BMO Fraud civil claim no reason for higher rates tomorrow

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Are mortgage rates going up because of uncovered massive fraud?

Last week, CBC's breaking news story of a civil lawsuit started by the BMO-Bank of Montreal, at the Calgary Court of Queen's Bench, action 0901-07347, has caused quite a stir of media activity and consumer speculation.

The action is to reclaim about $30 million in mortgage losses. Alleged master-minds also pulled their schemes off with another sixteen financial institutions, according the the BMO statement of claim.

With a sitting Member of Parliament on the list of defendants, this has generated a lot of air time and ink, so far.

As a consumer, we all pay for fraud.  Fraud is found not just in mortgages but insurance, investments, day to day banking, credit cards and loans.  

Will this news result in an increase of rates for mortgages?  This is not a cause for increased rates.  However, keep in mind that the role of a lender is to extract as much money out of your pocket to theirs as you as a consumer are willing to give up.

 Here is why:

Banks judge investments based on the return compared to other investments.   The comparision is considered based on the risk of the other investment and the administration to buy the investment and administration to get the money due into their hands.

A comparision investment would be investing in a Government of Canada Bond.   These bonds have little administration to buy, are easy to administrate, and easy to collect the earnings and initial money invested.  

Mortgages require_

  •  underwriting,
  • lots of paper work done by a number of people and departments,
  • frequent receipt of income and capital return- interest and principle sometimes coming in weekly
  • re-investment of small units of cash as they come in
  • issuing statements to borrowers
  • answering questions about allowable changes to the financial instrument
  • accepting early returns of the investment, with and without penalties
  • having to call to collect on delinquent accounts
  • spending money on lawyers, home inspectors, appraisers when the income is not paid
  • selling collateral, and sometimes at a loss
  • dealing with insurance companies during periods of late payments
  • dealing with default insurance company when late payments occur
  • dealing with defualt insurance company when the property is sold and a loss occurs.
  • and, more

Because there is more involved for a lender to get the earnings they expected and the investment moneys issued, there is a premium added to the rate they would lend their money to the government for the government bonds.

That is called a "spread".

Where you are concerned, mortgage rates, 2.45% is the average spread from April 2000 to April 2007. This is the spread comparing the five year benchmark Government of Canada Bonds for five year maturity to the conventional mortgage posted five year mortgage rate. 

In August 2007, the world financial markets became rattled over the risk of Sub-Prime mortgage lending.  That is, lending to folks who would not qualify for most residential programs because of their income, credit, equity or down payment, and at times the style of housing they wanted.   They were at a bigger risk of failure to pay, and chance of a loss of a big part of the original investment made by the lender.    The spread for Canadian mortgage rates increased even though Canadian lenders were much more conservative in their lending practises than the US, UK, Australian and many Europeon lenders.

Remember the World Bank talking about Canada as having the soundest of financial institution practises?

Since 2007, the average spread for Canadian mortgages has increased from 2.45% to 3.49% over bench mark Government fo Canada Bonds.  That's an over 40% increase to their cushion for risk and administration.

At one time, in December 2008, during the stock market crisis, the spread was over 5%.    Since then, as of April 2010 it is down to 3.16%.

BOTTOM LINE:   The Banks have boosed their spread between bonds and posted rates since 2007.   This has been lots of time to bring in the additional income on mortgages made since this big fraud caper done in 2006, to recover the costs of this alleged fraud loss.

IF they start a Public Relations compaign saying they now have to increase rates because they need to recapture these costs of doing business......what have they been doing with the 40% premium they have charged since late 2007?