The Liberals served up their Fall Economic Statement (FES) yesterday and it's got multiple ramifications for mortgage borrowers and lenders. We've taken the liberty to grade our trusty rule makers on each of their mortgage-related moves.

The result? A smattering of A's - impressive. But then, as unexpected as finding cheese on a pizza, there's one glaring F.
​​

Out of the myriad of economic data, #CPI# is what matters most. And we made solid progress today. The question is, when will mortgage rates catch on?

What CPI did

Headline inflation, which usually hogs the spotlight, fell to 3.1% in October from 3.8% the prior month.

But the bigger star was the BoC's closely watched 3-month average core inflation measure. It dropped to 2.95%, the best reading since early 2021.

The cherry on top was the month-over-month change. BMO Economics notes that "in seasonally adjusted terms, prices fell 0.1%" in October. That's the first such decline since we all started hoarding toilet paper in 2020.

Mortgage interest cost and rent remain the main inflation drivers. The latter is more of a troublemaker than the former, given that rates should be on the downswing (infamous parting words).

"We expect headline inflation to fall to 2.0% by the third quarter of next year," said Stephen Brown from Capital Economics today. "With gasoline prices falling further in recent weeks, headline inflation is on track to drop below 3% this month."

It wasn't all a picnic in the park, however. Services inflation picked up, as did seasonally-adjusted inflation, excluding food and energy.

Canada's 5-year yield took the data in stride, falling just 3 bps on the day as of this writing. But it still managed to hit a low unseen since July.

Mortgage implications

Our leaders have been swiping the national credit card like it's Black Friday, and mortgagors are paying the price for their extravagant spending.

Someone finally quantified that price last week when a Scotiabank report concluded:

"We estimate that government consumption and pandemic transfers to households account for about 200 basis points of the 475 basis points increase in the Bank of Canada’s policy rate."

Let's say Scotia's estimate is even half right. That's a whopping $17,000 extra that families are shelling out on a 5-year term (based on average mortgage amounts, according to TransUnion).

As much as some of that spending was justified to save families and jobs, much of it was our federal and provincial leaders acting like teenagers with a new VISA. The spending taps remain wide open, with federal program spending estimated at ~16% of GDP, well above the ~13% long-term average. How much the Liberals rein in spending will partly influence how far rates fall in the next rate-cut cycle.

But what many don't realize is, the riskiest spending is out of our control.

Bob Rennie is unquestionably one of the most successful real estate marketers in Canadian history. In his early days as a realtor, he was famous for selling a property a day. His development promotion expertise later earned him the nickname the condo king.

MLN soaked up Bob's insights on various real estate issues weighing on this country. Among other things, he shared:

• Why home price declines are skewed
• The biggest reason for housing unaffordability
• The financing requirement that helped build Rennie's business
• Rennie's "secret" to real estate marketing
• How the foreign buyers' tax impacted the market
• How the foreign buyers' tax elevated racism
• Why Canadians need two properties to get ahead
• How soaring rates in 1981 crushed him for years
• His government-sponsored financing strategy.

Without further ado, here's our chat...

When Smith Financial bought out Home Capital, it necessitated that Home lose its precious NHA mortgage-backed securities (MBS) and Canada Mortgage Bond (CMB) allocations—i.e., the ability to fund its mortgages through MBS and CMBs.

That was a crushing blow to Home's prime mortgage competitiveness. After all, the spread on CMB/MBS funding is just 25-50 bps more than the Government's risk-free borrowing rate. Lenders must add miscellaneous costs (guarantee fees, insurance premiums, etc.), but CMBs/MBS are still often the cheapest way to fund a mortgage.

Knowing this crucial lifeline would end, Home Capital chose to cut off its low-margin prime mortgage business like a gangrene-infected leg.

The loss of Home Trust as a prime mortgage competitor, in turn, led some to ask why this had to happen.

We turned to CMHC, the Yoda of securitization, for an explanation. It said...

Credit unions are an afterthought for many Canadians. Yet, CUs are critical to the mortgage ecosystem because they compete in ways that banks don't.

In the once stable world of mortgage market share, the Big 6 banks have slipped on a banana peel. Their market share of new mortgage originations sank 590 bps to 53.8% in Q1 2023, according to new CMHC data. That starkly contrasts with their previous 62.0%, from just two years back.

Policymakers have waged a two-pronged attack on fixed-payment variable-rate mortgages.

Last week, the BoC's Senior Deputy Governor Carolyn Rodgers came out swinging, telling Bloomberg:

“I think you’ll see the industry reflect on how much they want to offer that product. It is concerning. You don’t want a big portfolio of negative amortizing mortgages. It’s not good for the banks and it’s not good for the mortgage holders."

In what seemed to be a coordinated attack, OSFI head Peter Routledge piled on last week, labelling static-payment variables "dangerous" in senate committee testimony. His stated reason: in cases where interest exceeds the borrower's payment, and their balance grows, this "increases the risk of default."

Are we getting the whole picture?

Pine trees can be prickly. How appropriate because that's exactly what kind of competitor Pine Canada Financial Corporation ("Pine") is becoming.

You'll notice in the rate table below, Pine has decided to emerge from the forest undergrowth and overtake every national lender in uninsured 1- to 5-year fixed pricing.

That's an interesting development from a tiny online lender whose staying power some questioned. Heck, when we first reviewed the company 15 months ago, we wondered if its $27+ million in VC funding amounted to bonfire kindling.

It turns out prickly little Pine isn't such an easy-to-dismiss competitor. It just accomplished one of the most difficult of tasks in the Canadian mortgage industry:

With cutthroat mortgage competition, plummeting insured volumes and margins so thin they'd starve a supermodel, it's been way more challenging to make money in insured lending.

That and non-stop regulatory tightening have inspired mortgage finance companies to jump headfirst into the alternative lending pool.

Strive is no exception. It's been piloting its new "Aspire" non-prime products since summer. Now, the company has hired a sales director for alternative lending, is adding new funding partners and is opening up the product to more brokers in Alberta, B.C. and Ontario.

As traditional prime lenders turn down more borrowers due to credit and qualification constraints, "the Alt-A credit profiles we're seeing are strong," says Steve Kissuk, Chief Credit Officer and Co-Founder at Strive.

It's hard to take a firm position on which mortgage term is optimal for most people at any given time. But on Friday, we did just that by awarding the "MVT" (most valuable term) to floating-rate mortgages.

Now, we take such declarations seriously and didn't just pull this call out of fortune cookie. Multiple factors went into MLN's analysis, including:

Just when you thought jobs data Fridays couldn't get more exciting, the economic deities serve up two reports tailor-made for low-rate aficionados.

Today's softer-than-expected employment data is keeping North American bond yields in a nosedive. And given the market's positive reaction to U.S. Treasury supply projections, it looks increasingly likely that the ceiling for yields is in.

With economic deterioration mounting and bond bulls stampeding away from 5% yields, Bruce Buffer would probably tell you, "It's time!" to bet on variables.