Mortgage fraud hits home
RBC sues ex-worker for inflating Calgary real estate values.
The Royal Bank of Canada has filed an $8.9-million lawsuit against one of its former employees and members of his family over allegations they orchestrated a complex mortgage fraud scheme that has left the financial institution facing millions in losses for properties with artificially inflated values.
At the heart of the lawsuit are allegations the defendants -- including Ilan Levy, who worked with the bank as a mortgage specialist between August 2004 and March 2009 --approached people to allegedly buy real estate at prices that had been intentionally inflated over market value in exchange for fees between $20,000 to $70,000, according to court documents obtained by the Herald.
The defendants then apparently received payments of part of the mortgage loan proceeds, for Levy or companies under his control, that translated into at least $2.46 million, the documents allege.
As a result, the bank claims it was "intentionally misled" into agreeing to loan more money than the properties were worth.
In the documents filed by the Royal Bank last month in the Court of Queen's Bench, the bank indicates Levy was terminated because it was "discovered that he planned, organized, participated in and executed the fraudulent transactions."
The documents state Levy or companies under his control received at least $2.46 million from the proceeds of mortgages obtained fraudulently.
He is among eight people and six corporations named as defendants in the suit, including his wife, two of his brothers and a lawyer.
None of the allegations have been proven in court.
In all, the bank claims the group was involved in at least 20 transactions using a so-called straw buyer scheme, most for properties in the Elbow Valley area, some with mortgages for more than $2 million.
The bank, in its statement of claim, alleges Levy--whose duties included helping people apply for and obtain residential mortgages from the Royal Bank--organized, planned and executed each of the 20 transactions and that either he or another defendant found the properties, drafted documents and retained an appraiser for the fraudulent purchases.
CIBC says mortgage growth cut in half
Canadian consumers are scaling back spending and becoming especially cautious about credit cards and home mortgages this year as the recession wears into their pocketbooks. A report by CIBC World Markets says growth in the mortgage market has slowed to roughly half the pace of six months ago, while non-mortgage consumer credit is also showing weaker growth.
"The slowing will accelerate over the next few months," said CIBC economist Benjamin Tal. "You will see less spending and more savings."
The outlook suggests Canada's mortgage market is starting to slow with the drop in home prices. Falling home prices could mean the next year will see either very limited or no growth in the mortgage market.
Outstanding mortgage credit is rising by half a per cent a month, compared with 0.9 per cent a month advance in mid-2008, CIBC said.
CIBC says that means the industry will have to generate about $55 billion in new mortgages just to compensate for the ones reaching maturity, however Tal predicted consumers will return to the market, partly because of attractive deals offered by lenders.
"Although you won't see it this year, maybe in 2010 you will see a nice recovery. Affordability is much better than it was in '91 and '82 because interest rates are at a record low," he said.
The CIBC report also suggests that while consumer credit is still strong - rising nine per cent last year as compared to a year earlier - the signs of tighter spending are more apparent when comparing each month to the next.
Outstanding consumer credit rose by 0.6 per cent a month, compared with 0.8 per cent a month in mid-2008. Tal expects consumer debt to rise by three or four per cent over the next year - down from 14 per cent over last year.
"Even after we recover, in 2010 or 2011, we will not go back to the days of consumer debt rising," he said. "We believe there is a permanent softness in consumer spending reflecting the fact that people will start saving again."
However, a new Royal Bank survey suggests that Canadians are starting to become hopeful, and even contemplating buying a home.
The survey, conducted in January, found that 65 per cent of the people polled thought it was a buyer's market, while another 27 per cent of those who responded planned to buy a home within the next two years.
The four-point increase is the biggest uptick recorded by the annual RBC home-buying intentions survey since 2001.
The predictions could be overly optimistic, suggests economist Doug Porter at the Bank of Montreal.
He says the findings doesn't necessarily mean the prospective buyers are going to actually enter the market "given the wave of gloomy economic news we've seen in recent months."
"We've seen the housing market shift very abruptly from an outright seller's market a year ago, to an outright buyer's market now," he said.
Canada's Bank Mortgage Purchases
At a news conference in Toronto yesterday, Canada's Finance Minister, Jim Flaherty said the government will buy up to an additional $50 billion in insured mortgages by the end of the fiscal year. That will bring to $75 billion the total amount of money available under the program, announced last month. The aim of the program is to encourage lending by taking mortgages off banks' books in exchange for cash.
What is mortgage loan insurance?
Mortgage loan insurance protects lenders against mortgage default. It is usually required when homebuyers make a down payment of less than 20 per cent. To get the insurance, lenders pay an insurance premium, which they typically pass on to the buyers.
Premiums go up on an escalating scale from 0.50 per cent of the loan amount to as much as 2.9 per cent depending on the amount of down payment.
What is the purpose of the latest mortgage purchases?
"What it comes down to is getting the mortgages off the portfolios of the lenders and giving them cash, increasing their ability to loan by improving their risk-weighted capital ratios since cash is less risky than a mortgage," said Tsur Somerville, who holds the real estate foundation professorship in real estate finance at the University of British Columbia.
Doesn't this expose taxpayers to more risk?
In one sense, it does, Somerville said. "Mortgage defaults will rise with the downturn in the economy and from drops in housing prices."
But he said there is no overall increase in absolute risk because "these are all mortgages that are insured under the National Housing Act, so the mortgages all carry insurance either from CMHC or one of the two private providers. If the insurers are unable to cover the value of the mortgage and missed interest resulting from default, the government already provides a 100 per cent guarantee for CMHC insured mortgages. Basically, if there are a lot of defaults, the government already has to cover those costs if the insurers cannot, so we already have the risk."
Central Bank Cuts Interest Rate
Bank of Canada warns of 'mild recession'
In a surprise move today, the Bank of Canada sliced interest rates by only one-quarter of a percentage point to 2.25 per cent — a milder cut than what many investors were expecting. In a statement, the central bank said major interrelated developments are having a "profound impact" on the Canadian economy.
The intensification of the global financial crisis has led to severe strains in financial markets. The associated need for the global banking sector to continue to reduce leverage will restrain growth for some time. "Canada's economy and strong financial system will benefit directly from these actions," said the statement.
Still, the weaker outlook for global demand will increase the slowdown on the Canadian economy coming from exports. The tightening in Canadian credit conditions will also restrain business and housing investment, said the Bank of Canada.
Ottawa tightens mortgage rules
Maximum amortization period for loans backed by government reduced to 35 years.
Concerned about the "risk of a U.S.-style housing bubble developing in Canada," the federal government has tightened rules on government-backed mortgages including limiting the use of popular, but controversial forty-year amortizations.
Longer-term rates of up to 35 years will still be allowed under new rules which are seen as a pre-emptive move to quell the kind of housing implosion in the United States not seen since the Great Depression.
"They are obviously quite concerned about what is happening in the United States, and the spillover into Canada," said Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals. "The government is looking at their risk tolerance and the impact on Canadians."
Murphy said 37 per cent of all new Canadian mortgages taken from the one-year period ending in the fall of 2007 were longer than the standard 25-year amortization period. "Longer-term mortgages have been extremely popular with Canadians," he said.
The new rules, which take effect October 15, would also require a minimum down payment of 5 per cent on new government-backed mortgages and also call for "consistent" minimum credit-score requirements and loan-documentation standards. Under current rules, it is possible to take out a 40-year mortgage, which has been available on the market for less than two years, with zero down payment.
The regulations will apply to federal agencies such as the Canada Mortgage and Housing Corp., which has an estimated 60 per cent share of the mortgage insurance market. However, private-sector mortgage insurance rivals such as Genworth Financial, PMI Mortgage Insurance Co. Canada and AIG United Guaranty are free to offer the product. One difference is that the federal government will no longer provide insurance that protects lenders in the event of a default by the insurers.
The new regulations mean potentially higher sales and prices in the near-term as "buyers jump into the market before they are enforced," said TD Bank deputy chief economist Craig Alexander. "Then, the new rules will likely contribute to the cooling of the housing market."
According to analysts, the housing market would have slowed sooner if longer-term amortizations hadn't been introduced. The longer amortizations mean much greater interest costs over the life of the mortgage, but smaller monthly payments, which allows buyers to bid on a more expensive home than they otherwise could afford.
Source: Toronto Star
Mortgage rates dropping
Canadian financial institutions have begun to slash their mortgage rates amid lower borrowing costs in the bond market and more competition for mortgage business. BMO Bank of Montreal was the first to announce lower rates. Effective Wednesday, a five-year closed mortgage will carry a posted rate of 6.65 per cent, a drop of a little more than a third of a percentage point.
Bigger cuts apply to shorter-term mortgages. BMO's one-year closed mortgage drops 8/10ths of a percentage point to 6.15 per cent. Its two- and three-year closed mortgages tumbled by 0.85 of a percentage point to 6.15 per cent.These are all posted rates. Many consumers are actually able to get closed mortgages at rates that are a full percentage point or more below the posted rates. BMO, for instance, said its "special offer" rate for a five-year mortgage will drop to 5.59 per cent, down 0.34 of a percentage point.
Laurentian Bank and Desjardins Group's caisses populaires and credit unions in Quebec and Ontario announced similar cuts Wednesday, effective on Thursday. TD Canada Trust soon followed.
Since December, the Bank of Canada has slashed its key overnight lending rate by 1.5 percentage points to three per cent as it tries to stimulate the Canadian economy. But until this week, cuts to fixed mortgage rates have been relatively modest as the credit crunch made it more costly for banks to raise money.
The wide spread between mortgage rates and government of Canada bond yields with the same maturity has since lessened somewhat, but one economist said these big rate drops may be due more to competition.
"This looks to me like more of a competitive move on BMO's part to boost its share of new mortgages," Ted Carmichael, chief economist at JP Morgan Securities Canada, told CBCNews.ca. "It may be an indication that mortgage activity is slowing down."
Despite Wednesday's higher-than-expected April inflation reading from Statistics Canada, most economists still see at least one more rate cut from the central bank.
Recent housing start numbers and real estate sales figures point to a cooling in Canada's housing market from last year's record pace.
Source: CBC News
Bank of Canada Cuts Rate by .5%
The Bank of Canada lowered its benchmark rate by half a point to revive an economy that's growing at its slowest pace in 16 years, and signaled more easing may be needed. Governor Mark Carney and his five deputies cut the rate on overnight loans between commercial banks to 3 percent, the lowest since December 2005, a move predicted by 28 of 32 economists in a Bloomberg News survey.
The projections for growth and inflation in the central bank's statement today indicate policy makers may ease again as soon as their next meeting on June 10, economists said. The bank cut its 2008 growth forecast to 1.4 percent, the lowest since 1992, from a January prediction of 1.8 percent, and said inflation will stay below their 2 percent target until 2010.
"The main concern for the Bank of Canada is that economic growth is going to be well below potential," said Craig Alexander, deputy chief economist at TD Bank Financial Group in Toronto. The bank today sent "quite a strong signal," he said, "and we expect another rate cut at the next meeting."
Bank rate cut again in March
The Bank of Canada cut its benchmark overnight lending rate by one-half of one percentage point to 3 1/2 per cent on March 4th, and signaled further cuts in the near future. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, now stands at 3.75 per cent.
The Bank warns: “there are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected,” and, “deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy.”
“These developments suggest that important downside risks to Canada's economic outlook…are materializing and, in some respects, intensifying,” the Bank also cautioned.
The Bank repeated earlier statements that the domestic economy remains strong, while a high Canadian dollar and weakening U.S. economic growth is hurting exports.
“Our high dollar is keeping inflation in check, so the Bank of Canada is cutting its trend-setting bank rate to boost economic growth,” said CREA Chief Economist Gregory Klump. “Financial market turmoil will remain a downside risk to economic growth for some time, and the Bank all but said it will continue lowering interest rates.”
When the Bank decided to lower interest rates on March 4th, the advertised five-year conventional mortgage rate stood at 7.29 per cent. This is less than one per cent above where it stood at the beginning of last year. Competition among mortgage lenders remains stiff, which continues to help many borrowers negotiate discounts from advertised rates. However, fallout from the U.S. sub-prime mortgage debacle has tightened credit conditions in financial markets, resulting in smaller discounts off advertised mortgage interest rates.
Declining interest rates and a rebound in economic growth are factored into the CREA MLS® 2008 market forecast, to be issued later this month. “Sales activity will stay strong and reach the second highest level on record this year. Prices are also forecast to continue rising. Additional cuts to mortgage interest rates are good news for housing affordability and Canadian housing demand,” Klump added.
Key interest rate set at 4 per cent
The Bank of Canada, confronted by cascading losses on financial markets, cuts its key interest rate by one-quarter of a percentage point to four per cent. The Canadian central bank's scheduled decision came less than an hour after the U.S. Federal Reserve Board handed down a surprising three-quarter-point cut in its benchmark policy rate.
The Fed said it's cutting the federal funds rate -- the interest that banks charge each other on overnight loans -- to 3.5 per cent, down by three-fourths of a percentage point, from 4.25 per cent.
The Fed action is the most dramatic signal it can send -- that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory.
Key interest rate lowered to 4.25%
The Bank of Canada cut its key interest rate by a quarter of a percentage point Tuesday, citing the increased risks to Canada's economy from the weakness south of the border. The cut lowered the bank's overnight lending rate to 4.25 per cent. It's the first cut in the central bank's key rate in more than 3 years.
The chartered banks quickly lowered their prime lending rates by a quarter of a percentage point to six per cent, effective Wednesday.
Tuesday's interest rate cut will mean cheaper borrowing costs for Canadians with variable rate mortgages, lines of credit and other loans with floating rates.