The “I Wish We Had Better News” Edition

Daily Mortgage Report – May 7

Record job losses could depress mortgage rates.
  • A Record 4 million: That’s how many jobs disappeared in April, predict economists surveyed by Bloomberg. That’s a stunning one-fifth of the labour force, and only a portion of those jobs will return soon. How many of these families own homes? A meaningful minority. But the bigger question is, how many will continue paying their mortgage after September if/when payment deferrals end? Many believe deferrals will have to be extended. Banks aren’t thrilled by that prospect but most would comply if prodded by the feds. It’s the smaller, less capitalized lenders that simply can’t keep deferring and could be in trouble.
  • This Yield Curve Godfather: Says the yield curve is “a leading indicator, and it’s saying that we’re coming out of recession.” That’s the good news. The bad news is that “coming out” could take 1 to 2+ years.
  • Free Credit Report: Equifax Canada is offering free online credit reports for the first time ever. Link
  • Norwegian Omen?: Floating-rate borrowers want to know if Canada will cut its key lending rate again. If Norway—a country also heavily dependent on oil—is any indication, there’s a real chance. Norway surprised 90% of economists today (according to Bloomberg’s survey) by cutting its policy rate to zero for the first time ever. Like Canada, Norway’s central bank has previously warned about the damage a 0% rate could do to the financial sector.
  • Sub-zero U.S. Rates: South of the border, Fed funds futures imply negative rates by the end of this year. That would make The Donald do cartwheels, and thus far he’s got what he’s wanted from the Fed. If the Americans do go negative, Canada will be under pressure to follow, regardless of BoC messaging to the contrary.
  • The Oracle on Negative Rates: Expect “extreme consequences.”
  • Quotable: “…We anticipate the gap between listings and sales to grow in the coming months, as financial stresses force some homeowners to list their properties.”—TD
  • Montreal Prices Dip Slightly: The city’s median single-family home price fell 1.4% in April, versus March.
  • Commercial Financing Freeze: “…Owners who are unable to sell their properties are refinancing with alternative lenders at higher rates,” reports Reuters (via Yahoo! Finance). Expect commercial lenders to boost rates as demand grows and adjust LTVs lower to reflect valuation risk — not a good combination for income property investors on the ropes.
  • Too Soon: “We…believe it is too early to be buying [mortgage stocks]…We think a significant increase in loan losses is likely in [the second half of 2020].”—RBC Capital Markets
  • Padding Loss Reserves: Lenders will all be setting aside more capital for expected losses. Home Capital, Canada’s biggest non-prime lender, surprised analysts by announcing $30 million in Q1 credit loss provisions, up almost 400% y/y. The Street had expected roughly $10 million. Why does this matter to Joe Borrower? Because lenders are less willing to price mortgages aggressively in the face of mounting losses.
  • Siddall takes another jab at brokers: “Containing housing demand and limiting indebtedness are…reinforced by the mortgage insurance stress test, notwithstanding opposition from mortgage brokers, realtors and homebuilders,” said CEO Evan Siddall in CMHC’s annual report. “Our role is to promote housing affordability, not to stay silent when the real estate industry seeks to preserve its income at the expense of housing affordability.” The industry counters that it’s been Siddall’s way or the highway, and that it’s merely looking for common-sense tweaks to flawed policy made without proper industry consultation. Albeit, some industry group recommendations (like slashing the stress test rate) are ill-advised, while others are more common sense (e.g., decoupling stress test rates from bank posted rates and exempting borrowers who switch lenders with no increase in risk). Siddall’s term at CMHC ends December 31, 2020.
  • Divergent Credit Trends: Canadian and U.S. credit scores have been moving in very different directions since 2013. Peep these charts.


  • Mike says:

    My question is, if the bank of Canada lowered its rate under 0% what would happen to variable rates?

    • The Spy says:

      Hi Mike, Like David64 and JS said, if the BoC cut to zero most would expect the prime rate to fall another 1/4 point. But it’s pure speculation to say what might happen if rates drop below zero. Negative rates are costly for banks for multiple reasons. There’s a chance banks might not reduce prime by the same amount and/or they may reduce discounts from prime rate for new customers.

  • David64 says:

    BoC decides on overnight rate which is 0.25% now (and might go to zero, or, negative). Variable rates are based on prime rate, decided by banks and is 2.45% now. Prime rate will change if overnight rate changes (if banks decide to change it. They don’t have to, but usually will follow), but it is still far from negative. Prime rate currently is BoC overnight rate + 2.2%, and that covers other bank’s expenses, overhead and of course their profit from the loan if I am not wrong.

  • Just saying says:

    David64 is correct. Whereever overnight rate goes, prime rate may follow so the floating mortgage rate. However, Overnight rate + 2.2% most likely will remain constant.

  • BaySt says:

    The Bank of Japan tried to convince people it wouldn’t cut rates below zero and then in 2016 it did just that. All central banks try to downplay negative interest rate policy – until they run out of options.

  • jaya says:

    “Free Credit Report: Equifax Canada is offering free online credit reports for the first time ever. Link”

    – Online (free), (Your data will go to the United States.)
    – By mail (free), Your data remains in Canada

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