29 Dec

Why Mortgage Interest Rates Will Stay Low


Posted by: John Dunford

Many of the jobs the US energy boom has created in the last few years are now at risk.

Their loss could drag the economy into a recession.

The Saudis could very well succeed in making a big portion of US and Canadian oil production


If you only paid attention to the mainstream media, you'd be forgiven for thinking that the US is going to

get away from the collapse in oil prices Scot free. According to popular belief, America is even going to

be a net winner from cheaper oil prices, because they will act like a tax cut for US consumers. Or so we

are told.

In reality, though, many of the jobs the US energy boom has created in the last few years are now at

risk, and their loss could drag the economy into a recession.

The view that cheaper oil automatically boosts US GDP is overly simplistic. It assumes that US consumers

will spend the money they save at the pump on US-made goods rather than imports. And it assumes

consumers won't save some of this windfall rather than spending it.

Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even

more dangerous assumption: that the price of oil won't fall far enough to wipe out the US shale sector,

or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate

the global oil glut-without a formal agreement between OPEC, Russia, and other producers to cut

production-is if the price of oil falls below the "cash cost" of production, i.e., it reaches the price at

which oil companies lose money on every single barrel they produce.

If oil doesn't sink below the cash cost of production, then we'll have more of what we're seeing now. US

shale producers, like oil companies the world over, are only going to continue to add to the global oil

glut-now running at 2-4 million barrels per day-by keeping their existing wells going full tilt.

True, oil would have to fall even further if it's going to rebalance the oil market by bankrupting the

world's most marginal producers. But that's what's bound to happen if the oversupply continues. And

because North American shale producers have relatively high cash costs (in the $30 range), the Saudis

could very well succeed in making a big portion of US and Canadian oil production disappear, if they are

determined to.

In this scenario, the US is clearly headed for a recession, because the US owes nearly all the jobs

that have been created in the last few years to the shale boom. All those related jobs in equipment,

manufacturing, and transportation are also at stake. It's no accident that all new jobs created since June

2009 have been in the five shale states, with Texas home to 40% of them.

Even if oil were to recover to $70, $1 trillion of global oil-sector capital expenditure-in fields

representing up to 7.5 million bbl/d of production-would be at risk, according to Goldman Sachs. And

that doesn't even include the US shale sector!

Unless the price of oil miraculously recovers, tens of billions of dollars worth of oil- and gas-related

capital expenditure in the US is going to dry up next year. While US oil and gas capex only represents

about 1% of GDP, it still amounts to 10% of total US capex.

We're not lost quite yet. Producers can hang on for a while, since there has been a lot of forward

hedging at higher prices. But eventually hedges run out-and if the price of oil stays down sufficiently

long, then the US is facing a massive amount of capital destruction in the energy industry.

There will be spillover into the financial arena, as well. Energy junk bonds may only account for 15% of

the US junk bond market, or $200 billion, but the banks are also exposed to $300 billion in leveraged

loans to the energy sector. Some of these lenders are local and regional banks, like Oklahoma-based

BOK Financial, which has to be nervously eyeing the 19% of its portfolio that's made up of energy loans.

If oil prices stay at $55 a barrel, a third of companies rated B or CCC may be unable to meet their

obligations, according to Deutsche Bank. But that looks like a conservative estimate, considering that

many North American shale oil fields don't make money below $55. And fully 50% are uneconomic at


So if oil falls to $40 a barrel, a cascading 2008-style financial collapse, at least in the junk bond market, is

in the cards. No wonder the too-big-to-fail banks slipped a measure into the recently passed budget bill

that put the US taxpayer back on the hook to insure any ill-advised derivatives trades!

We know what happened the last time a bubble in financial assets popped in the US. There was a

banking crisis, a serious recession, and a big spike in unemployment. It's hard to see why it should be

different this time.

It's a crying shame. The US has come so close to becoming energy independent. But it's going to

have to get its head around the idea that it could become a big oil importer again. In the end, the US

energy boom may add up to nothing more than an illusion dependent upon the artificially cheap debt

environment created by the Federal Reserve's easy money policy.

If you ever have any questions about the mortgage industry or about your mortgage, refinance, etc. please
get in touch with me.

John Dunford
15 Dec

Update On The Mortgage Market


Posted by: John Dunford

Finance Minister Joe Oliver, who is currently in meetings with his provincial finance minister counterparts, has said the government may take steps to rein in an overvalued housing market.

“In terms of household debt and the real-estate market, this is a subject, of course, we’re monitoring very carefully,” Oliver said, according to the Canadian Press. “So, we’re not going to take any dramatic steps in that regard, but we may take some moderate steps.”

Oliver, who took over for the late Jim Flaherty in March of this year, has said from the outset that monitoring the housing market will be a priority.

“Our government has taken action in the past to reduce consumer indebtedness and the government’s exposure to the housing market,” Oliver told CTV News on in late March. “I will continue to monitor the market closely.”

The Finance Minister remains mum about what measures would be considered.

“Our longer-term objective is to reduce the government’s exposure to the mortgage market and we keep that objective in mind going forward,” .

The Bank of Canada recently took a stance on the state of housing prices, saying it believes the Canadian housing market is 10-30 per cent overvalued. However, the Governor of the Bank of Canada, Stephen Poloz, has also said he does not fear a housing crash.

“The risk comes when some catalyst sets off the vulnerability,” Poloz said on Thursday. “In this case it would be, let’s say, a rise in unemployment, a significant one, where it makes people have difficulty paying for their mortgage, or a rapid rise in mortgage rates, neither of which we’re expecting.

If you ever have any questions about what’s happening in the world of mortgages or about your specific financing needs, get in touch with me at 1-514-949-5434 or by email at jdunford@dominionlending.ca

4 Dec

An Update From The Bank Of Canada


Posted by: John Dunford

The Bank of Canada may have been largely positive about the economy but Stephen Poloz’ statement yesterday in which he announced that the interest rate will stay at 1 per cent also raised concern about the level of household debt. New figures from Equifax show a $1.5 trillion debt burden for Canada’s households, with the debt load rising 7.4 per cent in the three months to the end of September compared with a year before. That works out at an average debt of $20,891 per person excluding mortgages. However, unlike the BoC, the credit agency says that it is not concerned about the levels as consumers are controlling their debt well. Of the $1.5 trillion owed two thirds is mortgage debt, totalling $985.1 billion.