Wednesday, March 21, 2012

BMO: Skyrocketing prices bound to come down

So many mixed signals from the banks and the Canadian government. Oh, too much debt BMO CEO says, oh and by the way, we offer a mortgage at 2.99%. Somewhere, deep inside this bank, the incentive structure is badly messed up. Skyrocketing house prices bound to come down, BMO head says
Bank of Montreal (BMO-T58.90-0.17-0.29%) chief executive officer Bill Downe told the bank’s annual meeting in Halifax that soaring household debt levels are highlighting the need for a soft landing in the residential real-estate market. As a way of tightening lending, Mr. Downe said he supports a move toward shorter amortizations on mortgages in Canada to reduce consumer exposure to debt.
Shorter amortizations don't solve the high leverage problem of 0% down. They need to lower the leverage by either 1) enforcing 5% down, for real, no gifts, no cash back. 2) Requiring 10-15% down so that a gift or cash back is harder to arrange. It's the leverage, people. Reducing the leverage from 360:1 to 300:1? Big deal.

It's all about the marginal buyers. The market is being made right now by those who can't save for a down payment. Start actually requiring that and the market will fall.
Mr. Downe said BMO’s decision to focus on offering 25-year amortizations, as opposed to 30-year terms, is to direct consumers into loans that have lower costs over the long term.
Yeah, but interest rates are 2.99%. Over time they have averaged between 7 and 8%. Long term costs are far less an issue than, one: low barriers to entry into the market and two: new buyers having dangerously low equity.
But RBC argues that BMO’s mortgage campaign involves terms that are less flexible and could prove costlier for borrowers if they run into financial trouble or need to refinance.
You know what's even better than being trapped in an underwater mortgage and needing to sell? Having to hand the bank a massive check on top of it for fees. If they will even take one at all.

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