Tuesday, April 10, 2007

A Comment of Note; A Blogger of Note

We've loved this blogging thing for one primary reason: your comments. We got into this looking for info; we thought it valuable to record our journey; and we thought it extremely valuable to learn from other's experiences.

We just noticed this comment to a post from April 5th.

Melanie McLister said...
Hi All, Unfortunately there is a wee little inaccuracy here. The GMAC 107% mortgage does not give you 7% cash back. It provides 3% cash back. The other 4% is a lender fee. There is no extra CMHC insurance on this mortgage because it is self-insured by GMAC. (That's what the 4% is for)

The loan-to-value (LTV) of this mortgage is therefore 107% -- not 112% as the story suggests.You can read more about this mortgage here:
http://www.mortgageintelligence.ca/imortgages_i107.aspx

Or feel free to email me
at melanie@myvirtualmortgagebroker.com if you need more info.

Kind regards,

Melanie


I'd been ranting about so-called alternative mortgage products. Melanie corrected me, which I am happy she did. I don't always go digging too deep, shall we say, into what I read and write about. So I was wrong and I say so. And this is the greatest thing about blogging IMHO.

So to check out who Melanie is, I clicked on her link. It's obvious from her comment that she's involved in the mortgage business and is likely a broker. I'm pleasantly surprised that she's also a blogger and didn't simply link to her commercial site.

I don't mean this post to come across as a rant against mortgage brokers or the mortgage business. Like all businesses and the sales people that work in them, they are simply reacting to the demands of the marketplace.

Some bears might like to argue that brokers are driving the market in a certain skyward direction--and you can feel free to make that argument in the comments if you'd like--but this bear believes that the market is an emotional machine that sways back and forth between the pressures of the consumer and the pressures of the sales people. Information bias is everywhere, it definitely exists in the MSM, it definitely exists on Melanie's blog, and it most definitely exists on this blog.

Our point is simply this: we think that information, carefully analyzed based on its source, is good information. It gives us insight into the 'other side' and may prove to save us time, money or from a bad situation. One of us sells mortgages (no commissions involved) but the other one of us thinks that using a mortgage broker can be a good thing too. We'll happily let them compete for our business when the time comes. What say you?

10 comments:

Vicguy said...

"Some bears might like to argue that brokers are driving the market in a certain skyward direction--and you can feel free to make that argument in the comments if you'd like"


HHV,
If these new "creative financings" were not available as they were not only a few short years ago, then where do you think this market would be ? Three guesses and two don't count.
You and I both know it would only take a small percentage of monthly buyers to not have a hope in hell of qualifying anytime in the next decade to seriously effect the low end market numbers. Can you imagine the VREB actually not being able to say "and as a point to not be missed is 25% of houses sold were under $400,000 ". That number would be much lower without this high risk lending.

hhv said...

VG,

Totally agree. This market is unsustainable. Only 35% of Canadians are homeowners. In my post from yesterday, we're talking about less than 25% of Victorian's having the financial ability to get into conventional mortgages.

I see a decrease in prices coming with a rise in alt-mortgages. I sure hope people take the time to educate themselves re this alt-mortgage situation and the real costs. But I don't hold my breath. It will take a downturn like the US to make people realize that this is a pressure cooker.

Brokers and salepeople can say what they will about this CDN situation not being sup-prime. Maybe the debtors have good credit, but when you ignore the fundamentals and the economy sours, even good credit can become too much to handle.

osiris_vic said...

I posted this over at VicsTruth, but thought I would share it here too :
"A little OT, but I thought you guys might get a kick out of this. It seems that Langdon Auger, a local hip hop artist of some fame, has taken up the bubble cause in his new song, titled, well, Bubble. I think you will get a kick out of it whether hip hop is your thing or not. The mention of Rennie nearly killed me."

VictoriaREBear said...

Perhaps Melanie would be willing to comment on this blog (or her own) regarding the number of "toxic" type loans her company has been originating here in Victoria over, say, the last year. I for one would love to know what percentage of first-time and investment purchasers are using the 103%, no-doc reverse amortization option ARMs to lever themselves into our local market. It really chafes me that this information is unavailable to the public, as I consider it vital in making any sensible and fact-based RE purchasing decision.

greg said...

I commend Melanie for her correction, but indicating that loan value for the buyer is actually only 103% of purchase price is quibbling - buyer may only receive 103%, but the buyer is still on the hook for 107% - that is the real cost of the loan.

The other 4% goes mostly to pay CMHC fees to insure the loan (crazy, toxic loan with no equity right from the start), and also (probably) to pay the mortgage broker.

These products are financial insanity, in a market with prices at 8-9 times median family earnings.

But let's face it, for a mortgage broker, they are one of the best ways to get paid, because the value of the loan is larger than might otherwise be the case, and the broker usually receives a percentage back of the total loan amount.

hhv said...

Greg,

As Melanie pointed out, even CMHC won't insure these types of loans. Instead GMAC self-insures, and takes back 4% of that 7% they gave you for signing onto this stupid scheme.

But if we compare this to the current 100% loans available at traditional banks, is it any worse? If I take out a 100% mortgage, assuming I have nothing down, I still need 3.5% CMHC fee, 1% transfer tax, plus other closing costs. Who is paying for that? I'm willing to wager that banks are offering over 100% of the value of the home to get the deal done and wrapping all these charges into the mortgages too.

greg said...

hhv,

yes, it is definitely worse.

a 100% mortgage of $500,000 plus 4% CMHC fee totals $520,000.

a 107% mortgage of $500,000 is $535,000.

The only way it breaks even is if the client turns around and plunks his $15,000 cash back right onto the principal - in which case, what is the point of this loan?

In reality, most people taking this option are using cash back to finance other things, like moving or closing costs. Okay, I have no stats to support that, but it seems the most likely conclusion.

Besides which, anyone promoting a loan that results in ZERO equity is potentially doing the purchaser a tremendous disservice.

After all, when time comes to sell that house, if it was at the same price, the seller could only expect to receive around 93-94% of the sale price. Which on a $500,000 home would be around $470,000.

If prices stayed flat, the purchaser is down $50,000 as soon as the ink is dry!

Prices would need to increase to around $553,000 before this purchaser can break even.

etc etc......

Melanie McLister said...

HHV has cultivated some excellent feedback here. Here are a few clarifications for good measure.


--> "It's obvious from her comment that she's involved in the mortgage business and is likely a broker."

I’ve been exposed! :) Yes, I am a mortgage planner.

--> "Some bears might like to argue that brokers are driving the market in a certain skyward direction"

If I had to pick a word I’d choose “facilitating” in place of "driving." Clients themselves are the underlying drivers. They come in requesting these products to the tune of roughly 1 in every 3 new loans in my experience.

Despite this, as a mortgage planner my job is to save the client as much interest as possible. Therefore, I’m hesitant to propose high ratio and long amortization mortgages unless the client's circumstances leave no other choice.

--> “Perhaps Melanie would be willing to comment on this blog (or her own) regarding the number of "toxic" type loans her company has been originating here in Victoria over, say, the last year.”

The number is zero. We try to avoid “toxic” loans. :)

I’m not aware of any figures on the number of Canadians using 100+% financing but that is a great question and I will post the answer if I can find it.

--> "I commend Melanie for her correction, but indicating that loan value for the buyer is actually only 103% of purchase price is quibbling”

Maybe there’s a little miscommunication? My note mentioned that “The loan-to-value (LTV) of this mortgage is therefore 107%”

--> “The other 4% goes mostly to pay CMHC fees to insure the loan…and also (probably) to pay the mortgage broker.”

These loans are not CMHC insured so the 4% is actually GMAC’s self-insurance charge.

--> "for a mortgage broker, they are one of the best ways to get paid”

We don’t put our clients in GMAC’s 107% product so I’m not sure what GMAC pays brokers for it.

--> “most people taking this option are using cash back to finance other things, like moving or closing costs.”

That is correct.

--> “anyone promoting a loan that results in ZERO equity is potentially doing the purchaser a tremendous disservice.”

We try to steer clients away from these products. 107% loans have drawbacks for most people:

a) They permit clients to over-leverage, which can obviously be bad if home prices falter.
b) They compel people to stay in their homes longer (despite the fact that the average client moves or refinances roughly every 3 years)
c) The interest rate is notably higher (clients can get a much better deal in a fully-discounted 100% loan-to-value product)
d) You have to pay back the extra 3% loan if you move. If you can’t sell your house for enough to offset this, you’re under water.


The best advice is to talk to a good mortgage planner before entertaining any “exotic” mortgage. You need to understand the repercussions, know the total interest you’ll pay, and evaluate every alternative before taking the leap.

Take care, Melanie

hhv said...

Melanie,

Thank you for your clarifications. You are welcome here anytime despite what some of our more boorish bearishness comments may suggest.

I think this could quickly turn into an argument of language: where you use 'exotic' bears would use 'toxic'.

We're glad you've found this site, We've been reading yours. What exactly is the difference between a mortgage broker, a mortgage planner and someone who sells proprietary mortgages in the role of financial advisor?

Melanie said...

Thanks HHV. You're right. Everyone has their own favorite language for things.

While typing a reply to your question about the difference between a broker and planner I realized that it's not a short answer. So I took some time and wrote an in-depth explanation on our site. (Linking back to HHV of course)

Hope it clarifies things a touch.

All the best, Melanie