New home prices fall more than expected

An article last week by Garry Marr in the Financial Post published on Wednesday, March 11, 2009 had the headline as given above this blog.



The problem I have with the article is that it doesn't say higher than whose expectations. From all the negativity in the news lately about housing, particularly in the Metro Vancouver area my own expectations were that housing starts would be down substantially and new house prices even more so. In the last few months everyone has become aware of the sale going on in presale properties finally reaching completion and occupancy. The impression all these stories have given is that prices would be down anywhere up to 25% to 30% for product now coming into the market.



It turns out that prices are down, but a small fraction of that amount. In fact new housing prices are down .8% year over year from last year. Significant in that it is the first time since 1997 that this number is actually lower than the previous year, but hardly large enough to justify the headline. .8% is a whole lot smaller than 25%.



The news media keeps trying to find evidence that Canada is following the US example in housing declines, only with a delay of maybe eighteen months. There is no evidence to support this but all the negative reporting is driving an atmosphere of anxiety unsupported by hard facts.



Investors need to be cautious about declining markets, indeed hopeful about them, as revenue properties could become cost effective if price decline enough. But in a market where rental vacancy rates are under 2% of the market, and there is less than six months of inventory of new home product based on demographicly demanded housing, investors should also be cautious about missing out on opportunities to make investments in the current market place.



House prices generally are lower than a year ago, whether 10% or higher, they are lower. Lenders need to be sure that any appraisals used are current, which in today's environment probably means within 45 days of the loan advance date. But the bottom has not fallen out of the market, at least, not yet.



Demand is lower than previously, which basically means that you might have to wait for a while to find a buyer. Instead of being able to get your price in three months it might take six months, and in rural markets even longer.

Conflict of Interest

Conflict of Interest is something that few people consider in their day-to-day lives that absolutely must govern the conduct of a financial services adviser, such as a mortgage broker, yours truly.

There are any number of ways that a conflict of interest may arise for a mortgage broker, any of them significant to the potential victim of the conflict of interest.

I will define a conflict of interest as follows, "A confict of interest is the result of an imbalance of power created by an advisor's ability to gain the trust of a client, when in the present of that trust, the client relies on information provided to the client that fails to disclose relevant information known to the advisor but not to the client, such information causing potential harm to the interests of the client."

Another way to put this, is to say that, "anything known which may have a tendancy to cause a client not to engage in a contract, must be disclosed prior to the client completing the contract. This is particularly true when an advisor acts as an agent for the client, and using superior knowledge or skill on a client's behalf."

For brokers there is certain information they are expected to provide as a part of their normal due diligence, and while the precise information required depends upon the specific details of a given mortgage arrangement, due diligence is required of a broker. It is not enough for a broker to say, "I didn't look, so I therefore didn't know."

In the day-to-day lives of mortgage brokers there are several situations which commonly occur, particularly when a broker is representing a borrower and a lender in the same transaction. It is a rule of ethics, and of law, that the broker fully disclose any compensation he is receiving from either party to the other party, and that there be no secret commissions or compensation, as the party not in possession of this information may conclude that the broker is being influenced by such an undisclosed payment.

There are other potential conflicts of interest, such as when a borrower client tells a broker confidential information, which if disclosed to a lender would result in a mortgage loan being declined, such as information that the borrower is just about to lose a job. In such a situation, where the right to confidentiality of one party potentially violates the right of the other party to full disclosure the broker may very well find himself in a position of having to withdraw entirely from the file and cancel the application for the mortgage prior to completion, as this situation would result in an improper outcome if the information is withheld. On the other hand the borrower has a legitimate right to have his or her confidentiality preserved.

In such a no-win scenario a broker has no choice but to withdraw from the transaction altogether because there is no way he can legitimately balance the rights of both parties.

Many times a potential conflict of interest arises because the lender is paying the broker's commission or finder's fees while the broker is simultaneously acting for the borrower. This is the most common conflict of interest experienced by mortgage brokers acting to place mortgages with institutional lenders such as the banks, who generally pay all of the broker's fees. Just because the bank is paying the freight does not mean that the broker has no obligation to the borrower, on the contrary. The broker must balance his duties to the two parties carefully, to ensure that he fulfills his fiduciary responsibility to his borrower while at the same time ensuring full disclosure of all relevant information to the lender.

In most provinces there is legislation mandating specific forms of disclosure of this last type of conflict of interest, which allows the broker to deal with the potential confict of interest, and the harm it could cause a borrower, by fully disclosing that conflict of interest in the course of the transaction.

Although much more could be written about the potential conflicts of interest arising out of a brokers responsibilities to both borrowers and lenders, the bottom line is full disclosure of all material information to both parties at the time of any transaction. Any deficiency in disclosure, either statutory or ethical, is unacceptable as it has the potential to harm the financial interest of either the lender or the borrower.

Ultimately, both lenders and borrowers (ie: investors) need to accept personal accountability for their own lending and borrowing decisions, something only possible if they are in possession of all relevant information.

There are severe potential financial, legal and regulatory consequences for the financial advisor who does not takes his duty of disclosure seriously or his obligation to his clients to balance fairly the interests of both the borrower and lender.

In the context of investing in mortgages or mortgage investments generally it is critical that investors read the disclosure documents closely whether the Mortgage Investment Disclosure Form as defined by the Form 9 in British Columbia, or by an Offering Memorandum for an investment in a mortgage investment corporation. It is extremely important to review all documents provided by your broker or other investment advisor in order to satisfy yourself that everything needed for you to make a decision is present.

MORTGAGE UNDERWRITING CRITERION

I was asked the other day to provide one of our larger investors with an outline of the basis on which loans are made by private investors, and what type of returns may be earned on different levels of riskiness of the mortgage loans.

The following is a discussion for the purpose of providing general information to mortgage investors without attempting to be comprehensive in its description of all potential risks involved in mortgage lending for private individuals.

In broad terms Trillium-Accessible Investment Fund (MIC) Inc. is focused on residential first and second mortgages placed on properties located in British Columbia and Alberta. Trillium – Accessible Mortgage Corp. also manages private mortgages for investors in the same jurisdictions and beyond throughout Canada. Lending criteria varies according to the objectives of the individual private lender, mortgage pool, syndicated lender or Mortgage Investment Corporation.

There are certain underwriting requirements that vary only slightly from one type of lender to another, regardless of their investment objectives, and these pertain primarily to the due diligence undertaken by the mortgage broker and mortgage broker manager for pooled funds or syndicates.

• Full disclosure of all material information pertaining to a mortgage application. This includes:
• Mortgage application
• Employment and/or income details and verification by way of job letter, pay stuff, bank accounts or other third party verification of income
• Telephone interview by the mortgage broker or manager of the borrower regarding in particular any details contained in the application including use of funds, employment expectation, special circumstances and any conflicting information arising out of the due diligence review process.
• Credit Reports - our firm uses Equifax for Canadian credit information, taking the time to use the credit report as an independent source of verification of current and past employment, address and trade accounts; international borrowers credit scores and other references are obtained and checked by the broker
• Formal Investor Disclosure – each mortgage funded by a private investor, whether pooled or not, is provided with a complete investor disclosure document that conforms with the regulatory requirements in the jurisdiction where the mortgage is registered.
• Full disclosure of any and all conflicts of interest. It is not unusual for the broker or broker manager to represent both the lender and the borrower in a transaction and there is a special duty of care of full disclosure to both parties of any and all conflicts of interest.
• Independent professional verification supporting property valuations in all transactions:
• Appraisers must be members in good standing of the Canadian national appraisers association – the Appraisal Institute of Canada. There are exceptions when full appraisals may not be required due to the low loan to value of the proposed loan against the provincial assessed value, or where actual value can be verified by a purchase through a Multiple Listing Service sale. Any special circumstance pertaining to a sale will result in a full appraisal being ordered.
• Property Inspectors or Engineers must be certified members of their provincial association in good standing

Conveyance law firms – Lawyers acting for the lenders provide disclosure regarding a full list of required information including property tax status, strata fees, contingency obligations of a strata corp., standing and balance of any mortgages in priority to the subject mortgage.

TRILLIUM-ACCESSIBLE INVESTMENT FUND (MIC)
The lending practices of the Manager of the MIC involve preparing the same level of disclosure for the MIC as are provided to private investors in second mortgages. Mortgages are funded on the basis of equity – no more than 85% of the value of a property based on an appraisal; on ability to pay, based on a review of the credit record of the borrower and his job situation; and on various other intangible factors – primarily the assessed risk of losing capital on an investment in a mortgage always assuming the worst case analysis, collection of the interest and principle by way of foreclosure.

Borrowers of funds from a MIC are generally people who do not obtain bank financing for a variety of reasons – credit problems, income verification, business for self, ownership of too many separate properties, etc. For this reason second mortgage based MIC’s are riskier than 1st mortgage loans, insured by CMHC or Genworth but at a similar level of risk as institutional loans from Finance companies such as HSBC Finance or Well Fargo. Rates charged to borrowers range between 10% and 16% based on various factors, but influenced by perceived risk and competitive factors in the market place.

In addition to second mortgages as discussed above, the MIC will from time to time and for a portion of their portfolio invest in other types of Mortgages within the rules and guidelines set out under the income tax act. Ultimately the decision to fund mortgages will be based primarily with the view to acceptable levels of income consistent with preservation of capital under the provisions of the offering memorandum.

Thus as covered in the Offering Memorandum:

We invest in investments permitted of a MIC under the Income Tax Act. The Tax Act provides that a MIC may invest its funds as it sees fit, provided that a MIC must not invest in mortgages on real property (land and buildings) situated outside of Canada or any leasehold interest in such property, debts owing by non-resident persons unless secured by real property situated in Canada or shares of corporations not resident in Canada.

The Tax Act also provides that at least 50% of the cost amount of a MIC’s property must consist of debts secured by mortgages or otherwise on “houses” or property included within a “housing project” (as those terms are defined by section 2 of the National Housing Act (Canada)) and money on deposit in a bank or credit union. No more than 25% of the cost amount of a MIC’s property may be real property, including leasehold interests in real property (except for real property acquired by foreclosure or otherwise after default on a mortgage or other security).
We are in the business of investing in mortgages granted as security for loans (the "Mortgages"), to builders, developers and owners of commercial, industrial and residential real estate located in the provinces of Canada.

Investment Practices and Restrictions Our investment guidelines are consistent with our articles of incorporation, the provisions of the Tax Act and real estate legislation that applies to us. Our investment activities will be conducted in accordance with the following investment practices and restrictions:

(a) Our only undertaking will be to invest funds in accordance with the objectives, strategies and restrictions of our investment guidelines;
(b) We will invest in commercial, industrial and residential Mortgages;
(c) All Mortgages will, following funding, be registered on title to the subject property in the Corporation’s name;
(d) All Mortgage investments will be made in established or developing areas in the provinces of Canada;
(e) Generally, we will only invest in Mortgages on properties for which we have reviewed and evaluated an independent appraisal and, with respect to environmentally sensitive properties and on commercial loans we will generally receive an evaluation of the property subject to the Mortgage in the form of a Phase I Environmental Audit;
(f) We will not invest in a Mortgage or loan any funds to be secured by a Mortgage unless at the date the Mortgage is acquired or funds are initially advanced (as the case may be) the indebtedness secured by such Mortgage plus the amount of additional third party indebtedness of the borrower in priority to us, if any, generally does not exceed, on a property by property basis, 85% of the appraised value of the real property securing the Mortgage, provided that the appraised value may be based on stated conditions including without limitation completion, rehabilitation or lease-up of improvements located on the real property which activities we will monitor on an ongoing basis;
(g) If the independent appraisal reports an appraised value for the real property securing the Mortgage other than on an ''as is basis", we will advance funds under a loan by way of progress payments upon completion of specified stages of construction or development supported by receipt of reports of professional engineers, architects or quantity surveyors, as applicable, or upon completion of other specified milestones;
(h) We will not make any investment, or allow an investment mix, that would result in our failing to qualify as a MIC;
(i) Subject to subsection (p) below, we will not invest in securities, guaranteed investment certificates or treasury bills unless such securities, guaranteed investment certificates or treasury bills are issued by an arm's length party and are pledged as collateral in connection with Mortgage investments or obtained by realizing on such collateral;
(j) We will not invest for the purposes of exercising control over management of any issuer;
(k) We will not act as an underwriter;
(l) We will not make short sales of securities or maintain a short position in any securities;
(m) We will not guarantee the securities or obligations of any person;
(n) We will not loan money to or invest in securities of the Manager, or the Manager's affiliates;
(o) To the extent that, from time to time, our funds are not invested in Mortgages, they will be held in cash deposited with a Canadian chartered bank or Trust Company or will be invested by the Manager on our behalf at a Canadian chartered bank or Trust Company in short term deposits, savings accounts or government guaranteed income certificates or treasury bills so as to maintain a level of working capital for our ongoing operations considered acceptable by the Directors.

PRODUCT DEFINITIONS AND REQUIREMENTS FOR LOANS

• Terms of mortgages – generally one year terms although longer terms are available upon special request.
• Interest only – borrowers pay interest only on mortgages, although amortized mortgages may be made available under special conditions.
• Pre-payment penalties – the company charges a prepayment penalty for the early payout of a mortgage, equivalent to Three months interest charge by way of liquidated charges as opposed to a penalty payment
• Rates are set based on market conditions – current rates are higher than previously due to reduction in competitor product due to USA mortgage meltdown.
• Loan to Value ratio – maximum loan to value available is 85% based on appraised value subject to review by underwriter. If the loan is made on an equity basis alone, without substantial evidence of either credit worthiness or income stability, then the loan to value will be reduced to the lesser or 75% or 65% based on an evaluation of current borrower situation.
• Beacon score is not used to evaluate credit worthiness, but is used to assist in determining Loan to Value. Beacon scores lower than 550 will result in a maximum loan to value of 80% in urban markets.
• Rural market loan to values will be reduced to reflect local market conditions, with the practical application reducing the loan to value to 75% maximum in many markets, and 65% in more remote areas. The company will not lend in communities with less than 5,000 residents with 30 minutes driving time.
• The company requires loan committee approval of any loan representing more than 10% of the loan portfolio.
• The company will make no loans to officers, directors or other management of either the MIC or its manager. It will make no loans to the manager.

TRILLIUM – ACCESSIBLE MORTGAGE CORP.

The lending practices of private lenders or syndicates involve preparing the same level of disclosure as are provided to the MIC. Mortgages are generally funded on the basis of equity – no more than 85% of the value of a property based on an appraisal; on ability to pay, based on a review of the credit record of the borrower and his job situation; and on various other intangible factors – primarily the assessed risk of losing capital on an investment in a mortgage always assuming the worst case analysis, collection of the interest and principle by way of foreclosure.
Borrowers of private funds are generally people who do not obtain bank financing for a variety of reasons – credit problems, income verification, business for self, ownership of too many separate properties, etc.

For this reason second mortgages are riskier than 1st mortgage loans, insured by CMHC or Genworth but at a similar level of risk as institutional loans from Finance companies such as HSBC Finance or Well Fargo. Rates charged to borrowers range between 10% and 16% or even higher based on various factors, but influenced by perceived risk and competitive factors in the market place.

Brokers who work with private lenders recognize that the criteria applied by each lender will be slightly different and the lender’s criteria determine the exact elements applied to each private mortgage loan. Most private mortgage investors seek to preserve capital while maintaining the highest level of interest earned possible without undue risk. The very definition of undue risk is a high personal one, which is why mortgage lenders have vastly difference lending experience and outcomes. Higher risk mortgages typically have higher levels of default, while lower risk mortgages typically earn less return on Investment when calculated over a pool of investment mortgages.

PRODUCT DEFINITIONS AND REQUIREMENTS FOR LOANS
• Terms of mortgages – generally one year terms although longer terms are available upon special request.
• Interest only – borrowers pay interest only on mortgages, although amortized mortgages may be made available under special conditions.
• Pre-payment penalties – the company charges a prepayment penalty for the early payout of a mortgage, equivalent to Three months interest charge by way of liquidated charges as opposed to a penalty payment
• Rates are set based on market conditions – current rates are higher than previously due to reduction in competitor product due to USA mortgage meltdown.
• Loan to Value ratio – maximum loan to value available is 85% based on appraised value subject to review by underwriter. If the loan is made on an equity basis alone, without substantial evidence of either credit worthiness or income stability, then the loan to value will be reduced to the lesser or 75% or 65% based on an evaluation of current borrower situation.
• Beacon score is not used to evaluate credit worthiness, but is used to assist in determining Loan to Value. Beacon scores lower than 550 will generally result in a maximum loan to value of 80% in urban markets.
• Rural market loan to values will be reduced to reflect local market conditions, with the practical application reducing the loan to value to 75% maximum in many markets, and 65% in more remote areas. The company will not lend in communities with less than 5,000 residents with 30 minutes driving time.

POOLED INVESTMENT CRITERIA

I have been asked to provide an outline of two separate types of pools for investment in mortgage investments.

POOL A – CONSERVATIVE
Targeted yield 8-9%
Blend of first and second mortgages Loan to value typically between 65% and 75%
Properties Urban, communities over 10,000 in BC and Alberta
Credit Scores Beacon Scores over 550, with score below 600 resulting in lower LTV
Mortgage Interest Rates First mortgages at 8% – 10%
Second mortgages at 12% – 14%
Employment and Income Qualifications Full time jobs – verified
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Use of Funds Purchase or Refinance
Property Tax and Strata Fees must be current at the close of the mortgage.
Cash

POOL B – MODERATE RISK
Targeted yield 12%-14%
Primarily second mortgages Loan to value typically between 65% and 85%
Properties Urban, communities within 20 kilometers of BC and Alberta towns and cities over 5,000
Credit Scores Beacon Scores reviewed, but common sense review of Credit information, all collections, legal actions and outstanding mortgage related debt on the property to be paid out of proceeds.
Mortgage Interest Rates First mortgages at 8% – 10%
Second mortgages at 12% – 14%
Employment and Income Qualifications Full time jobs – verified
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Use of Funds Purchase or Refinance
Cash

POOL C – HIGHER RISK
Targeted yield 14%-16%
Primarily second mortgages Loan to value typically between 65% and 85%
Properties Urban, communities within 20 kilometers of BC and Alberta towns and cities over 5,000
Credit Scores Beacon Scores reviewed, but common sense review of Credit information, all collections, legal actions and outstanding mortgage related debt on the property to be paid out of proceeds.
Default management and payouts of defaulting and foreclosure mortgages, other defects or charges such as outstanding income taxes owing… all to be resolved from proceeds of the mortgage
Mortgage Interest Rates First mortgages at 12% – 14%
Second mortgages at 16% – 20%
Employment and Income Qualifications Primarily equity lending without reliance on employment – prepayment of interest for the term of mortgage included as part of loan to value calculation.
Non-income qualified – proof of type of work, income must be reasonable for the type of work, bank account information to verify cash flow.
Rental property income – verified by leases or rent rolls on multiple unit properties
Should have a plan that allows the borrower to end up better off than prior to mortgage.
Full assignment of rents
Use of Funds Purchase or Refinance
Payment of mortgage default or legal demands on accounts
Marital settlements
Child support payment remedies paid
Cash

COSTS TO THE LENDERS OR SYNDICATES

As a mortgage originator and mortgage administer Trillium-Accessible Mortgage Corporation acts as an agent for the lender(s). Fees are charged to borrowers, in the main, rather than lenders. In syndicated mortgages there may be administration charges not passed through directly to the borrowers, where the managers are responsible for various administrative responsibilities including underwriting and placement of mortgages.

Some syndicated funds are held in trust with interest payments, and other income paid directly to the trust. Trusts may be operated entirely by the management of Trillium-Accessible Mortgage Corp. and registered as trusts with the Financial Institutions Commission with annual audits conducted and filed with FICOM. Some trusts are actively held by third parties, and managed by professionals responsible for investment or reinvestment decisions. In general, fees related to the operation and management of the trust are charged against the income and capital of the trust, whereas expenses related to the lending of funds to borrowers are charged directly to borrowers.

Trillium-Accessible Mortgage Corporation is a full service mortgage administration company and charges borrowers a variety of fees, penalties and charges related to the administration of mortgages. Costs of collection, default or foreclosure are charged against the borrower to the extent covered by the value of the property upon foreclosure or conduct of sale. Any shortfall in the value of a property at the time of foreclosure is a cost to the lender, and such potential costs must be considered when determined the nature of the mortgage to be approved, and the risk profile of the borrower(s).

High potential returns and interest also mean a higher degree of risk, including a higher risk of loss of both income and capital.

This blog is for informational purposes only. Information is intended as a summary and expansion on specific sections of an Offering Memorandum rather than an offer for the sale of any securities. Interested parties should review the Offering Memorandum and seek independent financial advice Prior to making an investment. Private investors or syndicated investors should speak to their broker and receive appropriate disclosure documents before investing in any mortgage or mortgage syndication.

Budget Day In Canada

Today is budget day in Ottawa, and by now the government has announced the largest deficit budget in Canadian history. Strangely, for those of us who have been paying attention, there is little criticism of this planned deficit, even by those who have previously railed against any deficit by the Feds.

So what's going on?

The truth is, both the country and the world economies are at a place unseen by anyone alive. The major financial institutions all around the world are in deep trouble, due to collapsing confidence in financial instruments, mostly brought about by the US subprime collapse, but certainly exacerbated by a serious of other financial failures, the likes of which haven't been seen since the Crash of 1929.

What governments all of the world are trying to do is to replace private spending, which is almost at a dead standstill, with government spending, to trigger a rebirth of economic confidence in consumers, (and probably more importantly, in bankers).

Seldom before during my lifetime have I seen such evidence of the transient nature of what we know of as "the real world" or how vulnerable that world is to a collapse of belief. Students of economics will always tell you that the "real" value of anything is what a willing seller and a willing buyer agree it is. The logical extension of this is that there is no "objective" value to anything, all economic values are relative, and depend upon the confidence of buyers and sellers in the marketplace. Once confidence is seriously damaged, or even destroyed, it is extremely tough to restore it to its proper place.

But this is precisely what governments are trying to do with massive deficit spending and building programs. The whole economy of the world is somewhat based on a house of cards supported ultimately only by our belief in it. If that belief is fundamentally flawed, then we really are in for a serious collapse. If the system merely needs to be "tweaked" by better regulations and public policy, then it may perhaps come back sooner rather than later.

What does this mean for investors?

It means a rough ride is getting rougher all the time. There's little point in trying to say that the stock market will be volatile... that would be more than a little redundant after the past couple of years. Real estate values will continue to slide... but nobody can tell you with any confidence how much they will slide.

I still believe that your best investment bet is in mortgages against residential property.... because no matter what happens in the world economy real people still need to live in real property, and will pay to keep their homes. Even if there is double digit unemployment the vast majority of people will continue to be employed, and will continue to pay their mortgages to stay in their homes.

We are recommending lenders be more cautious than ever in their second mortgage investments, with the result that the absolute maximum loan to value in private mortgages these days is 85% for people with otherwise excellent credit, and 65-75% for so called equity loans. This isn't a reflection of paranoia, but rather of useful prudence given the uncertainty surrounding property values in the near future.

In other words, if we have to foreclose we need to be aware of the potential for loss created by the current market conditions, and therefore lend more cautiously than in a strongly expanding marketplace, such as existing in the past five years or so.

The balance to this is that we receive far more applications these days from people with better credit scores than ever before... because if private lenders are being more cautious, institutional lenders are as well. The range of risk represented by private lending is much less exposed today than it was previously, simply because there is less competition for the loan opportunities.

So if you want to maintain a good return on investment, then invest in debt... residential mortgages.

And returning to the budget... let's hope that the Finance Ministers from around the world are able to right the ship and get the world economy back on track.

Bank Lending Policy Initiative by MOF

Loosen your purse strings, Canada tells banks

OTTAWA (Reuters) - Canadian Finance Minister Jim Flaherty delivered a blunt message on Wednesday to the country's banks, telling them to loosen their purse strings and summoning them to a meeting to press the point.

"There is evidence now of a constriction in credit in Canada, not only for smaller businesses and for families, but for larger businesses. So this is something that we are going to continue to address with our financial institutions. In fact a meeting is being set up now," he told CTV television.

"We expect our banks to make lending available, to have credit available and affordable in Canada. We're acquiring a lot of their mortgages ... up to C$75 billion worth. We've given a guarantee with respect to some of their obligations. So this is a two-way street. We expect credit to be available through our financial institutions."

I have had many borrowers ask me why it seems so difficult now to obtain mortgage financing, despite the fact that the official policies regarding loans haven't really changed very much over the past few months - yet loans seem virtually unavailable no matter what the applicant presents in terms of qualifications.

Anecdotally I have been told by a loan manager for a local community credit union that the credit union hasn't made a new mortgage loan since May of 2008, six months in total. The real estate market in that community is completely dead,and last month there were only two sales in the entire community.

So do you think that these items are related? You bet they are. Banks and Credit Unions claim that their lending policies haven't changed... but they aren't lending money.

What the Minister of Finance isn't saying, is that the banks are actually directly creating the current economic crisis in Canada, even though there was no crisis until they made one! The real crisis in confidence is NOT the consumer but rather tha corporate elite at the banks, who no longer trust each other or their institutions. Bank Paper is not considered worth the paper it is written on, or the electrons used to count it. The feds have done their share all around the world. It is time for the banks, worldwide, to get over it... and do what they need to do to begin lending money again.

If they don't this recession will go from a serious recesssion to a full blown world wide depression, the end of which will be uncertain at best.

And it will have been created almost entirely by bankers, because they don't trust each other. At some point these people need to be held accountable for their completely irresponsible behavior. It may be bad banking to make loans in an environment of uncertainty, but it is bad citizenship to withhold credit from the entire world because of corporate cowardice.

Mixed Messages

It's been a whole month since my last blog entry on mortgage investing. The reasons for this are many but the biggest reason is that the fall is traditionally one of my biggest seasons of the year for private mortgage investments. As a result I find myself extremely busy dealing with new investments in mortgages and MICs by investors, and have found it difficult to find the time to contribute to this column.

In addition, of course, I also had to serve Jury duty in a trial in BC Supreme Court, which was interesting, if you consider "interesting" to be a pejorative. Twelve ordinary people come together to decide the fate of one of our fellow citizens, whether or not he is guilty of the crime of which he is accused. Human nature being what it is, I was amazed that we all managed to agree on a verdict, despite much discussion about the merits of the case during deliberations. I hate the jury system, but I still think it is better than allowing the experts to decide our fate as citizens.

Now, back to mortgage investing.

2009 will go down as the year of the great world-wide financial crisis, the likes of which few of us have experienced in our lives. According to all the economists there really has been nothing like it since the great depression.

This crisis was triggered by the US sub-prime mortgage collapse, and, quite frankly, incredibly incompetant lending practices south of the border. Unfortunately it didn't end there, as the underpinings of whole international financial system have ended up coming under assault as a direct result of a profound lack of trust in the system itself by the very people in the heart of the system.

When banks won't or can't lend money to other banks, financial liquidity dries up in a hurry. Much of the efforts of the various national governments and central banks around the world are doing everything they can to restore faith in the system, not so much in the minds of ordinary investors but rather in the hearts and minds of the major players in the industry.

There has been a lot made lately of the failure of the US regulatory agencies to control the conduct of US Banks, and there is probably a significant amount of truth to the criticism. However, the challenge is not merely about regulation and control, but rather more fundamentally - if nobody understands the investment products they are buying or selling, how can faith and trust ultimately be earned and maintained. A significant part of the failure of the international financial system has been the undermining of sophisticated financial products like derivatives.

This should not be taken to suggest that more sophisticated products shouldn't be bought or sold, but rather there needs to be more transparency and a better job done of disclosure of these complicated financial products. The banks who rely on these instruments to provide fundamental security for their loans need to be able to rely on the ratings assigned and on the disclosure filings as to the nature of the risks being undertaken when they invest in those instruments.

High risk investments are not necessarily bad investments, they are simply investments that require a risk premium appropriate to the amount of risk and type of risk. They should also represent only a portion of a balanced portfolio rather than a primary portion.

I've never criticised my relative who goes to the horse races ever Thursday and "invests" fifty bucks in his favorites of the day. Some days he wins, although mostly he doesn't. So this investment is extremely high risk, but once in a while he wins enough to make the whole exercise worth every dime. Those nights are great.... we all go out to dinner to celebrate his success as a gambler. However, if he started to gamble his nest egg, set aside for his retirement, I would be most concerned.

Of course, I found it equally perterbing when I realized that his investments in blue chip mutual funds were almost as risky as the race track.

Years ago I began to move out of stock market based investments into secured investments or real property. Yes, real property does go up and down. Just like stocks in the public markets. But there is a fundamental difference - real estate will always retain real value over the long run, as opposed to the stock of any given company, which has at least as good a likelihood of disappearing completely in 15 to 25 years as it does of thriving.

You want proof? Check out the names and positions of the top 1000 US listed companies in 1990 and see how many of them have completely disappeared in 2009. There are no properties that have fallen into the sea since 1990, and most have increased in value at a pace at least equal to the rate of inflation in the intervening period.

Real property and security based on real property, if managed with a degree of caution, will protect an investor for the long run. In the short run you can easily lose your shirt if you make a bad investment, or leverage your capital at the wrong time and in the wrong market. However, in the real estate world, time is generally your friend.

Just remember this - subprime mortgages in Canada have a default rate of less than one half of one percent. A portfolio made up of Canadian mortgages, even subprime mortgages, will have made money during the past twelve months during this market meltdown. There is few other investments that can make the same claim.

There are few guarantees in the world, especially in the investment world. But there are reasonable ways to mitigate risk, including lending in strong real estate markets in a stable country with good prospects.

And being persistent and patient enough to see the investment through.

Final Mortgage Insurance Guarantee Parameters

Those of you who are following this blog may remember my tirade a few weeks ago about the changes to CMHC insurance rules, particularly in regards to fixing a minimum credit score at 620 and removing all discretion from lending institutions in working with people on the "bubble" as it were.

The following is extracted from an email delivered to me by the Canadian Association of Mortgage Professionals in regards to this issue which answers a number of these issues.

On Friday, September 19, 2008 the Department of Finance issued its final
mortgage insurance guarantee parameters and accompanying explanatory notes.

The final guidelines follow the initial announcement on the
financial
guarantee for mortgage insurance providers issued July 9, 2008 by
the Department
of Finance.

There are two noteworthy changes from the draft parameters:

1. Elimination of reference to a Total Debt Servicing (TDS) number, replaced
by a
principles based approach;

2. Reduction in minimum credit score to 600 from 620. Three percent "basket"
for flexibility remains;

These modifications follow discussions with stakeholders, including CAAMP.
CAAMP through its submission focused its comments on the minimum credit score
and welcomes the decision by the Department of Finance to adjust the credit
score. For more information on the mortgage insurance guarantee parameters click
here for Schedule A and click
here for Schedule B. All of these changes come into effect October 15,
2008.

If you have any questions please contact jmurphy@caamp.org; 416-385-2333 ext. 31Jim Murphy, AMPPresident & CEOCAAMP/ACCHA

This is an example of how concerted effort on behalf of an industry can help to protect the public from a poor legislative or regulatory change.

More importantly, it leaves the job of evaluating credit risk in the hands of the industry as a whole, justifiably in my opinion, given the record of the Canadian credit granting industry in maintaining stability while the rest of North America goes to hell.