by Neil Sharma

A recent study elucidated how badly homeowners got burned when Toronto’s housing market plunged about a year ago.

The report, published by Move Smartly, determined that hundreds of homeowners lost an average of $140,000 because of closing defaults, and according to John Pasalis of Realosophy, that totaled $121mln in lost market value.

“It tells you how rapid the decline was,” Pasalis told the Globe and Mail. “It tells you how quickly markets turn.”

Closing defaults often result in litigation, but that becomes even trickier when the purchaser who reneges on the transaction lives in another country.

“One client sold to a buyer from Iran, who was buying as a non-resident, and decided he’s not closing on the deal, and then what’s the recourse of the client—you’re going to sue someone in Iran?” said Mortgage Outlet’s Principal Broker Shawn Stillman. “Some people will simply not close because they don’t want to buy something that’s worth $200,000.”

On preconstruction purchases, Stillman recommends to all his clients that they take the on-site mortgage broker’s preapproval. While the terms might not be favourable, it mitigates the chances of defaulting on closing.

“One thing we always recommend people do is the builders always offer a preapproval for a set amount of time and we tell them to take it,” he said. “It’s something we can’t offer in the mortgage world. There’s always a mortgage broker from a major bank on site that usually does financing that will preapprove you for a few years. It’s a terrible rate but I always tell clients, ‘You don’t know what the future holds,’ and to always take that preapproval because that would be the worst case scenario.”

Unfortunately, through no fault of their own, sellers end up being the real losers. Because they sell their home on condition and buy another to move into only for their buyer to back out, they’re stuck between a rock and a hard place.

“Unfortunately, it’s not anybody else’s responsibility to help [the defaulting buyer] get out of that hole,” said Stillman. “When things went up in value, builders weren’t saying ‘You have to pay me 20% more, or a $100,000 more.’ Same thing when prices go down. It’s nobody’s responsibility but theirs to close the deal.”

by Neil Sharma

Syndicated mortgage fraud, and the consequences its unscrupulous players are beginning to reckon with, has put the Financial Services Commission of Ontario on the hot seat, with many questioning the government agency’s effectiveness.

“Various parties in our industry have been talking about what’s wrong with Fortress to FSCO for seven years,” said Ron Butler of Butler Mortgage. “FSCO really took no definitive action until the Reuters report hit, and at that point the Finance Minister instructed FSCO to do something about it.”

Reuters reported that FSCO was in possession of enough evidence to act against Fortress-affiliated mortgage brokers, but that Anatol Monid—FSCO’S Executive Director for Licensing and Market Conduct—decided the evidence was insufficient.

Monid also ignored the pleas of various parties within the industry to look into the alleged untoward behaviour.

“We were on a conference call with various FSCO people and we talked about all the red flags,” continued Butler. “We talked about the insane amount of commission being paid—in our business it typically ranged from 50 basis points to 100 basis points, half a percent to 1%; these guys were being paid 8%, being spread out between mortgage brokers and brokerages.  That’s 800 basis points.

“If you read their mortgage document, what the consumer was buying, the consumer was allowing their position on the mortgage to go from second to fifth, so in other words it automatically allowed other lenders being involved and consumers’ interests being constantly postponed. I’ve never even seen that in a mortgage document in my life, and I’ve been doing this for 25 years. It said you may not stay in second position. Never saw that before.”

Also suspicious was the provenance of Fortress Real’s funds. Butler notes the company held a few black tie galas to recruit investors, which are pricey affairs, and still managed to pay out exorbitant 800-basis-point commissions. He wonders where the money came from.

Butler suspects up to half of investor monies were used to recruit even more investors.

“Why are these guys so incredibly different than everybody else in the business?” asked Butler. “It turned out in the end that the front companies like FDS (Broker Services Inc.) would offer syndicated mortgages to investors, and what was unknown was between 35 and 50 cents of every dollar invested was going to Fortress. I think Fortress just existed to raise money and that was their sole contribution to the development. I believe that, but I may be wrong.”

Fortress’s co-founders Vince Petrozza and Jawad Rathore previously paid the Ontario Securities Commission a $3mln settlement, and the latter received a lifetime ban from the Mutual Fund Dealers Association and fined $25,000 in penalties and $7,500 in costs.

“If I was giving money to a development company, I would not want the people to whom I was giving money to have accepted a voluntary ban from the mutual fund industry,” said Butler. “Personally, I would not feel comfortable with it. Others might, but I wouldn’t.

“I’ve never met anyone who invested in Fortress who paid their own ILA [independent legal advice]. They used a lawyer who provided ILA but the investor did not pay for it. I can’t tell you Fortress paid that ILA lawyer, but five of the investors I spoke to said they never paid. For independent legal advice to have validity, you need to pay them. I can’t say who paid.”

The Financial Services Commission of Ontario isn’t held in high regard in the broker channel. Corinna Smith-Gatcke was involved in a transaction in which a borrower could have fallen prey to a predatory lender thanks to a few deceitful brokers.

“None of the brokers who touched the file ever worked on behalf of the client, and I contacted all brokers of record, but what I do know is if you poke the bear and lodge a complaint with FSCO, if you open Pandora’s box, they’ll come after you as much as the person you’re lodging the complaint against,” Smith-Gatcke said of vindictive brokerages.

She was dissuaded by other mortgage brokers who told her not to pursue the matter with FSCO.

“Nobody feels FSCO has any clout at all, and when you do find people doing inappropriate things, very little happens,” said Smith-Gatcke, adding FSCO cannot execute its mandate “in a concise and swift manner.”

“There’s nothing in our industry to protect you as a broker or an agent. There’s no incentive for a broker or agent to willingly declare that they had seen something fraudulent. Most brokerages make those claims regardless, and those are the brokerages you want to be aligned with, but, unfortunately, there are a lot of other bad brokerages out there.”

by Andy Blatchford

The Bank of Canada is maintaining its trend-setting interest rate as its careful assessment of the timing of future hikes continues amid a backdrop of moderating growth.

The central bank, which kept its rate at 1.25 per cent Wednesday, said slower first-quarter growth of about 1.3 per cent was largely a result of housing markets’ responses to stricter mortgage rules and sluggish exports. The bank had predicted the economy to expand by 2.5 per cent in the first three months of the year.

It’s expecting the economy to rebound in the second quarter with 2.5 per cent growth, in part because of rising foreign demand, to help Canada expand by two per cent for all of 2018. The economy saw three per cent growth in 2017.

“Canada’s economic growth has moderated, and the economy is operating close to capacity,” the bank said in its latest monetary policy report, which was released alongside the rate announcement.

“While a moderation was anticipated, temporary factors … are resulting in sizable short-term fluctuations in growth.”

The bank reiterated it expects further interest-rate hikes to be necessary over time and that it will follow a cautious, data-dependent approach when weighing future decisions.

“Some progress has been made on the key issues being watched closely by governing council, particularly the dynamics of inflation and wage growth,” the bank’s statement said.

“This progress reinforces governing council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.”

The bank will also continue to watch the economy’s sensitivity to higher interest rates and how well it builds capacity through investment, which would enable Canada to lift growth beyond what is viewed as its potential ceiling without driving up inflation.

Signs suggest the economy has made some progress in building this capacity, the bank said.

The bank is also keeping a close watch on the evolution of external risks.

Exports and business investment in Canada have been held back by competitiveness challenges and trade-policy uncertainties, which include escalating geopolitical conflicts that risk damaging global expansion, the bank said.

It laid out estimates on the growth impacts on Canada due to tax reforms in the United States, which are expected to lure more investment south of the border. Due to these investment challenges, it predicts Canada’s gross domestic product to be 0.2 per cent lower by the end of 2020.

Exports are also expected to take a hit from reduced investment and trade uncertainties. The bank projects that Canada’s GDP will be 0.3 per cent lower by the end of 2020 due to the negative impacts on exports.

Fiscal stimulus introduced in recent provincial budgets is expected to help offset these effects by adding about 0.4 per cent to Canada’s real GDP by the end of 2020.

Governor Stephen Poloz introduced three rate hikes since last summer in response to an impressive economic run for Canada that began in late 2016. But due, in part, to factors such as mounting trade unknowns, Poloz has not raised the rate since January.

The bank offered an analysis Wednesday of some of the key indicators it’s watching ahead of rate decisions.

On inflation, the bank said temporary downward forces weighing on the rate have largely dissipated. Other transitory factors, including higher gasoline prices and recent minimum wage increases are now expected to raise inflation above the bank’s January predictions.

Canada’s annual pace of inflation in February sped up to 2.2 per cent _ its fastest pace in more than three years _ to creep above the central bank’s ideal target of two per cent. Meanwhile, the average of the agency’s three measures of core inflation, designed to omit the noise of more-volatile items like gasoline, climbed slightly above two per cent for the first time since February 2012.

For wage growth, the bank said despite recent improvements it remains below what would be expected if the economy no longer had slack in its labour force.

On Wednesday, the bank also released new economic forecasts in its monetary policy report.

For 2018, it’s now predicting two per cent growth, as measured by real gross domestic product, compared to its 2.2 per cent prediction in January.

The bank raised its growth projection for 2019 to 2.1 per cent, up from its previous prediction of 1.6 per cent, before easing to 1.8 per cent in 2020.

It noted that these readings would still be slightly above Canada’s estimated potential output for the next three years.

The Canadian Press

by Greg Quinn and Erik Hertzberg

Canadian new home prices fell for the first time since 2010 in February, led by a drop in Toronto as buyers were squeezed by higher interest rates and tougher mortgage regulations.

Prices in the nation’s largest city fell 0.6 percent, the second monthly decline and the biggest in eight years. Builders also charged the same or less across much of Toronto’s surrounding cities, an area known as the Golden Horseshoe.

Statistics Canada’s nationwide home price index declined by 0.2 percent from January, the most since June 2009 around the time of the nation’s last recession. Economists surveyed by Bloomberg predicted a 0.1 percent increase.

Toronto’s weakness is a swing from last year when policy makers stepped in to curb 30 percent price gains in resale prices, which raised concerns some buyers were taking on unsustainable mortgages. The new home price decline likely reflects a new mortgage stress test that took effect in January and a rise in lending rates, Statistics Canada said.

Those market changes may have also been a drag in western Canada.

Prices were unchanged for a second month in all three cities tracked in British Columbia including Vancouver, another city that has been the focus of concern about a housing boom.

Statistics Canada also reported declines in all four cities it monitors in the provinces of Alberta and Saskatchewan.

One bright spot was a 0.6 percent gain in Montreal. The agency’s index covers single houses and multiple-unit residences but not condominiums.

Copyright Bloomberg News

by Chris Fournier

Scott Hannah says low borrowing costs and rising home prices have lured Canadians into a debt trap they may not escape if looming economic threats materialize.

Hannah, president of the Credit Counselling Society, is seeing an influx of clients as higher financing costs begin to bite and people find it harder to manage. Phone calls were up 5.3 percent in the first quarter from a year earlier, while online chats increased 40 percent.

He says with debt loads at a record and little in the way of savings to fall back on, Canadians may be “caught off guard” if housing markets cool significantly or North American Free Trade Agreement talks go sideways.

“We’ve been in a perfect storm for a number of years” where low interest rates encourage borrowing and discourage saving, Hannah, 60, said by phone from the Vancouver suburb of New Westminster. “People have been lulled into a false sense of security.”

Hannah’s organization can help people set up a debt management program or find a licensed insolvency trustee. He’s sounding the alarm as rising interest rates and stricter borrowing rules threaten to squeeze households even further. The Bank of Canada is expected to raise its benchmark rate twice more this year and it’s next decision is April 18.

Credit Relief

Hannah’s colleagues dubbed him “Dr. Debt” after he received an honorary degree in 2012 from University Canada West, a private business school, for his “distinguished service in the field of credit counseling.” Prior to establishing the non-profit, registered charity in 1996, he worked for 11 years at Equifax Canada, a credit reporting company, but decided “a nice title and a good salary doesn’t make you happy,” so he left to find something that “made a difference.”

He found it by helping people get relief from their creditors. As Hannah tells it, during the early 1990s, the provincial debtor assistance program in British Columbia was cutting back just as bankruptcy rates were rising. A group of banks, credit unions and department stores tried and failed to establish a complementary service. Hannah offered to raise the necessary funds, so long as he was allowed to run the organization.

Drop in the Bucket

Twenty-one years later, the society — with offices from the provincial capital in Victoria to Ottawa — has assisted more than half a million people. The average client is 43 years old, has C$31,000 in outstanding debt and seven creditors. More than half are female. Average gross monthly income is C$5,200, and housing costs consume 42 percent of their net income. The society’s clients repaid C$51 million last year, up about 6 percent.

It’s still a drop in the bucket.

Canadian household credit totaled a record C$2.13 trillion at the end of February, roughly doubling since 2006, central bank data show. Residential mortgages account for 72 percent of that. The rest includes credit cards, lines of credit and auto loans.

People carrying large debt loads still feel ahead of the game because home prices keep rising, Hannah said. “What happens when the economy has a downturn, like in Alberta. We know what happened. We’re still seeing the impact of that,” he said, adding people in the oil-rich province were “caught off guard, and because of a lack of savings, many people lost their homes, had to sell their assets and start over again.”

Read more about cracks starting to show in the quality of Canadian credit

Some observers argue Canada’s household debt isn’t a problem because asset ratios and home equity levels are also high and the country’s labor market is strong. A report from the Canadian Banker’s Association this week showed the national mortgage arrears rate through January was 0.24 percent, close to the lowest in three decades.

Hannah doesn’t buy it. Low arrears and delinquency rates “don’t tell the whole story,” because a robust housing market is masking financial strains, he said. “If a person’s had difficulty keeping up with the mortgage payment, it’s been relatively easy just to sell your home,” said Hannah. “What happens though when you have a tight market and it’s not as easy to sell your home? That’s when you’ll see delinquency rates start to rise.”

Copyright Bloomberg News