High interest rates drove BMO’s mortgage delinquency rate higher in the third quarter, according to the bank’s latest earnings results.

As Canada’s fourth-largest bank, BMO also reported that it was forced to set aside significantly more funds—$906 million—for potential losses, reflecting the growing financial strain on borrowers.

The bank saw 90+ day delinquencies in its mortgage portfolio rise to 0.24% in the quarter, up from 0.20% last quarter and 0.15% of its portfolio a year ago.

“Specific client segments continue to feel the impact of prolonged elevated interest rates, tightening of credit conditions as well as shifting consumer demand for products and services,” said Chief Risk Officer Piyush Agrawal.

“Moreover, rising unemployment in Canada and reduced pandemic-related liquidity are challenging consumer and business balance sheets,” he added. “This has led to credit downgrades in our portfolio with higher watch list and impairments.”

BMO reported that its Canadian Personal and Business Banking impaired losses were up $27 million from prior quarter.

CEO Darryl White noted that the cyclical increase in credit costs “has resulted in loan loss provisions above our historical range, which has not met our expectations.”

“We’ve investigated the circumstances that led to recent impairments and the conclusion is, for some customers, the combination of prolonged high interest rates, economic uncertainty, and changing consumer preferences had an acute impact,” he said on the third-quarter earnings call. “This is presented in a relatively limited list of borrowers. For instance, only 15 accounts comprise almost 50% of year-to-date impaired provisions in our wholesale portfolio.”

Despite the current challenges, White added that BMO “has a long history of superior credit management and that has not changed.”

Agrawal said the bank is continuing to take action to manage losses, “including pre-delinquency engagement with customers most vulnerable to payment stress.”

In the bank’s Commercial Banking division, impaired losses increased by $31 million.

Losses blamed on post-pandemic underwriting

BMO’s executive team explained that there are no industry or geographic themes amongst the losses. Instead, they say it’s due to market conditions during the time of underwriting, which was soon after the COVID-19 pandemic.

“What we’re experiencing here is effectively the delayed consequence of the dynamics that were pretty unique to a pandemic,” explained White. “There’s a vintage of, I call them, pandemic loans that might have had higher leverage and larger holds than if we were able to do them again.”

Agrawal added that those were “exceptional circumstances” and that liquidity was high at the time, which “carried consumers [and] carried companies.”

“We’ve gone back, looked at our entire book, combed through underwritings we’ve done and really it comes down to a handful of accounts that are now on our watch list, which is why we are guiding you to a higher elevated performance for the next few quarters,” he said.

32% of BMO’s variable-rate mortgages still in negative amortization

BMO also disclosed details about its mortgage portfolio and the status of its fixed-payment variable-rate mortgage clients.

As of Q3, BMO has $15.1 billion worth of mortgages in negative amortization, representing about 32% of its total variable-rate mortgage portfolio. This is down from a peak of 62% of its variable-rate mortgages in negative amortization and 42% in Q2.

• What is negative amortization? Negative amortization impacts borrowers with fixed-payment variable-rate mortgages in an environment when prime rate rises significantly, resulting in the borrower’s monthly payment not covering the full interest amount. This causes the mortgage to grow rather than shrink.

“Our outreach to customers continues to be successful with many taking actions, resulting in a significant reduction in mortgages that are in negative amortization,” Agrawal said previously.

The bank also provided updated figures on the number of renewals it anticipates in the coming years.

The bank expects 14%, or $22.6 billion, of its mortgage balances to renew in the next 12 months, with another 70% of its mortgage portfolio up for renewal after fiscal 2025.

BMO has also continued to see the share of its mortgages with a remaining amortization above 30 years continue to decline each quarter, reaching 23.6% as of Q2, down from nearly a third a year ago.

Remaining amortizations for BMO residential mortgages

BMO earnings highlights

Q3 net income (adjusted): $2 billion (-8% Y/Y)
Earnings per share (adjusted): $2.64

Conference Call

On deposit growth:

• “Strong growth in customer deposits continues with average balances up 9% from last year, driven by higher deposits in our U.S. and Canadian personal and commercial businesses,” said Chief Financial Officer Tayfun Tuzun.

On the impact of Bank of Canada rate cuts in the coming quarters:

• “As we’ve talked about in many calls, the transmission of central bank policy takes about 6 to 12 months to go through the system. So that should start helping the market start helping consumers. And so that’s why the next couple of quarters elevated. And then after that, receding back to our long-term normal and our long-term averages are in the range of about 36 basis points that we’ve seen over the last 30 years,” said Chief Risk Officer Piyush Agrawal. “For the next couple of quarters, higher than what you saw this quarter.”

On commercial real estate:

• “In Commercial Banking, loan and deposit growth is strengthening in Canada and while softer in the US, we continue to acquire new clients and increase deposit penetration,” said White.

Source: BMO Q3 conference call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

Feature image by Igor Golovniov/SOPA Images/LightRocket via Getty Images

This article was written for Canadian Mortgage Trends by:

Canadian lenders are cutting fixed mortgage rates following a drop in bond yields. But what’s behind these latest moves?

Canadian lenders are once again trimming their fixed mortgage rates, offering additional relief to today’s mortgage shoppers.

The latest rate cuts follow a sharp drop in the Government of Canada bond yields, which typically influence fixed mortgage rate pricing. After hitting a six-month high in late April, bond yields—which move inversely to bond prices—have been trending downward.

The steepest drop has taken place over the past week, with yields down roughly 30 basis points, or 0.30%.

As a result, many lenders have reduced their rates, with some making substantial cuts.

“Five-year fixed rates are way down and we may see two-years at 4.99% soon,” rate expert Ron Butler of Butler Mortgage told CMT. “The downward path for both fixed and variable rates is now certain.”

The lowest nationally available deep-discount uninsured 5-year fixed rate was down roughly 25 basis points (0.25%), according to data from MortgageLogic.news. Other terms have seen reductions ranging anywhere from 5-20 bps.

Among the Big 5 banks, CIBC this week trimmed nearly all of its special-offer rates an average of 20 bps.

What’s driving bond yields lower?

As we’ve reported previously, Canadian bond yields, and in turn mortgage rates, take much of their lead from what happens south of the border. And this latest move is no different.

“You can see we’re being pulled along as usual by news south of the border,” Bruno Valko, VP of National Sales for RMG, told CMT, pointing to a chart comparing Canada’s 5-year bond yield and the U.S. 10-year Treasury, which has fallen below 4.00% for the first time since the start of the year.

Of course the big news out of the U.S. this week was the Federal Reserve rate hold on Wednesday, where comments by chair Jerome Powell boosted market confidence of two quarter-point rate cuts to come before the end of the year.

“Bond traders south of the border are 90% sure of two rate cuts in the U.S. by the end of 2024 and there is even talk of three cuts, therefore U.S. Treasury yields fell and Canadian yields followed suit,” explained Butler.

That news carried more sway than this weeks’ latest Canadian GDP figures, which showed better-than-expected albeit slowing growth in May.

But still, signs are growing that both the U.S. and Canadian economies are slowing, struggling under their weight of high interest rates.

And as Valko reminds us, bad news can be good news for borrowers.

Implications for mortgage selection

The steady easing of fixed mortgage rates is a welcome relief for the countless Canadian borrowers—some 2.2 million, representing nearly half of all Canadian mortgages—who will see their mortgages come up for renewal over the next two years.

At the same time, existing variable-rate mortgage holders and those considering a variable rate are also seeing relief.

Variable mortgage rates have fallen by 50 basis points (0.50%) since June thanks to the Bank of Canada‘s two consecutive quarter-point rate reductions. Rates are expected to fall further by year-end and beyond. (In case you missed our previous piece: Will the Bank of Canada deliver another 175 bps in rate cuts? TD and CIBC say yes)

Don’t forget the prepayment penalties

One important consideration for those mulling their mortgage options is the cost of getting out of a high-rate product if rates fall significantly in the years ahead.

An Interest Rate Differential (IRD) penalty, often substantial, can significantly impact the cost of breaking a mortgage early. These penalties can pose a considerable financial burden for certain borrowers looking to switch mortgages before the term ends.

“It’s important for brokers and their clients to understand that if they believe rates are going to drop in the next 12 months, the more flexible the mortgage the better,” Valko tells us. “Regardless of term, if a fixed rate is taken, the IRD penalty and the transparency of its calculation is important.”

Valko adds that this is especially true for anyone who may end up switching or refinancing a mortgage in a year or two, as IRD penalties would generally apply for any term beyond that timeframe, including 3-, 4- and 5-year fixed mortgages.

Valko notes that RMG’s special-offer 5-year fixed product is currently popular among borrowers, while Butler says he’s seeing increased interest in 3-year fixed terms.

Recent Bank of Canada data confirms the trend towards shorter-term fixed mortgages, with over 50% of new mortgage borrowers opting for 3- or 4-year fixed terms in April.

While shorter-term fixed mortgages may have a near-term advantage over variable rates, Butler suggests that those willing to “gamble” should consider a variable rate, but only if they can handle the added rate and payment uncertainty.

Another benefit of a variable rate is that the penalty to switch to a fixed-rate mortgage in the future is limited to three months’ interest.

“The client has to determine which term/rate is best for them,” says Valko. “However, as indicated, even if/when taking a fixed mortgage term, the potential IRD calculations of the lender and flexibility of the mortgage in the future should be considered.”

This article was written for Canadian Mortgage Trends by:

Steve Huebl

Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.

The following is re-posted from the Bank of Canada website

The Bank of Canada today reduced its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is continuing its policy of balance sheet normalization.

The global economy is expected to continue expanding at an annual rate of about 3% through 2026. While inflation is still above central bank targets in most advanced economies, it is forecast to ease gradually. In the United States, the anticipated economic slowdown is materializing, with consumption growth moderating. US inflation looks to have resumed its downward path. In the euro area, growth is picking up following a weak 2023. China’s economy is growing modestly, with weak domestic demand partially offset by strong exports. Global financial conditions have eased, with lower bond yields, buoyant equity prices, and robust corporate debt issuance. The Canadian dollar has been relatively stable and oil prices are around the levels assumed in April’s Monetary Policy Report (MPR).

In Canada, economic growth likely picked up to about 1½% through the first half of this year. However, with robust population growth of about 3%, the economy’s potential output is still growing faster than GDP, which means excess supply has increased. Household spending, including both consumer purchases and housing, has been weak. There are signs of slack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work. Wage growth is showing some signs of moderating, but remains elevated.

GDP growth is forecast to increase in the second half of 2024 and through 2025. This reflects stronger exports and a recovery in household spending and business investment as borrowing costs ease. Residential investment is expected to grow robustly. With new government limits on admissions of non-permanent residents, population growth should slow in 2025.

Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.

CPI inflation moderated to 2.7% in June after increasing in May. Broad inflationary pressures are easing. The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm. Shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation. Inflation is also elevated in services that are closely affected by wages, such as restaurants and personal care.

The Bank’s preferred measures of core inflation are expected to slow to about 2½% in the second half of 2024 and ease gradually through 2025. The Bank expects CPI inflation to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices. As those effects wear off, CPI inflation may edge up again before settling around the 2% target next year.

With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is September 4, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on October 23, 2024.

 

Canada’s banking regulator is pushing back implementation of a rule change that could have significant implications for Canadian lenders, following consultation with domestic intuitions and global regulators.

Late last week, the Office of the Superintendent of Financial Institutions (OSFI) announced a one-year delay in implementing a higher global standard for lending risk as it waits for other countries to move forward with the change.

Some fear that the increase to the capital floor level for banks, in accordance with standards set out by the international Basel Committee on Banking Supervision, could result in lower lending volumes in Canada, along with higher fees and fewer options for consumers.

The capital floor level sets a minimum threshold for the amount of capital banks must hold relative to their risk-weighted assets, ensuring financial stability and reducing the risk of insolvency.

The delay comes after concerns were raised that Canada was moving forward with the change too quickly, putting its banks at a disadvantage while those same standards face resistance and delay south of the border.

Mortgage Professionals Canada (MPC) expressed concern that the change would have significant implications on the mortgage industry by limiting how domestic banks calculate loan risk.

“We commend OSFI’s prudent decision to delay the implementation of new capital floor levels for another year, preserving lenders’ flexibility in risk assessment,” said MPC’s President and CEO Lauren van den Berg. “MPC has strongly advocated for OSFI to proceed cautiously with significant changes affecting lenders and implement regulations that prioritize flexibility for the consumer rather than limit it with standardized models.”

Van den Berg says that while the standardization model could simplify things for regulators, it would impose limits on both lenders and consumers.

She explains that the global standard could make it harder for lenders to consider unique circumstances or alternative risk factors when making loan decisions. That, in turn, could make it harder for borrowers to qualify for loan products, increase borrowing costs, and limit their product options.

OSFI remains committed to reform

Though the changes have been pushed back by a year, the Group of Central Bank Governors and Heads of Supervision (GHOS) — which oversees the Basel Committee on Banking Supervision and which the Bank of Canada is a member — unanimously reaffirmed its commitment to implementing the reforms as soon as possible.

“The Basel III 2017 reforms will strengthen banks’ ability to withstand financial shocks and support economic growth while enabling them to compete and take reasonable risks,” said Peter Routledge, the Superintendent of Financial Institutions, in a press release. “Key to these reforms’ success is full, timely, and consistent adoption and implementation across BCBS jurisdictions so that competitive balance prevails throughout the international banking system.”

Routledge added that OSFI will implement the reforms with a focus on competitive balance in banking and the soundness of Canada’s capital regime.

The Basel III reforms include a set of measures developed in the wake of the 2008 financial crisis to protect the global economy from future crises, and were accepted by the international body’s members, including Canada, in 2017.

They are intended to ensure financial institutions adhere to a universal standard for balancing risk with adequate levels of capital and liquidity.

The capital floor imposes a universal approach to capital requirements, rather than allowing individual countries and institutions to set their own standards. With the delay, the 2025 capital floor will remain at the current 67.5% threshold, postponing the increase to 70%, originally scheduled for this year, until the 2026 fiscal year.

This article was written for Canadian Mortgage Trends by:

Early Signs Of Renewed Life In June Housing Markets

The Canadian Real Estate Association (CREA) announced today that national home sales rose 3.7% between May and June following the Bank of Canada’s rate cut. While activity was still muted, it wasn’t nearly as weak as the media recently portrayed.

“It wasn’t a ‘blow the doors off’ month by any means, but Canada’s housing numbers did perk up a bit on a month-over-month basis in June following the first Bank of Canada rate cut,” said Shaun Cathcart, CREA’s Senior Economist. “Year-over-year comparisons don’t look great mainly because of how many buyers were still jumping into the market last spring, but that’s a story about last year. What’s happening right now is that sales were up from May to June, market conditions tightened for the first time this year, and prices nationally ticked higher for the first time in 11 months”.

New Listings

The number of newly listed properties rose 1.5% last month, led by the Greater Toronto Area and British Columbia’s Lower Mainland. As of the end of June 2024, there were about 180,000 properties listed for sale on all Canadian MLS® Systems, up 26% from a year earlier but still below historical averages of around 200,000 for this time of the year.

As the national increase in new listings was smaller than the sales gain in June, the national sales-to-new listings ratio tightened to 53.9% compared to 52.8% in May. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

“The second half of 2024 is widely expected to see the beginnings of a slow and gradual return of buyers into the housing market,” said James Mabey, Chair of CREA. “Those buyers will face a considerably different shopping experience depending on where they are in Canada, from multiple offers in places like Calgary to the most inventory to choose from in over a decade in places like Toronto.

At the end of June 2024, there were 4.2 months of inventory nationwide, down from 4.3 months at the end of May. This was the first time that the number of months of inventory had fallen month over month in 2024. The long-term average is about five months of inventory.

Home Prices

The National Composite MLS® Home Price Index (HPI) increased by 0.1% from May to June. While a slight increase, it was noteworthy because it was the first month-over-month gain in 11 months. Regionally, prices are still generally sliding sideways across much of the country. The exceptions remain Calgary, Edmonton, and Saskatoon, and to a lesser extent Montreal and Quebec City, where prices have steadily increased since the beginning of last year.

That said, there have been more recent upward price movements in other markets, including across Ontario cottage country, Mississauga, Hamilton-Burlington, Kitchener-Waterloo, Cambridge, London-St. Thomas, and Halifax- Dartmouth.

The non-seasonally adjusted National Composite MLS® HPI stood 3.4% below June 2023. This mostly reflects how prices took off last April, May, June, and July – something that has not been repeated in 2024.

Bottom Line

Housing activity will gradually accelerate over the next year as interest rates continue to fall. Yesterday, bond yields fell considerably due to the marked improvement in the June US inflation data. Markets are now pricing in a 90% chance of a Federal Reserve rate cut in September, allaying fears that the Canadian dollar will decline precipitously if the Bank of Canada continues to go it alone in easing monetary conditions.

Next week’s CPI data will determine whether the Bank of Canada cuts rates at their July confab or waits until the September meeting. A further reduction in core inflation will open the doors to another rate cut on July 24, particularly given the continued rise in the Canadian unemployment rate. Rising monthly mortgage payments in the wake of record renewals will continue to slow discretionary consumer spending, providing further impetus for Bank of Canada rate cuts.

Please Note: The source of this article is from SherryCooper.com/category/articles/

Average rents across Canada are now up 32% from their pandemic lows.

The average asking rent in May was $2,202, up $200 from the previous month and 9.3% from a year ago, according to the latest monthly report from Rentals.ca.

Rent prices have been climbing steadily in recent years, rising $540 or 32% since hitting their low of $1,662 in April 2021.

“Canada’s rental market is entering the peak summer season with continued strength,” said Shaun Hildebrand, President of Urbanation, which co-released the report.

“Markets such as Vancouver and Toronto that had experienced some softening in rents in previous months are stabilizing near record highs, while many of the country’s mid- and small-sized cities are still posting double-digit rent increases,” he added.

The Rentals.ca report noted that rents have averaged an annual growth rate of 9.1% over the past three years. However, when incorporating the declines experienced in 2020 and 2021, the five-year average growth rate is more moderate at 4.7%.

Saskatchewan led the provinces in rent price growth

Provincially, rents increased the most in Saskatchewan, up 21.4% to $1,334. Alberta and Nova Scotia weren’t far behind with average year-over-year increases of 17.5% and 17.1%, respectively.

Quebec was the only province to record a month-over-month decline in apartment rents during May, dipping 0.6% from April to an average of $1,999.

At the municipal level, Regina led rent price growth, with an annual rise of 22% to $1,381.

Among mid-sized markets, Quebec City and Waterloo topped the list, with average annual rent increases of 20% and 19%, respectively.

This article was written for Canadian Mortgage Trends by: