spend each month is only half of the equation. You may want to make a down payment – the money you put toward the price of a home. A down payment generally ranges from 5 per cent to 25 per cent of the purchase price. Some financial institutions offer no-down payment mortgages. If you have a good credit history, but haven’t been able to save the down payment, this option may be for you. Keep in mind that the higher your down payment, the lower the interest costs over the life of the mortgage.

Coming up with a down payment may be your biggest challenge. If you make a down payment of 25 per cent of the appraised value or purchase price of the property, you can get an uninsured low-ratio or conventional mortgage. On a $200,000 home your down payment would be $50,000.

If you can’t come up with the 25 per cent required for an uninsured low-ratio or conventional mortgage, you can get a high-ratio mortgage – which is usually for more than 75 per cent of the appraised value or purchase price.

A high-ratio mortgage must be insured against default, or non-repayment, by the federal government through the Canada Mortgage and Housing Corporation (CMHC) or an approved private insurer (the lender usually arranges this). The borrower pays a one-time insurance premium to the insurer (the rate varies depending on the amount of the down payment – check with your lender) and additional charges may apply. The default insurance premium is usually added to the principal amount of the mortgage. With mortgage default insurance, if you default on your mortgage, the lender is paid back by the insurer.

Unless you have an inheritance, win the lottery or have generous relatives, getting your down payment together will mean a lot of saving, planning and budgeting. But it will be worth it. The more you put down, the more you’ll save in the long run (a smaller mortgage means less interest to pay). If you don’t have quite enough to make a down payment, try to get on a savings schedule where you set aside a percentage of your gross income each year.

The RRSP Home Buyer’s Plan

Are you a first-time homebuyer? If so, take a look at the federal government’s “RRSP Home Buyer’s Plan.” It allows first-time home buyers to withdraw up to $20,000 per person from their Registered Retirement Savings Plan (without tax liability) to buy a home in .

Among the conditions of the Plan:

You have to enter into a written agreement to buy or build a qualifying home.

The home must be your principal place of residence and includes all types of homes (e.g., single-family homes, semi-detached homes, townhouses, condominium units, or mobile homes).

Your RRSP contribution must be in your RRSP for at least 90 days before you make a Home Buyer’s Plan withdrawal.

You must withdraw funds within the same calendar year in one or more installments. For instance, if you withdraw funds over two years, you will be taxed on the funds withdrawn in the second year. In addition, you will lose contribution room in your RRSP. For more information, contact the Canada Revenue Agency or check the Web site at www.cra-arc.gc.ca.

Of the borrowed funds, a minimum of 1/15th must be repaid each year until the full amount is repaid to your RRSP. Basically, you’re borrowing a tax-free, interest-free loan from yourself. However, bear in mind that you are not earning interest on the RRSP funds used for your down payment. Your RRSP repayment period begins in the second year after your initial funds withdrawal.

Before you cash in your RRSP to buy a home, weigh the pros and cons carefully. Is it worth it to give up the advantages of long-term compounding interest on your RRSPs to buy a home? Can you afford the RRSP payback requirement? If you can get a low mortgage rate and your investments are paying a relatively low rate of return, financing your home with RRSPs may be a wise move.

- Canadian Bankers Association