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Dave Larock
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Hi Rob, Thanks for the well-written summary. I watched the “warning” link you referred to in the post and was surprised by Kevin O’Leary’s conclusion that variable-rate borrowers should run to their lender and lock-in now before fixed rates begin to rise. I disagree with that view. In fact, I have long argued that our federal government and the Bank of Canada would use increased regulations, rather than tighter monetary policy (i.e. higher short-term rates), to reign in household debt levels. This latest change to the securitization rules provides further confirmation of that view and in my opinion, makes it even more unlikely that the BoC will raise its overnight rate for any other reason than because our economic fundamentals demand it. (For example, when we have with 2%+ GDP growth, 2%+ inflation, consistent and healthy job creation etc.) Given the current state of our economy, that day still appears to be a very long way off. I think borrowers should be running to their lender, but to lock in today’s best variable-rate discounts, not to concede their cheaper borrowing costs and be penned in to a more expensive fixed rate.
For most people, 35 yr. ams were a preference, not a necessity. To wit: In a 2010 CAAMP report based on 85,000 insured mortgages, the data showed that only 2% of the borrowers in the survey who chose a 35 yr. am would not have qualified for a 30 yr.am. (Rob, you quoted this stat yourself in a previous post). I agree that markets are made at the margin, and on the importance of first-time home buyers to the health of the market. But I think the assertion that dropping the maximum am by 5 yrs is pricing new home buyers out of the market based on Mr. Klump's observation that the latest changes “likely sidelined a number of first-time homebuyers” and a qualitative poll that says buyers felt a “signficant impact” on their buying decision, should be not been taken with some salt given the strength of real data suggesting otherwise. My two cents.
Dave, Looking back, I can recall that David Rosenberg for one subscribed to the view that interest rates would not rise quickly (he's about as prominent as they come in Canada), and there were several others (CREA and CMHC also held that view as I recall). Basically the feeling was that with the US recovery far from certain, with China showing weakness and with Europe struggling on several fronts, that the Canadian Central Bank was unlikely to pursue an aggressive tightening policy in the face of such global uncertainty. I would also add that many US economists forecasted that US rates would stay at their current levels for an extended period and that also influenced my view that Canada could not increase rates by the 2.5 to 3% that the Big 5’s economists were predicting (John Mauldin is my favourite if you’re looking for a US point of view). The bottom line is that there was easy to find evidence to indicate that dramatic rate increases were far from a certainty, yet the Big 5 Bank economists lined up to echo that view, to their clear advantage and to the detriment of their customers. They had all of the same information (and much more) but still chose to make what I felt at the time was a totally self-serving forecast. You can argue whether or not they thought they were right, but if you follow interest rates daily I don’t think you can absolve them by saying that nobody was predicting a different outcome.
Dave, (David L here) I respectfully disagree with your comment that "almost every authority in the country thought rates would soar." Quite the contrary. Throughout that period there was lots of dissenting opinion from non-bank economists and analysts (and mortgage broker bloggers!) It's just that their opinions were drowned out by the bank economists who, thanks to the media, were the loudest voices contributing to the sense of panic. As it turns out, they were wrong and by happy coincidence, they made a killing in the process. I just think someone needed to point that out.
I noticed that none of the banks said "sorry we grossly exaggerated the threat of rising rates during the spring market and pushed people into our much more profitable fixed rate mortgages." That would have been nice.
Here is one way a lender could implement a de facto application charge. Lender underwrites the file for free but charges a $500 "rate-hold fee" that is non-refundable if the customer walks. That gives people a choice - take a chance on rates (and live with the outcome) or pay for rate protection. While this change would be unpopular, is it really realistic to expect that a borrower should get a free 120 day interest rate option in a volatile rate market where hedging is a significant cost? And if no fee is charged, don't you think lenders will ultimately raise their rates for all borrowers to defray that cost? Isn't it fairer to attribute cancellation costs directly to those borrowers who cause the lender to incur them? Having said all that, the biggest hindrance to this happening is that one lender has to go first, and for that reason, I think this evolution will be a long time coming.