Now it can be said – the US is officially in a recession, and other countries around the globe are very quickly following suit. Predominating the country’s financial headaches is the real estate meltdown, or subprime crash, as experts call it. The question being asked is, was overinflated real estate the cause of the US and ultimately the global recession? If so, how?


New York Times economics columnist David Leonhardt explains it this way: In 1998, Wall Street started making it easier for home buyers to apply for loans, and packaged those loans to global investors as CDOs, or collateralized debt obligations. To make these investments even more enticing, Wall Street introduced the idea of subprime mortgages - ARM (adjustable rate mortgage) loans with high interest rates packaged in the guise of low initial interest rates.

High interest rates for the borrowers meant higher returns for the investors, while low credit score borrowers now had the opportunity to buy homes despite their normally unacceptable credit picture. The lax lending policies allowed people to borrow as much as 50% more than the real value of the house with a minimal down payment even as the high interest rates pushed prices up, resulting in grossly overpriced home prices. A case in point is San Francisco, where the median home price is currently 11.6% of the median annual salary.

Investors sought to accelerate their earnings by borrowing funds to invest. The extremely high loan interest rates caused many of the borrowers to default on their loans, and as home prices reached the point where borrowers couldn’t afford to pay their loans anymore and people stopped buying because prices were just way too high, the financial village came toppling down, one by one in a domino effect.

First to fall were Fanny Mae and Freddie Mac, the country’s two largest mortgage finance lenders that had bought the loans from the mortgage originators, repackaged them as mortgage-backed securities, and sold them to the global investors. Next came the banks and investment companies with heavy exposures on these sub prime loans such as Bear Stearns and Lehman Brothers, and as the banks fell so did the global investors who had invested in these mortgage investments. As the companies fell, investors panicked and engaged in a wave of selling, causing the stock markets to crash.

Industry insiders say that unless the number of foreclosures goes down, home prices will continue to decline and it will take longer before the real estate crisis bottoms out.

The S&P/Case-Schiller Home Price Indices show that home prices continue to fall – as of May, Phoenix reported an annual decline of 31.9%, Las Vegas was down 31.3%, San Francisco down by 29.5%, Miami down by 28.4%, Los Angeles down by 27.6%, and San Diego 26.3%.

With more and more companies downsizing workforces, it looks like we’re in for quite a long wait. In the meantime, here’s our advice: if you’ve got a home, hold on to it. If you’re in the market to buy a house, do your due diligence and homework – compare prices, read the fine print, and make sure you can afford to pay before you sign that loan.

Housing starts rose more than expected in May, with increased construction seen in both single and multiple dwelling sectors, according to Canada Mortgage and Housing Corporation.

The seasonally adjusted annual rate of starts increased to 128,400 units during the month from 117,600 in April, CMHC said Monday.

"Housing starts are expected to improve throughout 2009 and over the next several years to gradually become more closely aligned to demographic demand, which is currently estimated at about 175,000 units per year," the Crown corporation said.

Economics expected housing starts to total 126,000 units in May.

The seasonally adjusted annual rate of urban starts was up 11.1% to 107,800 units in May, CMHC said. Multiple unit urban starts rose to 60,900 units and single unit starts increased to 46,900 units -- with both categories rising by a similar 11.1% from the previous month.

"The increase in May is broadly based, encompassing both the singles and multiples segments," said Bob Dugan, CMHC's chief economist.

Overall urban starts were up 22% in Ontario, 16.8% in the Prairies, 7.3% in Atlantic Canada and 3.3% in Quebec. Meanwhile, urban starts fell 5% in British Columbia.

Rural starts were little changed at 20,600 units in May.

"The broad-based nature of the increase in residential construction activity in May was an encouraging development for this beleaguered sector of the Canadian economy," said Millan Mulraine.

"Indeed, after plunging precipitously since late 2007, and appearing to be in free-fall in recent months, this rebound may be an indication that the sector is perhaps stabilizing.

"Nevertheless, with the Canadian labour market continuing to weaken and the overall economy remaining quite soft, we expect residential building activity to remain in the current depressed range for some time."

TABLE

Housing starts in May (seasonally adjusted):

Canada, all areas 128,400

Canada, rural areas 20,600

Canada, urban centres 107,800

Canada, singles, urban centres 46,900

Canada, multiples, urban centres 60,900

Atlantic region, urban centres 7,300

Quebec, urban centres 34,200

Ontario, urban centres 41,600

Prairie region, urban centres 15,300

British Columbia, urban centres 9,400

TD Canada Trust (TSX:TD) is raising medium-term mortgage rates by up to half a percentage point while lowering some shorter-term rates effective Wednesday.

The rate for five-year closed mortgages, one of the most commonly chosen by Canadian homeowners, goes up 0.4 percentage point to 5.85 per cent.

That's on top of a 0.2-point increase in the five-year rate announced last week by TD and several other major banks.

Analysts have noted that rates for mid-to long-term mortgages are going up in response to higher yields being paid on bond markets, where lenders finance much of their mortgage business.

The biggest change announced Tuesday by TD will be with three-year closed mortgages, which will rise by 0.5 percentage point to 4.65 per cent. The posted rate for four-year closed mortgages rises by 0.3 point to 5.14 per cent.

TD is lowering its six-month convertible mortgage rate by 0.15 point to 4.6 per cent while its one-year close mortgage rate falls 0.15 point to 3.75 per cent.

The short-term rates are influence more by the Bank of Canada's policy rates, which are at a historical low.

There's the usual talk about what the latest Case-Shiller house price data mean for the next short term move in the real estate market. Has housing bottomed? If not, has the rate of decline slowed? And when will we see an upturn?

Human nature likes the short term. Which is why so little attention is paid to something that is probably more important, if less urgent: What the latest data show about the long-term of the real estate market.

And it's startling.

We have just been through the biggest boom in real estate in American history. The subsequent bust surely hasn't finished.

Yet look at the numbers. Since 1987, when the Case-Shiller index of 10 major cities begins, it's risen from an index value of 63 to 151. Annual return: Just 4.1% a year. During that period, according to the Bureau of Labor Statistics, consumer prices rose by 3% a year. Net result: Home prices produced a real return of just 1.15% a year over inflation over that time.

Critics may point out that the analysis is unfair -- after all, it starts counting near the peak of the 1980s housing boom. Fair enough. Look at the performance since, say, early 1994, when home prices were near a historic trough. Surely someone who bought then has made a bundle.

Not necessarily. Since then the ten-city index has risen from a value of 76 to 151. Annual return: 4.7%. Inflation over that period: 2.5%. That's still only a real return of 2.2% a year above inflation.

You can often do better on long-term inflation protected government bonds.

And real estate often costs 2% or more a year in property taxes, condo fees, maintenance, insurance and the like.

Conventional wisdom long held that home ownership was a route to wealth, and the imputed rent -- in other words, the right to live in your home -- was just part of the value you got from it. Under that widespread view, the recent housing bust was simply a temporary, though deep, pothole.

Yet for very many people, even over the past 15 or 20 years, the imputed rent may have been all, or nearly all, the real value they actually got from their home.

Yes, it's only recent data. And it's only ten cities. But there's some reason to suspect these numbers may, if anything, flatter real estate performance. After all, it's hard to look at the data and figure the bust is now over. And if they fall further, those long-term return figures will fall too.

Prices weren't just down 19% over the past year. They fell 2% just between February and March. And it's not the worst-hit markets that worry me the most -- Phoenix is down 53% from its peak, Miami 47%. That smells of capitulation. It's the other markets. New York and Boston are only down 20%. Denver's only down 14%.

Overall the ten- and 20-city Case-Shiller indices are merely back to mid-2003 levels. After the biggest boom and bust on record, history suggests things don't stop getting worse until they've gotten a lot worse than that.

When Rahim Moosa lost his job last October, he decided to sell the house he'd bought with his wife a year earlier.

His lender, TD Canada Trust, said there would be an $8,000 penalty to break his five-year closed mortgage – an amount he found tolerable.

"By the time we sold in April 2009, TD Bank quoted us a doubled penalty of $18,000. Now, they are stating it will be approximately $25,000 upon closing in June," he says.

Most mortgage contracts and renewal forms specify that clients seeking an early exit will pay either three months' interest or an interest rate differential (IRD), whichever is greater.

The IRD is calculated by taking the outstanding balance, multiplying it by the gap between your existing mortgage rate and the current rate for a term similar to what you have left, and multiplying by the number of months left to the end of your term.

Mortgage rates have fallen steadily since last fall, making the IRD penalties grow bigger and bigger.

Once I got involved in Moosa's case, TD worked hard to cushion the blow. It sent him to a mortgage specialist, who suggested making a 15 per cent lump-sum prepayment using a line of credit that would be paid back at closing.

Since TD hadn't told him about this option last October, Moosa asked for and received the right to make a 30 per cent prepayment to reduce the outstanding balance.

The estimated penalty is now $11,000 to $14,000.

"We won't know for sure what the exact penalty will be until the payments are made using the line of credit next week," Moosa says.

He wonders why TD dragged its feet when told about his financial problems last fall.

"Our branch representative should have advised us that we could pay a 15 per cent lump sum to reduce the penalty.

"TD needs to have a better process in place, particularly when dealing with clients whose largest investment is in their hands."

Moosa's comments will be reviewed, Hechler said. "We could have moved more quickly to help and provided clearer information from the beginning."

Kevin Plautz, also a TD mortgage customer, felt he received misleading information when he asked about breaking the deal to take advantage of lower rates.

His financial adviser initially quoted a penalty of $2,100, based on three months' interest. Other TD staff he spoke to later did not challenge that figure.

Only when he was ready to renegotiate did he learn there would be an IRD penalty of $5,900.

"I wouldn't have bothered doing a renegotiation if I had just been told the correct penalty at the start or one of the many times I asked about it since then," he says

TD agreed to reduce his IRD penalty to $4,000 after I escalated his complaint to the head office.

"We have offered to substantially reduce the amount of Mr. Plautz's IRD penalty as a goodwill gesture in recognition of the confusion he experienced over the amount he was quoted," Hechler told me.

While planning to take the offer, Plautz is leaving TD. He's found another bank that will give him a lower interest rate and cover $225 of his $270 mortgage discharge fee.

"I have a very bad taste in my mouth. I think I still prefer to move my business," he says.

I'd like to hear from readers. Have you tried to renegotiate a mortgage amid falling interest rates? How did the lender respond and what penalty was charged? I'll publish comments in a future column.

New and revolutionary mortgage payment discoveries explain how Consumers in Canada, the United States, the UK, Australia and the Commonwealth, give away huge amounts of money, freely every week or month with each mortgage payment. In fact this is true around the world for almost all Borrowers. We pay our mortgages and loans on terms dictated by the Lender without the expertise of a new wave of professionals who specialize in turning debt and mortgage payments to the financial advantage of the Consumer.



Lenders extend their loan repayment terms over 15, 25 and 30 years for maximum profits on the loan. Consumer Mortgage Repayment Specialists could shrink those profits by thousands of dollars depending on their experience and skill at saving you excessive and unnecessary payments. With some coaching, you too could divert new dollars to pay off the home loan in record time with big savings.

You would create these savings from Mortgage over payment if you could reduce taxes, eliminate excessive interest charges and shrink other payments on the loan. Success with the new way to pay means an early end to payments for an extended number of months. These are payments that in fact, are entirely un-necessary but you think you must make because usually you follow the Lenders' Plan.

Canadians, for example, are allowed tax deductions for retirement savings, as business expenses, and as tax credits for the costs of money used for investment purposes. Unfortunately, many Consumers forgo these allowable tax deductions. These lost tax dollars could be utilized efficiently to reduce excessive mortgage interest payments.

Citizens and Residents of the United States of America too, as Borrowers, have become desensitized to this huge wastage in mortgage costs because of:

• Record low interest rates recently
• Rising house values followed by the sub-prime mortgage fiasco
• The fact that Americans can deduct interest costs on their taxes and
• Aggressive home equity loans by Banks and Mortgage Lenders so that the average North American Home has become a virtual ATM Machine loaded with instant cash available to the Home Owner to spend

As a result, Borrowers and Home Owners continue to add their hard earned dollars to huge Bank Profits, unwittingly. We lack fundamental knowledge about how best to make mortgage payments and home equity loans work in our best interests. New approaches to faster mortgage payments show results very early. Savings of $10,000.00 in one year are not uncommon. About $30,000.00 of savings after three years of payments is almost always achievable.
Any good early, mortgage re-payment program can cause the disappearance of as many as 70 to 120 months of mortgage payments you no longer must make. In order to succeed, the Borrower must follow with discipline, a skilfully designed and specific fast mortgage repayment plan that applies money concepts differently.

This is a complex field. Consumers do not know which story to believe. How do you separate the genuine Mortgage-Payment Wiz-Kid" from the fraudulent, scam Artists and Pushers of get-rich-quick schemes that never work?
The News Media generally favors an easy and sensational story like credit card interest, pay day loans, or the recent surge in foreclosures. Academics, Statisticians and Researchers are not generally practical in their approach to these problems. Professionals in the Mortgage and Loans Industry have been funded largely by the Lending Establishment.

Almost all of them, including the brightest ones work for Lenders. As a result, Consumers have been abandoned, left to the mercy of Bank Profits and Mortgage Loan Officers' fees. What compounds the problem even more is the multitude of self made "Specialists", who in fact know little about the subject. Many of those who comment on fast mortgage payment options may hardly have basic college level math. Some may not ever have had any practical experience in paying a mortgage. You are reading. So here's your mortgage how to tip.

The most important tool for use in designing a good mortgage repayment plan is an amortization schedule that lists all payments from Payment #1 to the Final Payment. To design a good plan, you must compare and contrast different repayment scenarios for that mortgage. The average Canadian mortgage contract is written so that the loan will be repaid in 300 Payments. American mortgages get repaid in 360 Monthly Payments, generally. You must know and include the impact of related financial decisions such as taxes, retirement savings and investments etc. Even additional fees and costs must be considered. Three key components of your plan make a big difference in delivering dollars into your retirement account because of your skill in devising a clever mortgage repayment strategy:

The first of these components is the frequency of compounding and the frequency of payments. For example, Canadian Lenders do not exact a fee for changing from monthly payments to a bi-weekly mortgage repayment schedule. Many American Lenders charge such a fee. In Canada therefore, it is standard knowledge that you would reduce the number of years of payment from 25 to around 22 years by simply changing to a Bi-weekly mortgage payment schedule. A good plan from the new breed of Mortgage Payment Planners would pay off that mortgage in 10 to 12 years.

The second major planning component is the application of tax rules to benefit the Borrower. Our generous Uncle Sam allows US Taxpayers to deduct the interest on the mortgage loans on their homes to a maximum loan size of one million dollars. Canadian Mortgage Payment Planners, however, must distinguish themselves by devising various schemes to make the Canadian Mortgage Interest Tax deductible. Clever yet perfectly legitimate tax planning schemes could make a difference in your mortgage costs to the tune of tens if not hundreds of thousands of dollars.

Thirdly, a clever investment program that is closely integrated with the mortgage repayment plan could free you, the Borrower from loan payments much sooner and leave an Investment Account at the end.

Consumers have been diverted successfully to focus their attention on the low interest rate game. They are also enticed with other gimmicks such as interest-only payments, 100 percent financing, cash back from the mortgage at closing. These offers sedate and distract us from the real meaningful issues such as the time it would take to repay the entire loan. How much does the mortgage really cost? Such costs must be counted in before tax dollars and in after tax dollars. What are the penalties, fees and costs for early repayment?

A fast mortgage payment plan that ignores any of those three key components above is an Amateur’s Plan. Unfortunately, most mortgage pay off plans do not include such considerations. At the time of approvals and funding, Consumers become overwhelmed with the mortgage process. Even professionals, like dentists and doctors, teachers, nurses and police, even accountants and financial planners can be so intimidated with the experience that they accept the Lenders' Payment Plan without question. That payment plan usually has a built-in, profit pool to be counted in the hundreds of thousands of dollars over the life of the mortgage. The new breed of Mortgage Payment Specialists knows how to design a Consumer friendly, Mortgage Payment Plan that integrates tax issues, compounding frequency and investments. All three components, when skilfully integrated into a mortgage payment plan, deliver savings counted in the hundreds of thousands of dollars over the life of the mortgage.

Already you can see that the overwhelming majority of Borrowers do not usually create their own specific, mortgage payment plan. Those who do would not have the tools to integrate tax planning, payment and compounding frequency, in addition to investments into their plan. So you must consult an expert who has those skills. Since space does not permit, we will end here. Later on, we will explore the real benefits of a Fast Mortgage Payment Plan. In another article, we will explain the magnitude of those savings in numbers the size of which once again are too often misunderstood.