Monday, March 4, 2013

BMO does it again...

Goes sub 3% on the five .  Is this a prudent move for either the bank or the buyers. The buyers get better rates, but will they just buy more house than they can afford? Will it push them into the market just before a possible significant correction?

Will they gain on monthly savings but lose on the price?

What about the bank? We are looking at significantly lower activity in the housing across Canada, so are they just trying to price out competitors?

Well this is their first quarter report  .

TORONTO—Bank of Montreal said its first-quarter profit dipped 5% as revenue edged lower and provisions for loan losses rose....The bank said its total loan-loss provisions climbed to C$178 million from C$141 million.

What will this do, well it will bring in more business and allow them to book more profit, but how will it help reduce loan losses? It wont.

If you entice people to buy more house or to over-extend they are less likely to pay you back. Maybe BMO has such tight internal controls that they will tell their lending officers not to push the borrowers into more debt than they can afford. Go for to the same house, just  pay a lower rate for it. That would be the sensible thing to do. However if you think Banks are prudent and wise then maybe you should think again after reading this link. They look prudent when things are good.

What about Flaherty? Well he doesn't seem to pleased about this move : “My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Mr. Flaherty said in a statement to the Globe on Sunday, after Bank of Montreal reduced its price on five-year fixed-rate mortgages to 2.99 per cent from 3.09 per cent.

And nor should he, these too-big-too-fail behemoths know that with the CMHC and with the Finance Minister's ear, they will bailed out of any crisis which they helped make.

Lets leave the last word to a bank analyst

Analysts questioned whether lower rates are really a wise move by banks right now.
“How credit worthy is the marginal mortgage borrower in a market with a debt-to-income ratio at 163 per cent and an all-time high home ownership rate?” asked National Bank analyst Peter Routledge.