Budget? What budget? Let’s talk over stuff we actually care about. Like screwees and screwers in the housing business. And we have some saucy ones for you today. So, break out the Timmies and the latex. We’re going in.
First the screwer. It’s with awe, reverance and admiration that we salute the guy with 20-pound gonads who owned and sold 4541 Belmont Avenue in nutty Vancouver. This glorified one-bedroom garden shed has everything. Walls. Floors. Doors. Roof. All the features that pack those Airbus flights from Beijing, as BC-horny Chinese lust after an unmistakeable West Coast je-ne-sais-quoi.
When this beauty was listed last month near Locarno Beach this unworthy blog marvelled that someone would be courageous enough to ask $2,199,000.
But guts, heroics and marketing savvy did not end there. When an offer didn’t materialize, our epic screwer raised the asking to $2.4 million. Suddenly it was high enough to attract the interest of those little Mainland buggers, and this week it sold – for $2,305,000.
Remember this. It’s a Nortel moment.
Now, to the screwee segment of our show.
As you might remember, last year’s federal budget was feted in this space for actually doing something about the oft-staggering cost of breaking a mortgage. F and his truncated elves at Finance promised to ‘bring forward regulations’ governing how much our hard-ass banks can charge people who need (or want) to get out of a home loan. Months later the feds promised to have draft regulations for public discussion by the end of 2010. * Crickets. *
But we did get a working title: Standardization of Prepayment Penalties.
Why is this an issue? Simple. The rules buried in most mortgage contracts stipulate that if you end the relationship early, the bank gets to ream you in one of two ways – by extracting a penalty equal to three monthly payments, or by charging you an amount equal to the difference between your mortgage rate and current rates on the amount owing over the period left in your loan.
This is how a major bank which shall remain nameless (the Royal) defends the charge: “In order to lend you the money at this ‘fixed rate’ for a set period of time, RBC Royal Bank borrows the funds needed in the market and enters into fixed term contracts. When you break your mortgage term (or contract), RBC Royal Bank is in turn charged a ‘breakage cost’ as its contract will not be fulfilled. The mortgage pre-payment charges are collected from you to partially offset the costs that the bank is charged because you are no longer paying that agreed upon amount back to us on a monthly basis.”
Because the l-a-s-t thing this country needs is a bank (which gives you 1% on your savings account and loans the money out as a mortgage at 4%) suffering a ‘breakage cost’, Ottawa and the provinces have pretty much turned a blind eye to consumer pain. The result has been a slew of staggering IRD penalties as fixed-rate closed mortgages declined along with bond yields. This was behind a CBC investigation this week which unearthed a screwee who bought a condo he couldn’t afford with a $400,000 mortgage at 5.19% he couldn’t pay. When he sold his unit (at a loss), Scotiabank slapped him with a $25,000 charge – because current rates had plunged more than 2%.
And so this is what you need to remember about these penalties: when interest rates fall, you will be nailed with an IRD; while when rates rise, the banks will levy the three-month penalty. In virtually no instance will you get away with no blood. Even if you call the TV guys.
Worse, you might actually end up paying a bigger penalty the shorter the time you have left on your mortgage. That’s because short-term interest rates are usually lower than longer ones, so the IRD could be beefier between your existing five-year mortgage rate and the current two-year cost than that being charged for a 3-year term. (Most people mistakenly believe the rate differential charged will be between their old 5-year rate and the current one of the same length.)
Right now, with a federal erection looming over us (ask me to tell you about Diefenbaker one day…) the chances of getting better rules in 2011 for this prepayment penalty thingy are nil. In fact, it may be a totally dead issue, unless people choose to bring it up during a campaign. Interestingly enough, many US states have passed consumer protection laws in which lenders are forbidden to demand any penalty whatsoever for breaking the first mortgage on a primary residence.
That sounds like a fine solution but, of course, the banks would argue such largess would simply increase their costs, cripple their businesses and lead to tighter lending rules. You know, like not giving mortgages to people without money. Oh. The. Horror.
So, if the feds would rather work on new fighter jets than consumer protection, do people breaking mortgages have no recourse?
Not entirely. Get a nasty lawyer. Like this one. Litigation does wonders to curb banker appetite for human flesh.
In Ontario the government will give first-time homebuyers a fat rebate on the land transfer tax the rest of us have to pay. Nationally, the feds will throw virgins a $750 tax credit to offset closing costs. In BC new buyers can get their entire land transfer bill wiped out by the province. Across the country, two property virgins can raid their RRSPs for $50,000 for a down payment, and get 15 years to repay. And everywhere, banks will lend boodles to young buyers with more hormones than money, thanks to CMHC shifting the risk from the lender to the taxpayer.
In short, virginity pays. Especially when you lose it.
But, apparently, so does poverty. At least n Vancouver. And that observation led me to write a piece recently on how one of the country’s biggest credit unions, Vancity, has a homebuying program aimed at people too poor to even pay market rent for an apartment.
Called ‘Springboard’ it gives folks with low incomes, no assets and no savings 100% financing to grab a piece of real estate. The loan comes in two parts – a 10-year, interest-free term loan, and a 10-year mortgage with interest-only payments. As such, not only does it skirt federal intentions to make mortgage borrowing tighter (lest we turn into Subprime North), but it might risk preying on those who are in social housing for a reason. After all, owning a house is not a right. Especially in delusional BC.
“A number of us here at Vancity read your blog post titled Different on March 17th with interest,” says spokesgal Amanda Brittain. “We feel that you may have been misinformed.”
Said I: be my guest, and correct me.
Said she: “One of the keys we want to get across is that the Springboard Home Ownership Program is not for everyone. Vancity is quite well known for its community building activities and the last thing we want to do is to get people into a borrowing situation that is beyond their ability to service that debt as that does not benefit the individual or the community.
“Also, I noticed that you used an interest rate of 6.15% in your blog to demonstrate how much someone might pay in the Springboard program. I’m assuming that you got that rate off of the info page on our website. I just wanted to point out that the rate of 6.15% is just an example used for demonstration purposes on the website. The actual rate, while higher than a conventional mortgage (this fact is clear on the website), is based on current rates.”
I further offered Vancity space on this site for a complete rebuttal of my post, which you can read in all its allegedly misinformed and cavalierly cowboy original huffy glory – here.
Here’s the official response. I should mention I am running this not because I am being sued but because Amanda is hot.
Response to the Greater Fool Blog
The Springboard Home Ownership Program is designed for very specific individuals who live in social housing. These folks:
* Pay their rent on time
* Have verifiable income
* Must complete a one-day homeownership readiness seminar.
The goal of the program is to move qualified people – who are often called the working poor – out of social housing. This has the joint benefit of letting the working poor invest in their own homes and freeing up subsidized housing units for people who need them (the current waiting list for social housing in BC is eight years).
The 100% financing offered in the Springboard program is based on what the individual family pays for rent. All housing payments are kept within what they currently pay. There are many families who can pay their rent and expenses within their current pay cheques but are unable to save for a down payment on a home. The Springboard program helps fill this gap.
Since the program began in 2006, there have been 20 mortgages funded through this program and only one foreclosure (due to a marriage breakdown). One of the key reasons for this success rate is because the payments are kept to within the amounts the families currently pay for rent.
In addition to the 20 funded mortgages, 220 people have received home readiness financial literacy training which leads to a stronger, more educated community.
Meanwhile it might be a cool idea for Vancity to include the following in its one-day homeownership course, because anyone without any money contemplating a house purchase at this time needs a refresher on how housing ate America.
Resale house sales in the US have just crashed again – down a stunning 9.6%
Four in ten of those sales were ‘distressed’ properties
House prices have just dropped the most in an entire year, off another 5%
Foreclosures are expected to climb 20% this year
One in four US families with a mortgage is underwater
So why are Canadian governments (and banks) desperate to entice so many of us – especially the dwindling virgins – into an asset that can clearly be so dangerous?
Because it’s easy. By making credit cheap and greasing real estate with incentives, the hope is young couples will deep throat enough debt to stimulate the economy, so bankrupt governments need not. In a country where housing accounts for 20% of the entire gross domestic product, what keeps them awake at night is the thought Canadians might actually learn something from the American experience.
That, and guys like me.
BTW, ask yourself: if real estate is sound, why are governments funding vids like this? Nah, didn’t think so.
