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Tuesday, December 30, 2008

Mortgage Outlook

Slightly lower mortgage rates and house prices.

The credit crunch is far from over. But with credit spreads improving notably since early September, it seems that the market's focus is slowly shifting towards the US economy, which is deep in recession. Overall, it lost 1.2 million jobs this year, with about half of that taking place in the last three months.
What will it take to get out of this recessionary territory? The Federal Reserve has more ammunition than simply cutting rates—and in this sense, it's more powerful than in previous recessions. Specifically, the Troubled Assets Relief Program (otherwise known as the bailout) gave the Fed more flexibility to provide liquidity to banks without driving the effective Fed funds rate to 0%.

In Canada, the labour market continues to surprise on the upside. But it won't last. Look for notable slowing in the coming six months, with the unemployment rate approaching 7% by mid-2009.

House prices are falling, but not as much as the headlines say.
House prices in Canada are falling. But the headline numbers can be very misleading. In Vancouver, for instance, the close to 45% year-over-year fall in the number of homes sold and the fact that Vancouver prices are much higher than the national average combined to make it look as though national home prices were falling sharply. In fact, the decline was driven by fewer expensive homes being sold in Vancouver, as a fraction of the whole. As a result, the national headline number for October is down by close to 6% from a year ago. But if properly weighted, house prices actually fell by only 1%.
As far as interest rates are concerned, we're expecting the prime rate to drop a little farther. It's possible that we'll see long term rates dropping a bit too. But most of the decline in long term rates is already priced into the 5 year rate, so we won't see fixed rates declining by as much as the variable interest rate.

Benjamin Tal
Senior Economist
CIBC World Markets

What this means to you.

With variable and fixed mortgage rates still near historic lows, both options can offer real value. Deciding which one is most cost-effective for you depends entirely on your needs and plans. To help you make that decision, I’m happy to sit down with you and perform a no-charge analysis of your goals, requirements and financial abilities. Please feel free to call me at any time.

Giuseppe Strazzeri
Mortgage Specialist
Phone: 905-778-8100 ext 5161

Wednesday, December 24, 2008

Retainers versus Lenders Due Diligence Deposits and Commitment Fees

We are providing the client with a specific lender who can offer financing to them based on the lenders review of the representations made by the borrower with respect to loan size, geography, credit profile type and mix of collateral etc. The retainer paid to us by the borrower is not a deposit to be used for due diligence but rather an engagement fee to arrange for the specific financing.

We require this retainer to protect ourselves against situations where our borrower has inadvertently misrepresented the value of collateral or the cash flows to cover debt service. It would also protect us in a case where the lender finds they cannot perfect a security interest in the collateral being offered or the borrower cannot provide the necessary documentation that the lender requires.

Because we do not require any exclusivity with respect to our fee agreement, the retainer also protects us in the event that the borrower obtains financing elsewhere, secures an equity infusion, or simply decides that they do not require the financing at this time. If the loan does not close for any reason, other that our inability to produce a capable lender, then the retainer covers our time, effort and expense regarding the work done by us.

We represent hundreds of lenders across the country and all generally require the borrower to cover their costs of due diligence prior to loan closing. The only exception to this rule is a local bank ( if the business is bankable ) who typically will not need such a deposit. If lenders were to pay the due diligence costs they would often waste their money traveling to the borrowers company or property and performing appraisals and audits on situations where the results of that due diligence were such that the loan cannot be closed.

If the lender were willing to pay for the examination and investigation necessary to close the loan, borrowers who have problems might not disclose them in hopes that the lender would not discover these issues that may have previously caused the loan to be rejected.

The lender will not require their due diligence deposit until they have issued their formal proposal outlining the specific terms and conditions that will apply based on the representations made to them by the borrower. The purpose of the due diligence is to allow the lender to confirm that the representations made by the borrower are true and correct so that they can close the loan.

Lenders due diligence may include a site inspection at your company focusing on your back office operations relative to the performance of your accounts receivable. Particularly they will want to examine the exact service or product provided, how you bill, to whom you are billing, the net collectable amount paid to you after allowances and deductions, any potential offsets due other parties or issues that could lead to offsets and the historical performance of your AR's collect ability.

Clearly, as the lender is typically expert in such matters you can benefit from such expertise as it relates to the efficient billing of your accounts and the ability to diminish underpayments etc. Real Estate, equipment and inventory appraisals that are more than 6 months old will likely need to be updated or in some cases may need to be redone.

The lender will also be concerned with the character of the borrower (both from a company perspective as well as from the principals perspective) as it relates to previous issues of fraud or bankruptcy etc. They will also need to clearly confirm the viability of the company going forward and any legal issues that might cause them to suffer a loss with respect to the loan to be consummated.

This could include the possible inability of the lender to obtain a first lien against the collateral or the borrower’s inability to cover debt service etc. The lender will be available to explain in detail what could cause them not to close the loan so that there are no surprises once you have agreed to their terms and conditions and before you pay for the due diligence.

Most lenders make the deposit refundable minus specific expenses in the unlikely event that they are unable to conclude the loan. Due diligence deposits vary widely from lender to lender but are generally in the $2,500 to $25,000 range. A loan transaction of $10,000,000 or more might require a due diligence deposit of greater than $25,000.

Once the due diligence is complete some lenders will issue a commitment to fund at which time the borrower will be required to post a commitment fee which will be around 1 point on the loan amount. If the borrower walks away from the transaction prior to closing they will forfeit this fee. Some lenders will go straight to closing after completion of due diligence and will not require a commitment fee. Normally, once the commitment fee is paid the only steps to be taken prior to funding would be the negotiation and execution of closing documents.

Saturday, December 20, 2008

Financial Crisis

Good morning!

A lot of people are wondering if there is anything at all good that will come from the financial crisis.
Call me naïve if you like or even an eternal optimist, but I think so beginning with the following:
A regulatory overhaul leading to pro-active regulation: Much of our legal structure in the west is based on hundreds of years of English common law. That means new regulation is typically moved forward only after something has happened or as a function of something that's not contemplated by existing regulation.
With regard to the financial markets, I believe that's going to change and that we will see new pro-active mechanisms designed to monitor problems before they get out of control. Some of that will include more transparent valuations and mark to market rules, but the lion's share will likely focus on the credit extension problems that have largely created this mess on a variety of levels.

What's more, history suggests these changes will stand in stark contrast to Alan Greenspan's repeated refusals to crack down on sub-prime lending practices and his hesitation to impose regulations on derivatives that have figured so prominently in the current meltdown. Whether this happens on Bernanke's watch or not, I don't know. He may not be the right guy for the job.
A dramatic shift with regard to how firms understand and quantify risk. Beginning with accountability. A critical first step will be an overhaul of the incestuous and highly conflicted ratings agencies that have been in bed with Wall Street for years. There will, of course, be resistance from both Wall Street and the ratings agencies themselves, but the need for more objectively rated instruments could hardly be more clear than right now. Nor could the need to have the value and quality of financial instruments be determined by the ultimate valuation mechanism – open markets.
Greed and avarice will be replaced by thrift and integrity. Just like it's been in the past at other points in our history, saving will become an honorable concept again. And that will become an important part of the recovery process if for no other reason than history shows until you have credit going up instead of down, you can't have growth.
Risk aversion will rule for a long time. People, and indeed entire industries, have learned their lessons the hard way this time around. That suggests that dividends and income paid by companies engaged in real products with real cash flow will once again resume their rightful place among the most important investments people can make.
In closing, there are obviously lots of other changes that will occur, too. Without a doubt many of them will be in areas we haven't yet tackled or aren't yet thinking about.

Which is also good news for as my dad put it yesterday so succinctly, "the financial crisis is like an extremely low tide. Until the water runs out, you can't see how much crap needs to be cleaned out of the harbor."

Best regards,


Monday, November 24, 2008

Monday, November 10, 2008

This comes around this time every year, but is worth watching every time.

Private Investors needed

We currently have three transactions looking for financing ranging from:

A second in the amount of $600,000.00 representing a LTV of 56% in Bradford

A first in the amount of $2.2M Land Development in Norwood, Ontario representing a LTV of 65% of Land value.

A first in the amount of $1.5M Residential home representing a 50% LTV against a value of $3M in Caledon.

We also have a Rock Quarry in Haliburton if interested.

Serious inquiries only.