Tag Archives: credit checks
Looking at property? Be careful what you step in
Strong rebound is drawing would-be investors into a market that is delivering big opportunities – and new risks
Steve Ladurantaye – Globe and Mail
Frothy real estate markets attract more than young families looking for new places to live – they inevitably draw out investors looking to make an epic return on rapidly rising prices.
It was the busiest October on record for realtors as the rebound in housing continued to gain momentum. Sales have been so strong that the Canadian Real Estate Association boosted its sales forecast for the year by 6.6% to 460,200 units. Buyer enthusiasm has also led to record-high prices – the average is forecast to hit $317,900 by the end of the year.
The gains have been fuelled by record low mortgage rates – which means more of what is being paid on a mortgage is going toward paying the loan, rather than the interest.
One thing is clear – not everyone buying right now is looking for a place to live. Here’s what you need to know before using real estate as an investment.
The upside
With prices set to gain 6.6% in what was supposed to be one of the worst in Canadian real estate history, there is clearly some money to be made.
Those who invest in real estate say they like how they own something solid – they can get in their car and see what they own.
“Compared to a stock or a bond, a house is something tangible that doesn’t see its value fluctuate on a daily basis,” said Darryl Mitchell, the Toronto area manager at Royal LePage Real Estate Services. “Even in tough times, property holds on to its value.”
Other benefits to investing in property go beyond income – tax benefits can be had. Investors are essentially running a small business, and can claim such expenses as landscaping or renovations on their own taxes. Other writeoffs include interest on the loan and any property taxes.
“Property can also be borrowed against, which you can’t really do with a stock or a bond,” Mr. Mitchell said.
Money, money, money
It’s no secret that low mortgage rates are drawing investors into the market. Someone could buy a $300,000 townhouse with as little as 5% down, putting the initial cost of investment at about $15,000.
Rents pay down the mortgage, and the principal can vanish pretty quickly as long as rates stay low.
While many people think of how the steady stream of income will help pad their own pockets as faithful residents drop their payments in the mail each month, there are other considerations that many people overlook, said Jim Rawson, a Toronto-based regional manager with mortgage broker Invis.
“Any loans you take out for an investment are still going to affect your credit rating,” he said.
“Everyone thinks it won’t affect their credit rating because it’s an investment, but that isn’t the case.”
He also said it’s important to ensure an investor can make payments regardless of their tenants. If not, a mortgage provider is unlikely to provide the financing needed to get into the market.
The bigger the down payment, the less likely this will be an issue.
“If you put 50% down, then they may be less inclined to worry about such issues,” he said.
Get some help
Running rental properties isn’t something people know how to do intuitively, Mr. Mitchell said. Most will have to hire an accountant and a lawyer at the very least to make sure everything runs smoothly. Other sources for help across the country include investment clubs and organizations such as the Professional Real Estate Investors Group of Canada which holds monthly meetings where investors meet to learn from each other and guest speakers.
“We emphasize education, market research and due diligence,” said Navtaj Chandhoke, who founded the group and has helped it grow to more than 4,000 members. “It’s important people seek information, but only from seasoned professionals and experts instead of neighbours, co-workers, friends and relatives.”
A recreational option
Before the recession, recreational properties would generate thousands of dollars a week for landlords as concrete-weary city dwellers happily paid big bucks to escape the city.
But maybe now isn’t the time to cottage-hunt in the Muskokas, said David Ford, a partner at Calgary investment firm Ignite Strategic Inc.
“Investment is important but should not be the catalyst, although we certainly see mid- to long-term upside,” he said. “The priority should be on acquiring a legacy property that enriches your family’s life and experiences and provides a sense of escapism. Look for uniqueness – opportunities that are unique, authentic and relevant.”
If you insist on treating a getaway as a cash generator, he said it’s essential to check into the developer’s background. Financing is difficult, and some promised projects are unlikely to ever see the light of day.
The same goes for any new development, regardless of its location.
“Now more than ever it is critical to assess the financial stability of the developer and assess whether they have the financial means to execute on the vision,” he said. “Dig deep to determine if the project is highly leveraged or if it is financially positioned to deliver for the long term.”
The doomsday scenario
Not everyone is enamoured of the Canadian real estate market. Financial author and former member of Parliament Garth Turner has been talking himself hoarse warning against speculating in what he believes to be a doomed market.
He said the current run in prices is being fuelled by record low interest rates, and any gains are liable to be erased as the Bank of Canada moves rates higher and makes many current mortgages unaffordable for homeowners.
The recession that gripped the world over the last two years was rooted in inflated U.S. real estate prices, as those with bad credit obtained easy mortgages and drove prices to unsustainable levels. Some markets – such as Phoenix – have seen prices fall more than 50% as foreclosures rise and homeowners give up on their houses.
“Currently real estate is a fad, a fetish, a desire,” he said. “It is being bid higher in a bubble by a large whack of new buyers who could not afford a home if rates were returned to historic levels.
Comment: Except recent historic levels are only slightly higher than they are now. In the past 13 years, rates have only gone a little more than 1% than we have now, which is moot. We are simply not going back to the 18% mortgages of 20+ years ago. And people who call themselves experts should know that. And isn’t Turner the same guy who told people not to buy real estate 5-6 years ago? I guess the people who made $200,000 or more on their houses are glad they didn’t listen to him…
“So, an investor in residential real estate today is gambling.”
Comment: Isn’t investing in anything a gamble?
Another downside
You can’t invest in real estate without dealing with tenants. And that, for many landlords, is the single biggest challenge they will face.
“A good reminder is that many tenants tend to not respect their rental property as they would if it were their own, so there always seems to be something that needs to be fixed or replaced,” said Amy Olah, a marketing manager at Wellington Financial LP who owns rental properties in Guelph.
Ottawa-based consultant Chris Jurewicz owns two small apartment buildings totalling 14 units and a townhouse, and warns that tenants usually know more about their rights than landlords do. It’s essential to check tenants out thoroughly, including credit checks. And if you don’t want to deal with them 24 hours a day, a professional property manager can help.
“It sounds like a lot of money to pay up to 6% of your revenue,” said Mr. Jurewicz. “But investigate starting your own property manager business to see if you would want to do it for that amount of money.”
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Ottawa probes mortgage brokerages
Borrowers’ personal data at risk of misuse, privacy chief says
By Tara Perkins – Globe and Mail
The federal privacy commissioner is auditing a number of mortgage brokerages because of concerns about the security of borrowers’ personal financial information, The Globe and Mail has learned.
The audit, which industry sources say began this month, is looking into the potential misuse of consumers’ information to carry out fraud such as identity theft. It’s an issue that carries added significance in the wake of the U.S. subprime mortgage crisis, because mortgage brokers and lenders are now being pushed to request even more information and documentation from borrowers.
“The reason that we are doing this is we have been concerned that personal financial information of Canadians might have been falling into the wrong hands,” said Anne-Marie Hayden, a spokeswoman for the privacy commissioner’s office. “There have been numerous breaches reported to our office over the course of the last year or so.”
Ms. Hayden stressed that the audit is still in the preliminary stages, and it is too early to say what practices within the industry it might uncover.
While slightly more than half of all mortgages in Canada are sold by staff of the big banks, the broker channel, made up of about 16,000 brokers, is responsible for about 30% of mortgage activity, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP).
In the year up to March, total mortgaging activity in the country (including renewals) was about $235-billion.
Borrowers turn over a large amount of information about themselves in order to make what, in nearly all cases, is the biggest purchase of their lives.
Independent mortgage professionals are subject to provincial laws, and the standards governing the industry vary across the country. British Columbia and Alberta, for instance, each require mortgage brokers to have a certain level of training. Ontario tightened its standards for education and licensing with legislation that took effect last year. Manitoba Finance Minister Greg Selinger introduced legislation in April that requires mortgage brokers to be licensed.
Jim Murphy, president and chief executive officer of CAAMP, said most brokerage firms have policies and procedures in place to deal with the safeguarding of borrowers’ data and fraud avoidance. The privacy laws are so strict that there have been instances where brokers have had trouble sharing information with police, he said.
But many in the industry say that government and regulators need to do more to ensure that brokers are above board.
“There is tremendous fraud going on in the broker industry,” said Alex Haditaghi, chief executive of Mortgagebrokers.com, a Toronto-area mortgage broker. The privacy commissioner’s probe is “much needed,” he added.
Mr. Haditaghi said his firm carries out credit checks and criminal record checks on brokers before they join the company, and has put a privacy policy in place.
The Financial Services Commission of Ontario, which is responsible for the oversight of mortgage brokers in that province, recently issued a warning to the industry that it has “received a number of complaints from mortgage brokerages regarding fraudulent activities by their mortgage agents, who were fraudulently accessing clients’ credit information without proper authorization.
“The mortgage brokering industry’s reliance on personal information to complete mortgage transactions makes it a target for individuals who wish to gain access to personal information for the purpose of engaging in criminal activities.” Brokers are required to obtain the borrower’s consent to check their credit history.
An official at one mortgage brokerage said in an interview that a broker signed up with their firm and proceeded to carry out hundreds of credit checks in the span of 24 hours.
The privacy commissioner’s office has received 15 notifications of a privacy breach and in each case the mortgage brokerage came forward voluntarily, Ms. Hayden said. Each of the notifications came from the Greater Toronto Area, and so the commissioner’s office has chosen a sample of a handful of franchises in that area for its audit. Ms. Hayden declined to identify those brokerages.
The law currently does not require brokerages to come forward or volunteer the fact that a breach has occurred, and so the privacy commissioner’s office is struggling to obtain the full picture.
Since Ontario’s new laws governing mortgage brokers took effect last July, the Financial Services Commission of Ontario has conducted at least 68 investigations into the suitability of individuals who have applied for mortgage broker or agent licences, and at least two investigations involving unlicensed mortgage brokerage activities. It has sought to deny an application for a licence, or to revoke a licence, more than 25 times.
The U.S. subprime mortgage crisis shone a spotlight on mortgage brokers in that country. They have come under fire for, in many instances, not requiring enough information (such as proof of income) from borrowers, and for pushing them to take on homes that they could not afford. That’s something that Mr. Selinger referred to when he introduced the new legislation in Manitoba this spring.
Peter Wakefield, vice-president of compliance at Mortgage Intelligence, which has offices in multiple provinces, said he has caught an individual applying to the brokerage with false credentials, and reported the incident to York regional police. “I actually caught him with a forged educational certificate,” he said.
Despite that incident, Mr. Wakefield said he believes there are enough rules governing the industry. “I think there are sufficient rules in place, but what may not be in place in all cases is common sense.”
The privacy commissioner’s audit is being conducted under the Personal Information Protection and Electronic Documents Act, which governs how the private sector must protect consumers’ data.
“An audit is a pro-active activity, and it allows us to go into an organization and get a sense of their personal information practices,” Ms. Hayden said. “We need to have reasonable grounds in order to conduct an audit.”
She said the commissioner’s office hopes to progress quickly enough that it can discuss the issue in a 2009 annual report to Parliament.
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Contact the Jeffrey Team for more information - 416-388-1960
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U.S. housing woes are not headed here
Bob Finnigan
‘Oh Canada, Get a load of this boom!” What a great headline, especially since I found it on the front page of the real estate section of the Chicago Tribune (Aug. 5, 2007).
Americans are quite envious of our real estate market as they suffer through the subprime mortgage meltdown. I’m often asked if the same thing could happen here and I’m happy to say the answer is `no,’ at least according to Peter Vukanovich, president of Genworth Financial Canada, which, next to CMHC is the largest mortgage insurer in Canada.
Vukanovich says there are many important differences in lending practices and regulatory systems in the two countries. The Genworth head explains that subprime mortgages typically have higher interest rates and fees than “prime” mortgages and often include features such as “teaser” rates that offer the homebuyer very low payments for a short time, or the option to make interest-only payments. As well, whereas Canadian lenders are very strict about debt ratios, income verification and credit checks, the American lenders are not nearly as diligent.
Vukanovich notes that here in Canada, most loans are made for five-year terms with fixed monthly payments that will not jump quickly to unaffordable levels. Also, mortgage interest is not tax deductible here, so we have an incentive to pay off our mortgages as quickly as possible.
Another important difference in Canada is that mortgage default insurance is required under federal financial services law for those making less than a 20% down payment. As a result, 95% of the loans made in Canada are considered “prime” lending quality versus a much smaller number in the United States.
By acting as a lender’s “second set of eyes,” mortgage insurers see that underwriting standards are consistently applied to about half the market – approximately 450,000 mortgages in 2006.
Mortgage default insurance works by transferring the homeowner’s risk of default from the lender to the mortgage insurer. It also benefits Canadian homebuyers by allowing them to obtain loans at lower interest rates than would otherwise be charged if lenders retained the risk of default.
“If Canada had a U.S.-style system, at least one-third of all Canadians who currently have low-cost insured prime mortgages would pay higher interest rates and additional fees,” Vukanovich says.
“All told, Canadians can take comfort in knowing that our mortgage default insurance system is one of the most efficient, safest and stable in the world. “
The whole U.S. house of (credit) cards assumed rising real estate markets and stable or declining interest rates. Unfortunately, the U.S. has seen the opposite trends.
We’re very fortunate to be avoiding that fiasco here in Canada, although we are certainly feeling the side effects on the stock market side. For years, there were just two mortgage insurance companies in Canada, but we are starting to see some new players. I think competition is great, but we must ensure that responsible lending standards prevail.
The bottom line is that our lending practices are solid and our real estate market remains strong and insulated from the woes of our neighbours to the south.
Bob Finnigan is president of the Building Industry and Land Development Association. The views expressed are those of the president. president@bildgta.ca
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Contact the Jeffrey Team for more information
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