Coronavirus Mortgage Update – March 25

6:46 p.m. Update

• Prime Still Slated to Fall: Financial markets are still forecasting a 50-bps cut to the Bank of Canada’s overnight rate by April 15. Given government pressure on banks to pass through BoC cuts via prime rate, the expectation is for prime to fall to 2.45%. And while we were wrong on banks not cutting their prime rates by the same amount as the BoC, we were right that banks would not pass through the BoC’s 100 bps of monetary easing in full. Indeed, as noted below, banks have slashed variable discounts 80+ bps. That has the exact same result for new borrowers. They get squeezed despite BoC cuts.
• Quotable: “Governor Poloz suggested that the BoC wanted to have the benefit of the analysis on the impact of fiscal measures before taking its next decision on policy rates … If the BoC is waiting for everything to be set in stone before deciding whether it should cut rates towards zero, it may well be waiting for Godot.”—Desjardins Economics (via MT Newswires)

1:59 p.m. Update

• Cash Infusion: The Prime Minister says people who’ve lost income due to COVID-19 will get $2,000 a month. Canadians who qualify (more details on that) will be able to apply in “early April” and receive the cash in 10 days. The benefit is paid every four weeks, is designed to last up to four months and will end Oct. 3, 2020. This and mortgage payment deferrals will further mitigate credit delinquencies.
• Rate Changes: Here’s a look at how mortgage rates have moved over the last 30 days. This chart shows the lowest nationally-available conventional rates. And they’re mostly lower, thanks to a falling overnight rate. Government officials warned banks not to use this crisis as an opportunity to pad their profit margins. Meanwhile, big banks have slashed variable-rate discounts, thereby consuming (i.e., not passing along) over 80 basis points of the 100 basis points that the Bank of Canada cut.

12:18 p.m. Update

• Mass Confusion: There’s all kinds of misinformation over payment deferrals. Most lenders are not increasing borrowers’ payments during the term of their mortgage if the borrower opts for a deferral. And that’s the way it should be. People need a chance to get back on their feet. Lenders should defer payment increases until renewal on fixed-rate mortgages, but some are not. Here’s a screenshot of the policy from Canada’s biggest mortgage lender, RBC:

• C’mon: One reporter ridiculously sensationalized the fact that lenders must charge interest on the skipped payments, quoting someone who called banks “egregious and underhanded” for needing to get their interest back. As if banks should lend for free, in addition to offering unprecedented flexibility to borrowers in need.
• Stimulated: The Americans have announced the biggest stimulus package of all time ($2 trillion) and the S&P 500 has mustered a 2.5% gain (as of this writing). Nonetheless, with C-virus cases doubling every three days in parts of the U.S., investors fear this crisis will outlast early government attempts to mitigate it. Markets need a continued feed of good news, possibly from a U.S.-Saudi oil deal, to keep the upward momentum going. Otherwise, analysts say we’re almost certain to test last week’s market lows.
• Far From Over: The U.S. also passed a historic stimulus package back during the financial crisis. Stocks then plunged another 40% over four months. Canada’s 5-year yield—which usually steers fixed mortgage rates—rebounded over a point-and-a-half. But the Bank of Canada’s key rate stayed at a record low for over a year before rising modestly and flat-lining. Here’s what happened next…

9:49 a.m. Update

• Survival Mode: This Toronto Life article features a restaurant owner contemplating a costly second mortgage to keep his business afloat. How many countless others are in the same boat? It’s why qualified entrepreneurs need home equity lines of credit — which still have rates as low as 2.85%, by the way, a rate that seems completely illogical (too low) given rising credit risk and HELOC liquidity constraints.
• Tough Times for Banks: “Drastic rate cuts announced by the Bank of Canada and the Fed is the most visible earnings headwind for the banks,” says National Bank Financial. Worse yet, expect more than a 100% increase in loan loss provisions, it says. “We believe the next few quarters will reflect recessionary-like credit performance.” It’s no wonder banks are padding their mortgage rates.
• Waning Homebuyer Interest: Some anecdotal evidence that home searches are decreasing.
• Joblessness: One of the last things lenders want to hear is: “the unemployment rate will climb to near 15% in the coming months,” and that’s exactly what they just heard from Capital Economics and others.
• RBC Sees 0.25%: “…We anticipate the Bank of Canada will cut its policy rate further to just 0.25% and turn to large-scale asset purchases, also known as quantitative easing, a tool that has not been used in Canada.” But think twice if you believe record-low rates will stoke real estate prices. The nation’s biggest bank is also forecasting a stunning 18% plunge in Q2 GDP. Here’s a long-term chart of quarterly GDP if you’re curious how big -18% is.

Quarterly GDP
Source: tradingeconomics.com