The world needs a new way to supervise and regulate financial systems to restore stability and might want to follow Canada's example, the governor of the Bank of Canada said yesterday.

In a lecture to the University of Alberta's school of business, Mark Carney said Canada has weathered the financial storm better than most.

"Our system is better,'' Carney said. "Regulation has been more consistent. Our banks have been more conservative.

"Credit conditions in Canada remain superior to those in virtually every other industrialized country," he said.

"Canada is in a good position to offer sound advice as leaders of the G20 prepare for this week's summit in London. The core of our system has many -- although not all -- of the elements of a more sustainable, global financial system.''

Carney said that all financial activities that can pose a major risk to stability should be regulated.

However, he disagreed with the idea that banks should be tightly restricted to their core functions -- taking deposits and making loans -- and kept away from financial markets.

"To this way of thinking, banks could not then get themselves into trouble, or if they did, their demise could be safely managed," Carney said.

"But this is impractical, because banks and their roles are vital to the existence of markets. They are agents and underwriters and traders of most government and corporate debt.

"They provide cross-border financing products which are key services in a world of global corporations."

The better solution, he said, is to expand the perimeter of regulation to better supervise more players.

Carney placed much of the blame for the present financial crisis on the rise of a so-called shadow banking system, which appeared in recent years and usurped many of the functions normally provided by banks.

Canadian Mortgage brokers, finance companies, hedge funds, structured investment vehicles and the like grew enormously, but were performing without a safety net. The shadow system was wholly reliant on the continuous availability of funding markets.

As liquidity began to dry up last August, the whole structure tottered.

"The regulatory system neither appreciated the scale of this activity, nor adequately adapted to the new risks created by it," he said. "The shadow banking system was not supported, regulated or monitored in the same fashion as the banking system. With hindsight, the shift toward the shadow banking system that emerged in other countries was allowed to go too far for too long."

"It's time to regulate this system and this week's G20 meeting will have to start that process,'' he said.

"Canada will contribute an important perspective on these issues."

As mortgage professionals, we feel it is of the utmost importance to inform our customers as to the significance of their credit standing and how it affects their capacity to obtain a mortgage and, even worst, affects the cost of borrowing, especially in these uncertain economic times. Making some of the following mistakes can ensure that lenders will put on a hazmat suit to handle your credit report.


Remember the good old days, way back in 2007, when the streets were paved with Credit-Gold as far as the eye could see and credit cards rained from the sky? Even the creditdestitute were treated like kings by credit card companies and courted with lavish offers of unlimited credit.

Here, in the future, the world has changed. And woe betides those who ask for loans with glaring blemishes on their credit reports. An unpaid collection is apt to be regarded like a cockroach in the consommé.

What affects your credit score and in what proportion?

The Seven Pitfalls to Avoid

1. Close credit card accounts
2. Let credit cards collect dust
3. Run up high balances
4. Apply for new credit repeatedly
5. Don’t pay fine on non-credit-card bills
6. Ignore mistakes on your credit report
7. Make late payments or skip them all together

SO, WHAT TO DO?

1. Close credit card accounts

If you intend to close some credit card accounts, remember that only recently opened accounts should be considered for closing. Length of credit history is an important component of the credit score; therefore, it’s not a good idea to cancel a source that has been long-held since payment history can have positive implications for your credit rating.

2. Do not let credit cards collect dust

It is suggested that people use their cards periodically. Burying cards in the backyard or hoarding them in a shoebox in case of an emergency may also backfire. Consumers encounter two pitfalls if a creditor closes an account for non-use: The available credit is pared down and that account no longer contributes to their credit history.

3. Run up high balances

If using too little credit sends up red flags to lenders, using Loading up on high-interest credit cards isn’t a good idea even if the reward programs are attractive. Lenders want to see people use credit just right -- not too much, not too little.

It can be damaging to cardholders who run up a high balance every month on one card and then pay it off each month. Scoring systems do not take those payments into account. Restrict the amount and sources of your credit. Remember, credit is about a convenient payment method, so make sure it fits your needs. It should never be used as money you don’t have.

5. Don't pay fines on non-credit-card bills

Other business relationships that don't normally report your good payments can turn around and bite you if you decide not to pay as agreed. A lot of service providers don't report positive information. But the minute you do something wrong, they can outsource that debt to a collection agency who will report it.

Even if you never go over the limit on your credit card, being one day late on a bill can affect your credit rating. By the way, experts recommend not spending more than 35 per cent of your allowable credit limit.

6. Ignore mistakes on your report

Say what you will about credit bureaus, they do make it easy to dispute inaccuracies on your credit report. In order to dispute something on a credit report, one must, of course,check one's credit report. It's easier than it's ever been as consumers have unfettered access to their own credit information.

Unlike other issues that affect credit scores, mistakes sometimes can be remedied easily and quickly, so it's worthwhile to keep tabs on your report. By law, credit reporting agencies must provide your Consumer Disclosure report, which differs from the credit report lenders use, if ordered via mail or fax.

7. Make late payments or skip them entirely

It seems almost too obvious, but it bears stating that paying late and missing payments altogether are stellar ways to ensure that your credit score will scrape the bottom of the barrel.

If you experience cash flow problems or a downfall in your family economic situation for some time, don’t hide, it’s the worst thing you can do. Instead, call organizations that have loaned you money. Explain the situation and tell them you want to work out a repayment plan. Remember, always pay something.

The further back in time the mistakes are, the less impact they have on your credit score. Obviously, the fewer mistakes consumers make the better for their score.

We hope this information will prove helpful; should you have any further
questions, do not hesitate to call your Mortgage Specialist; he will be happy to
help you. And remember, you always play safer when you build savings; this is,
without a doubt, the best way to have a good night’s sleep.

In Canada, the average price of homes sold via the MLS in November fell 9.8 per cent from the same month in 2007.

CANADA: -9.8%

St. John's: +30.8%
Saint John: +5.5%
Halifax-Dartmouth: +12.6%
Ottawa-Carleton: +7.3%
Toronto: -6.3%
Kitchener-Waterloo: +2.2%
Hamilton-Burlington: +6.3%
London-St. Thomas: +1.6%
Windsor: +3.4%
Winnipeg: +1.8%
Saskatoon: +10.9%
Regina: +27.6%
Edmonton: -2.0%
Calgary: -6.0%
Victoria: -12:4%
Vancouver: -11.6%

UNITED STATES: -18%

The price of single-family U.S. homes in the 20 largest metropolitan areas fell 18 per cent in October from a year earlier.

Las Vegas: -31.7%
New York: -7.5%
Cleveland: -6.2%
Portland: -10.1%
Dallas: -3.0%
Seattle: -10.2%
Miami: -29.0%
Tampa: -19.8%
Atlanta: -10.5%
Chicago: -10.8%
Boston: -6.0%
Detroit: -20.4%
Minneapolis: -16.3%
Charlotte: -4.5%
Phoenix: -32.7%
Los Angeles: -27.9%
San Diego: -26.7%
San Francisco: -31.0%
Denver: -5.2%
Washington: -18.7%

At Christmastime a year ago, Toronto-area realtors had good reason to celebrate. The year ended with record high sales and the industry never looked healthier.

"Home buyers had to stop at Chapters last year for reading material just to stand in line for a condo," says realtor Mike Donia. "The banks were lending you money hand over fist."

One year later the turnaround has been dramatic and unprecedented.

At the end of 2007 prices rose by 7 per cent and sales by 12 per cent over the previous year.

But in September, as the global credit crunch started to exact a toll, the Toronto market finally succumbed to a 3 per cent price decline, the first such drop in more than a decade. By the end of November, the average home was some $25,000 cheaper than it was during the same time last year.

"The swiftness of the change in real estate market conditions and market sentiment was quite surprising," says RBC senior economist Robert Hogue. "For most of us looking at where the GTA economy was heading it was fairly clear there would be some dampening, but over the last few months it looked as if the market just priced in all the problems at once."

Given the credit crunch on Wall Street that has spread to markets globally, the question remains as to how much further Canadian households will be affected in 2009? For the average homeowner, the worry is whether prices will fall further and, if so, by how much.

Economists missed calling the real estate decline by a wide margin, to the point that last month the Bank of Canada warned ominously that many Canadians were in danger of losing their homes if the economic crisis gets worse.

But how did we get to this point?

The mantra, repeated endlessly by the real estate industry and some analysts, was that Canada was largely isolated from the pain in the United States, and that high oil prices and a more conservative approach to lending had helped us to partially decouple from sectors of the global economy.

"We're fine – it's the rest of the world that has problems" seemed to be the key message over the past few years.

"Canadians have watched with amazement for nearly two years now at the collapse of the housing sector in the United States, the United Kingdom and other countries that experienced overvalued housing prices with the sense that markets in this country stand on more solid ground," says Hogue.

It wasn't until last year, when prices started to fall in western provinces that some economists started to question the strength of the Canadian housing market.

And while sales in Toronto fell every month last year compared with the previous year, prices seemed to be holding the line.

"We're fine – it's the western provinces that have the problems – they appreciated too far and too fast" seemed to be the consensus then.

Analysts forecast that, after a decade-long run, the Greater Toronto Area's real estate market would be in for a "soft landing," and they seemed to be right.

In January, sales were down by only 2 per cent – a rounding error compared with the record numbers of 2007.

As the year progressed, sales started to decline further, but more importantly for homeowners, prices didn't.

But since September, prices and sales started to fall. The most recent numbers from the Toronto Real Estate Board show that, in the first two weeks of December, there were 1,487 sales, or about 48 per cent less than the same time in 2007.

Most people are hoping this is just a blip on the way to greener pastures.

After all, the Canadian economy is still fundamentally sound. It's true that our export earnings, job growth and corporate balance sheets are better than other nations, and the Organization for Economic Co-operation and Development said last month that Canada will lead the G7 nations in economic recovery in 2010.

A lot, of course, depends on what happens to our neighbours to the south. A prolonged recession means that fewer Americans will be buying cars from Ontario or lumber from British Columbia.

During the last bubble, average prices of existing home in Toronto hit $280,000 in 1989 and took seven years to sink downward, hitting bottom in 1996 at $196,000 before taking off again in 1997.

No one expects this market to be as brutal, but then again, no one expected oil to be below $50 U.S. per barrel, and a Canadian dollar more than 20 per cent less than at the start of the year.

To see what's in store for this year, the Star asked some of the country's top economists what they thought 2009 would bring for the real estate market:

"The question is what kind of correction are we having?" asks Tal. "Are we seeing a U.S.-style meltdown, or simply a recessionary correction?"

Tal says that Canada never had a subprime problem in the league of the United States, which means a market correction here will be more moderate.

"What we have is the U.S. situation minus the subprime problem, which gives you Canada," says Tal. "It's not a freefall, but it will still be a recession.

"In that case it's reasonable to expect to see a notable decline in major cities."

Tal expects average prices across the country to fall another 10 to 12 per cent by the end of 2009.

"Is this a crisis? No. Is it pretty? Still no, and you will lose two years of price appreciation. But this is part of the economic cycle."

Tal predicts that there may be a slight uptick in sales in the spring but "nothing significant" as the market will continue to level off till the end of the year.

After 2009, he is forecasting that the market will "flatline" for three or possibly four years, with not much activity, similar to the 1992 to 1997 period in the Toronto market after the last real estate bubble burst.

The most immediate problem for the Toronto market is a potential oversupply of newly built condominiums, says the economist.

Condo pricing will lead the correction down, even as he expects some future supply to be cut as developers are unable to get financing for some projects. He is bullish on the condo market in the longer run of at least five to 10 years, because new immigrants and baby boomers still will be attracted to that form of housing, says Tal.

Carl Gomez
VP research, Bentall Capital

Canada's housing market is "modestly overvalued" with home prices needing to fall by as much as 25 to 30 per cent from the peak in Alberta and British Columbia, says Gomez.

Ontario prices, he figures, are about 10 per cent overvalued.

"The market is in correction phase, and the question is how far back will we continue to go?" asks Gomez.

Protracted job losses in the key Ontario market, for example, would mean further pain. And while manufacturing has been hit over the years, Toronto has been largely isolated from the problems because of its strong financial services sector, says Gomez.

"You are starting to see some problems in the services sector now. They have been a major driver of growth in Toronto, everything from banks to insurance companies to accountants and realtors. We haven't really seen this shoe drop yet, but if you see things coming off dramatically, then things will definitely get worse and prices will be pushed down further."

Like Tal, Gomez sees the most vulnerability in the Toronto condo market.

"In some pockets it's dominated by speculators. If they sense they are not getting the kind of return they want, they are the first to pull the plug," says Gomez.

Robert Hogue
Senior economist, RBC

The next few months will be significant to determine where the market is heading, says Hogue.

"But given the economic context where conditions have deteriorated quite significantly, you'd be hard pressed to see a quick recovery," he says. "For 2009 we will likely remain in a period of fairly soft sales and declining prices."

A housing affordability study prepared by Hogue shows that homes are becoming modestly more affordable in the Toronto market.

It takes 53.3 per cent of pre-tax earnings to afford a bungalow in the Toronto market. But that's still up from the long-term average of 48.3 per cent.

"That means you've got to have a decline in interest rates or prices of homes coming down to meet the long-term average."

Still, Toronto looks solid compared with some other Canadian cities, where the affordability index is 33 per cent higher than long-term averages for Vancouver and 40 per cent for Saskatoon.

Canada, the best performing among the G7 economies, is officially in recession and there will no growth in 2009, the country's top bank has said in a new report.


The Royal Bank of Canada (RBC), the country's number one bank, said the US downturn and credit squeeze have led Canada's economy into recession.

The economy will grow by 0.6 percent in 2008 and post no growth in 2009, the report released Friday said.

Craig Wright, senior vice-president and chief economist at the RBC, said the US economy has fallen into a deep recession, dragging the Canadian economy along.

"However, we expect the slowdown in Canada not to be as severe as in other countries since the imbalances plaguing other countries are more pronounced. We expect to see a moderate, though sustained, recovery in the second half of 2009," he said.

After six years of solid gain, the report said, falling commodity prices will cut domestic income that has supported consumer, business and government spending for the past several years.

The outlook for 2009 is very bleak as the combination of falling domestic income, credit squeeze, and a rising debt-to-asset ratio will curb consumer spending, it said.

The bank said though negative growth is only expected to last the next two quarters, its impact will be far reaching, with the unemployment rate climbing to 7.4 percent in 2009.

On the economic deterioration in the US which accounts for more than 85 percent of Canada's global trade, the report said the real GDP in America will decline by 1.5 percent in 2009 because of slower export growth and weakening in global economic activity.

Though the Bank of Canada has reduced the overnight rate to 1.5 percent to stimulate the economy, the report expects the rate to be further reduced to one percent as the economy enters the weakest period for growth.

Imminent changes to residential mortgage rules in Canada will affect the majority of homebuyers, including those entering the market for the very first time, new Canadians and seasoned investors.

The federal government announced the changes at the beginning of August, with the new regulations going into effect October 15. The three most significant are: the end of the 40-year amortization; the requirement for borrowers to have a minimum credit score of 620; and the end of zero-down mortgages. “I think there are two reasons why we’re seeing these changes,” says Jim Murphy, president and CEO of the Canadian mortgage Association of Accredited Mortgage Professionals (CAAMP). “First, the federal government was looking at its exposure [to risk] and that of the Canadian taxpayer. Second, I think they were looking at what’s going on in the United States.”

When a homeowner defaults on a mortgage and the mortgage insurer is not able to cover the costs, the Government of Canada is left holding the bag. Says Murphy, “You have a lender – a bank or credit union. If you put less than 20% down, that lender has to have mortgage insurance. The government then provides a guarantee to the mortgage insurer.”

With these new regulations, the government is telling mortgage insurers that only mortgages meeting the above-mentioned new criteria will be backed.

Amortization

Although the 40-year amortization option is gone, 30- and 35-year amortizations are still available and growing in popularity. “These will probably become the norm,” Murphy says. “Between the fall of 2006 and the fall of 2007, 37% of all mortgages taken out had an amortization of more than 25 years. [This year] that number will be much higher.”

Murphy believes there are a variety of reasons for this. For first-time buyers, the issue is affordability. They are willing to pay more in interest over the term of the mortgage as long as it gets them into a bigger or better home than they could afford under more traditional 25-year amortizations. Paying back a mortgage over 35 years means paying less per month. This also allows first-timers the opportunity to get into the housing market sooner.

But just because you start with a 35-year mortgage, doesn’t mean you can’t make changes later on. “Most people will never be in that mortgage for the full 30 or 35 years,” Murphy says. “They may get a promotion or an inheritance and pay [it] down.”

Longer amortization periods are not just for first-time buyers. “We have people who have equity in their homes and for whatever reasons want a longer amortization,” Murphy says, “They may want to put money into investments or want to do other things with it.” If you have a down payment of 20% or more, no mortgage insurance is needed. Nonetheless, finding a lender who will offer a 40-year package won’t be easy now. “There’s nothing that prevents a lender from offering a 40-year amortization, but it will be likely difficult to find,” Murphy says.

Zero down - Taux Hypothécaire

The nothing-down mortgage (available for the past couple of years) is also gone. The new standard is the old standard – 5% down, minimum. “This change will have a bigger impact on the market, we believe," Murphy says, "particularly for first-time buyers and particularly in a place like the GTA, where housing costs are higher.” The good news is that the government will allow buyers to borrow that 5% from any lender or bank.

Credit score

Although a buyer’s credit score was always of concern to the lender, the government never got involved at this end of the transaction. That will change on October 15, when the government will require the buyer (or one of the buyers, if it’s a joint purchase) to have a minimum credit score of 620.

This new guideline may prove to be a problem for immigrants. “We have expressed some concern about this, especially when it comes to new Canadians, who may have a zero credit rating because they have no credit history,” Murphy says. “So how are they supposed to qualify?” Murphy says his association is currently discussing the minimum credit score issue with the government and hopes to see a change or amendment made to this rule.

Existing transactions

If you’ve recently purchase a home and are still awaiting closing, you might be wondering how the new rules will apply to loan commitments issued before October 15 and closing on or after that date. According to a memo issued by the government, “The existing rules will apply to loan commitments for which a mortgage insurance application has been received by the mortgage insurer on or before October 14, regardless of the closing date of the mortgage loan. This includes new construction in which the closing may not occur for more than a year after the initial loan commitment was issued.”

With the October 15 deadline looming, Murphy warns prospective buyers not to expect lenders to be eager to offer a mortgage under the old rules. “The government does not want lenders to be providing these products until midnight October 14,” he says. “Lenders have already announced that they are not offering these products anymore, and as we get closer to the deadline, they will be increasingly difficult to find.”