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Mixed messages over US inflation

Your mortgage memo news for the week of May 12, 2023.

Memo 1: US inflation sends mixed messages

With central banks indicating their hiking cycles are coming to a close, borrowers and investors have been keenly watching economic data reports for hints as to what monetary policy makers will do next – and perhaps no metric is as closely scrutinized as inflation. As both the Bank of Canada and US Federal Reserve are mandated with returning their respective elevated CPIs to their 2% targets over the next year, any downward action is reassurance that rate hikes are indeed in the rear view.

And the latest batch of data from the US does seem to support the chance of the Fed taking a rate hold stance moving forward, with the March reading coming in at 4.9%, from 5% in February. On a monthly basis, the CPI rose 0.4%, with Core inflation –the measure with food and energy stripped out – up by the same amount.

However, analysts warn that the numbers are too mixed to be a guarantee; while headline inflation is trending in the right direction, the Core metric isn’t easing as quickly as the Fed would like.

“Headline inflation continues to cool and should really drop off in the next few months. Core inflation remains sticky, however, suggesting it has become entrenched and will be difficult to root out,” writes Desjardins Principal Economist Francis Généreux. “The Federal Reserve has opened the door to a rate pause. But given still-high inflation, labour market resiliency and wage strength, that could be a risky move.”

His thoughts are echoed by CIBC Economist Karyne Charbonneau’s take, who points out that key basket-of-good items – such as higher gas prices – have offset cooling in other areas, such as food prices and shelter prices.

“Investors dug into the US inflation data and found reason to cheer, but taken as a whole, the latest figures still showed a long road to get to where the Fed wants to be,” she writes. “The headlines were hardly rosy… All told, these aren't the inflation readings of a central bank that would be thinking of cutting rates any time soon.”

Memo 2: Nearly half of mortgage borrowers are struggling to make payments

The challenges of rapidly rising mortgage costs over the last year have been deeply felt by both new borrowers and existing homeowners, according to new survey results from the Canada Mortgage and Housing Corporation (CMHC).

The data, which was compiled after polling 4,000 recent mortgage consumers, found many of them are struggling to manage their debt loads, and that overall satisfaction with the mortgage process has dropped to a five-year low. CMHC reports that a whopping 74% of respondents say they’re impacted, or anticipate being impacted, by rising mortgage rates, with 49% currently having a hard time making debt payments. As well, 61% of respondents – a mix of both repeat and first-time homebuyers – say they’re feeling uncertain about the homebuying process, and are concerned they’ll pay too much for a property.

Not surprisingly, overall satisfaction was higher among borrowers who obtained their mortgage before the Bank of Canada kicked off its hiking cycle, which saw its benchmark rate soar 4.25%, from 0.25% to 4.5% between March 2022 and January 2023. Combined with already-steep home prices, that’s contributed to some of the toughest affordability conditions seen in decades; 37% of CMHC respondents say they had to rely on a monetary gift to afford their home. 

Overall, the survey finds, the current borrowing environment is eroding Canadians’ faith in housing as a good long-term investment, with 81% reporting they agree – down from 91% last year.

“The current housing market is very challenging and stressful for many buyers and aspiring buyers,” states Sam Carnovale, CMHC’s Director of Client Relationship Management. “One of the goals of our Mortgage Consumer Survey is to help homebuyers and the mortgage professionals who serve them gain a deeper understanding of this environment and increase their chances for a successful, positive experience.”

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Memo 3:  Longer amortizations aren’t here to stay: CMHC

However, the CMHC is holding firm on its stance on current mortgage rules, advising against what has become a common tactic to reduce payment strain: extending amortizations.

Many lenders have taken this approach with existing fixed-payment variable-rate mortgage clients, many of whom have hit their trigger rates – the point at which their payment only covers interest – as the BoC rate soared. While spreading payments out over a longer time period increases borrower risk and results in ultimately more interest paid, it also provides immediate relief by lowering payments in the short term.

While new insured borrowers are capped at amortizations of 25 years, and uninsured at 30, banks have been willing to stretch this to as long as 35 or even 40 years in order to keep their mortgages viable.

And it’s becoming widespread; according to recent regulatory financial disclosures from Canada’s biggest lenders, the number of clients with longer-than-standard amortizations has jumped, making up between 25 - 32% of their books.

However, in an interview with The Globe and Mail, CMHC CEO Romy Bowers quashed the possibility that the measure should become the norm moving forward.

“It’s better to focus on increasing the supply versus making it easier for people to borrow more money. We feel, from a policy perspective, it’s probably not the best move in a supply constrained environment,” she said, adding that longer amortizations for insured mortgages would further stoke housing demand and, ultimately, higher home prices.

Canada’s federal banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is also not a fan of the practice. In a previous statement given to, Tolga Yalkin, Assistant Superintendent, Policy, Innovation and Stakeholder Affairs at OSFI, said:

“While increasing amortization is one way to cope with higher interest rate hikes in the short term, it’s not without risk.  Extended amortizations will lead to a greater persistence of outstanding balances, and greater risk of loss to lenders." 

"Our conversations with financial institutions have emphasized the need to be proactive in managing all types of mortgage accounts, and to act before levels of borrower stress become unmanageable.  Ultimately, these are decisions that will be made at the lender level and we appreciate that lenders are working with borrowers to manage cost increases while also ensuring the actions taken remain within the institutions’ risk appetite, including holding appropriate reserve levels."

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