Friday, July 16, 2010

Congress OKs Wall Street crackdown in burst of financial regulation unseen since Depression

· By Jim Kuhnhenn, The Associated Press

WASHINGTON - Congress has passed the stiffest restrictions on banks and Wall Street since the Great Depression, clamping down on lending practices and expanding consumer protections to prevent a repeat of the 2008 meltdown that knocked the U.S. economy to its knees.

A year in the making, and 22 months after the collapse of Lehman Brothers triggered a worldwide panic in credit and other markets, the bill cleared its final hurdle Thursday with a 60-39 Senate vote. It now goes to the White House for President Barack Obama's signature.

The law will give the government new powers to break up companies that threaten the economy, create a new agency to guard consumers in their financial transactions and shine a light into financial markets that escaped the oversight of regulators.

Large, failing financial institutions would be liquidated and the costs assessed on their surviving peers. The Federal Reserve is getting new powers while falling under greater congressional scrutiny.

From storefront payday lenders to the biggest banking and investment houses on Wall Street, few players in the financial world are immune to the bill's reach. Consumer and investor transactions, whether simple debit card swipes or the most complex securities trades, face new safeguards or restrictions.

"When this earthquake hit, there wasn't nearly enough oversight, transparency or accountability to shield us from the fallout," Senate Majority Leader Harry Reid said. "This law will strengthen all three."

Republicans said it is a vast federal overreach that will drive financial-sector jobs overseas.

Named after Connecticut Senator Christopher Dodd and Massachusetts Representative Barney Frank, the Democratic committee chairmen who steered it to passage, the legislation ends a trend to ease regulations that peaked in 1999 with the elimination of Depression-era walls separating commercial banking from riskier investment banking.

And though it calls for the biggest changes in generations, it does not approach the scope of the New Deal banking rules enacted under President Franklin Delano Roosevelt. That era saw the creation of the Federal Deposit Insurance Corp. to protect consumer deposits and the Securities and Exchange Commission to oversee the markets.

And, even at a thud-inducing 2,300 pages, the legislation doesn't offer a quick remedy, however. Rather, it lays down prescriptions for regulators to act. In many cases, the real impact won't be felt for years.

The Senate's final passage of the bill, two weeks after the House approved it, is a welcome achievement for the president and congressional Democrats, both increasingly unpopular with voters four months from midterm elections that threaten to put Republicans in charge of Congress. Only three Republicans voted for the bill — Maine Senators Olympia Snowe and Susan Collins, and Massachusetts Senator Scott Brown. Democratic Senator Russ Feingold of Wisconsin, who has said the bill is not tough enough, voted with most Republicans against it.

The law has been a priority for Obama, ranking just behind his health-car overhaul enacted in March. In its final form, the package hews closely to the plan unwrapped a year ago by the White House and in some ways is even tougher. White House spokesman Robert Gibbs promptly cast the vote in political terms for a highly competitive midterm election.

"This will be a vote that Democrats will talk about through November as a way of highlighting the choice that people will get to make in 2010," he said.

The political benefits, however, stand to be overshadowed by lingering high unemployment. And Republicans were betting that public antipathy toward big government and worries over jobs would trump their anger at Wall Street.

"We're going to be driving jobs and business overseas with this massive piece of legislation," said Senator Saxby Chambliss (R-Ga.).

Senator Richard Shelby (R-Ala.), who worked with Dodd on certain aspects of the bill, denounced it as a "legislative monster."

The Dodd-Frank bill's major creation is a Consumer Financial Protection Bureau. The agency will have power to write and enforce new regulations covering lending and other consumer transactions.

Lenders face new restrictions on the type of mortgages they write and could not be rewarded for steering borrowers to higher cost loans. Borrowers also will have to provide evidence that they can repay their loans, thus halting the no-document loans that had flooded the markets.

The vote Thursday capped a year of partisan struggles and cross-party courtship. Any remaining uncertainty about the bill's fate vanished earlier this week when it became clear three Republican senators would vote for it, thus assuring 60 votes to overcome procedural obstacles.

Industry lobbyists fought against a number of restrictions in the bill, ultimately winning some concessions. In the end, the final bill was tougher than they wanted but not as restrictive as they feared.

"Core elements of the bill will contribute to a stronger, more secure financial system," Steve Bartlett, president of the Financial Services Roundtable, a banking group, said in a speech Thursday. "Some items in the legislation we did not support and we expressed our views accordingly. Nevertheless, we are committed to making those items work as well as possible."

The American Bankers Association was not as conciliatory.

"The result will be over 5,000 pages of new regulations on traditional banks and years of uncertainty as to what the massive new rules will mean," said Edward Yingling, president and CEO of the group.

Republican opponents also criticized the bill for not addressing mortgage financing giants Fannie Mae and Freddie Mac, whose questionable lending helped start a collapse in the housing market.

Some supporters of the bill also voiced reservations, claiming the bill did not give regulators specific direction on how to implement and enforce new rules.

"Congress largely has decided instead to punt decisions to the regulators, saddling them with a mountain of rule-makings and studies," said Senator Ted Kaufman (D-Del.).

For all its ambition and reach, the legislation is dotted with exceptions.

Community banks won't have to be examined by the new consumer bureau and would get a break on higher insurance premiums. Despite calls to end proprietary trading by large banks, the law will let them put up to three per cent of their capital in hedge funds or private equity funds. Auto dealers won't be covered by the rules of the consumer bureau.

"It is not a perfect bill, I will be the first to admit that," Dodd said. "It will take the next economic crisis, as certainly it will come, to determine whether or not the provisions of this bill will actually provide this generation or the next generation of regulators with the tools necessary to minimize the effects of that crisis."

Thursday, July 15, 2010

Housing sales fall sharply in June

Steve Ladurantaye Real Estate Reporter

Globe and Mail

The spring housing market ended with a gasp in June, as residential housing sales fell sharply across the country and the average resale price moved lower after months of record setting gains.

The Canadian Real Estate Association said the number of sales fell 8.2 per cent in June compared to May, led by lower activity in Toronto and Calgary. Sales slipped in 70 per cent of the markets surveyed.

The national average resale price, meanwhile, was $342,662, down 1.2 per cent from May’s record setting $346,881. Prices are still 4.9 per cent higher than they were last June.

Canada Mortgage and Housing Corp. is reporting its seasonally adjusted annual rate of housing starts was 189,300 units in June, down 3.1 per cent from May.

The agency also revised up its figures for April and May – to a 3.7-per-cent gain in April (205,900 units) and a 5.1-per-cent decline in May (195,300 units).

The agency says June's decline was largely due to a slide in Ontario multiple starts.

Urban starts fell 2.6 per cent to 167,000 units in June.

Urban multiples decreased 5.8 per cent to 89,200 units, while singles edged up 1.4 per cent to 77,800 units.

The annual rate of urban starts decreased 19.8 per cent in Atlantic Canada and 17.4 per cent in Ontario, and increased 11.6 per cent in Quebec, 8.6 per cent in the Prairie region and 6.3 per cent in British Columbia

Rural starts were estimated at 22,300 units in June.

"Canadian residential construction activity has likely peaked for the time being, and should soften further given the weakening demand backdrop and lower rate of household formation," Robert Kavcic of BMO Nesbitt Burns said in a note.

Tuesday, July 13, 2010

Upbeat survey may pave way for interest rate hike

By Julian Beltrame

OTTAWA — Canadian firms are giving the recovery a vote of confidence in a key quarterly survey, paving the way for the Bank of Canada’s expected interest rate hike next week.

The central bank’s quarterly survey, released Monday, showed firms were concerned about the fallout from the European sovereign debt mess, but still generally upbeat about the coming year.

“Overall, (business executives) are positive about the outlook for business activity over the next 12 months,” the bank wrote.

“For the first time in two years, firms, on balance, reported an improvement in their past sales activity.”

The bank’s governing council next interest rate announcement is next Tuesday.

Following a strong jobs report last week, the survey likely represents the last piece of evidence governor Mark Carney was looking for to confirm a predisposition to continue raising rates.

“I’d say there’s a 75 or 80 per cent probability they will hike next week by 25 basis points,” said Derek Holt, vice-president of economics with Scotia Capital.

“I think they’d want to avoid the perception that they just came out with a whole new round of bullish forecasts and then got wobbly knees after just one quarter-point hike (in June).”

What could stay Carney’s hand, economists say is the unknown factor of what will happen to the global economy as governments move from spending to restraint later this year and next.

Canada’s domestic economy appears well grounded. Statistics Canada reported on Friday that an additional 93,000 jobs were added in June, bringing total re-hiring since the recession’s end to over 400,000.

And the business outlook survey showed that 50 per cent of firms surveyed said they planned to add workers over the next 12 months, as opposed to only 10 per cent that planned to cut their workforce.

TD Bank economist Diana Petramala viewed that finding as the strongest in the report, although she said it might indicate some hiring that’s already taken place.

While an increase in the bank’s policy rate to 0.75 per cent will raise short-term interest rates for consumers, most economists say it is unlikely to have much of an impact on longer-term, fixed mortgage rates. Many see a hike at this time as not applying the brakes to growth, since the rate would remain near the historic low, but as a judgment by the bank that the recovery is taking hold.

Not all agree, however. A bearish minority argue that Canada still faces considerable headwinds from the European situation and ongoing U.S. weakness, and that Carney should refrain from adding a further impediment to growth.

But failing a climb down from its forecast of 3.7 per cent growth this year, and 3.1 per cent next year, the bank appears on track to take interest rates a little higher next week, analysts say.

“With price pressures expected to rise in the production line, excess economic slack continuing to melt away, and credit and lending conditions continuing to ease, the survey results weigh on the tightening side,” noted economist Michael Gregory of BMO Capital Markets.

The summer poll, and a separate survey of loan officers also released Monday, found sentiments positive, if not deliriously so, across a range of topics.

The bank said credit conditions appear to be easing, especially for larger corporations, a critical prerequisite for expansion.

The balance of opinion was also positive on questions of sales volume prospects for the coming year, and future investment intentions.

Not all doubts have vanished, however.

Business executives expressed concerns about “recent global economic and financial uncertainties and possible spillover effects in Canada.”

And although on the plus side of the ledger, expectations on future sales and investment intentions were softer than three months ago. That’s partly because of the way the Bank of Canada couches its questions, contrasting expectations to what they were in the earlier survey.

The bank noted the responses suggest that firms that have already experienced strong sales growth from recession lows now believe that the growth rate will slow to more sustainable levels, but remain positive.

And many firms that do not expect to increase spending on new machinery have already made those investments, particularly firms in the services sector.

On other elements of business activity, executives said they expect the cost of their inputs to increase at a greater rate during the next 12 months, and plan to pass on these cost increases to their customers.

But the inflationary expectations over the next two years were modest, within the central bank’s one-to-three per cent range.

Wednesday, July 7, 2010

Household credit growth slowing

Derek Abma, Financial Post · Tuesday, Jun. 29, 2010

OTTAWA — Despite worries about the rise of household debt in Canada, a CIBC World Markets report says the rate of growth has recently slowed down.

Economist Benjamin Tal, the report’s author, said it’s a positive thing that the rate of household debt is slowing. He said the rate at which it grew during the recession and the early stages of the recovery were beyond what was healthy in the long term.

“That’s fine,” he said of the previous growth in debt, which helped mitigate effects of the recession in Canada. “That’s exactly what the Bank of Canada wanted to do. . . . The Bank of Canada cut interest rates during the recession to encourage you and me to go and spend, and that’s how you get out of recession.”

But the pace of growth in consumer credit is now slowing, said Mr. Tal, who pointed out the rise in Canadians’ credit for the six months ended in March was slower than the expansion of nominal gross domestic product, which include the effects of inflation, and it’s the first time in more than seven years that’s happened.

The CIBC report said mortgages are expanding at a rate of 0.6% per month, the slowest since 2003. Lines of credit are expanding at less than one per cent on a monthly basis, the most sluggish pace since 2007, it said. It added that the level of direct loans has flattened.

Credit-card balances, the report said, are rising at a “relatively soft rate” of 0.6% year-over-year with the pace not expected to quicken in the near future.

With the economic recovery now on solid footing in Canada, Mr. Tal said it’s positive that the rate at which household debt grows is slowing. He said the recent economic downturn marked the first recession on record in which overall household debt grew.

Barring another recession, Mr. Tal said he doesn’t anticipate a reversal of trends in which household debt actually shrinks. But he added it doesn’t have to, because the current trend is sustainable.

“Credit is good, credit is OK, credit is a normal thing in a functioning market,” he said. “It’s basically allowing people to purchase for the future using current cash flow to finance it. There’s nothing wrong with it.”

While debt continues to rise faster than income, Tal said what’s more important is that asset levels — which include investments and real estate — are growing at a faster pace than household debt.

First-time homebuyers wasn’t new, detached homes

By Sunny Freeman, The Canadian Press

TORONTO — A majority of Canadians who just bought or are about to buy their first home expect to pay less than the asking price and prefer newer and detached homes over older and semi-detached homes or condos, according to a TD Bank survey.

But the report questioned whether the homebuyers had unreasonable expectations, considering that nine out of 10 took out or expect to take out a mortgage for their home.

“It’s only natural to want your first home to be the home of your dreams, but it is important to be realistic about what you can afford,” said Farhaneh Haque, a mortgage specialist at TD Canada Trust.

Six in 10 first-time homebuyers said they were worried about being able to afford their home should interest rates rise — a scenario that economists say is inevitable after an era of historically low rates sparked a rush into the housing market.

Only 30 per cent said they plan to or already have more than a 20 per cent down payment, and the remaining 70 per cent will require mortgage insurance. Eight of 10 buyers reported putting down as much as they can afford.

But Haque advised that prospective first-time homeowners consider a larger down payment because paying 10 per cent or more will make a big difference, bringing down the time it will take to pay off a mortgage and possibly affecting regular payment amounts.

“It may mean that you need to save longer before buying your first home, but it will pay off in the end.”

The vast majority of those surveyed said they made informed financial decisions before buying, with nine in 10 homebuyers getting pre-approved mortgages and calculating closing costs before buying.

However, closing costs, land transfer tax, and legal fees were the top three costs buyers felt unprepared for.

Six in 10 first time home buyers said they bought or intend to buy a fully detached home and three-quarters want a new home.

Meanwhile, survey respondents were equally split between preferring a smaller home closer to work and 45 per cent would prefer a larger home with a longer commute.

Almost all respondents, 99 per cent, said price was the most important factor when considering what kind of home to buy.

The report compiled 1,000 results from an online survey between June 8 and 21 of Canadians who had purchased their first home within the past 24 months or intended to purchase their first home within the next 24 months.

First-time homebuyers in B.C. bucked a national trend and said condominiums were their No. 1 choice. They were also most concerned about being able to afford their homes if interest rates rise.

Respondents from Atlantic Canada were most likely to have their hearts set on new, large and fully detached homes. They are also most likely to prefer a larger home even if it would mean a longer commute.

Quebecers browsed through the fewest number of homes while shopping for their first, but were most likely in the country to live in their first home for their entire lifetime, the report found.

More first-time buyers in Alberta expected to pay less than asking price than those in any other province.

In Ontario, more homebuyers than the national average planned to put more than 20 per cent toward a down payment.

More than in any other provinces, people in Manitoba and Saskatchewan said they would prefer a newer home over an older home if price points were similar.

Drop in home sales may be sign of peak

Garry Marr, Financial Post ·

Existing home sales dropped sharply in Canada’s two most expensive markets, a further indication that the real estate market may have peaked.

The Toronto Real Estate Board said sales in June were down 23% from a year ago, leaving activity for the quarter up 1% from the same period a year earlier.

“We experienced a record number of existing home sales during the first half of 2010 but these sales were weighted more towards the beginning of the year, said Bill Johnston, president of TREB.

“The pace of home sales has moderated from record levels over the past two months with the prospect of higher mortgage rates.”

In addition to the fear of higher mortgage rates, the housing market was impacted earlier in the year by new mortgage rules that made it tougher to borrow.

The real estate industry has said many customers simply pushed forward their purchase to beat the new rules, predicting slower sales through the spring.

The industry is also now dealing with the impact of the harmonized sales tax, which was introduced in British Columbia and Ontario on July 1. Consumers trying to beat that tax — which will be newly applied to services such as real estate commissions — are said to have pushed their purchases forward, which will deprive the summer and fall of a number of sales.

Vancouver’s market is also feeling the brunt of the new real estate reality. Sales in Canada’s most expensive market were off 30.2% in June from a year ago, the Real Estate Board of Greater Vancouver said earlier this week. President Jake Moldowan noted June 2010 sales are still up 22.6% from 2008 recession levels.

The slowing market appears to be a phenomenon right across the country with Calgary also reporting last week June sales were off about 42% from a year ago. June sales were 16% from May alone.

So far, the drop in demand has not hit prices dramatically, but coupled with increased supply, the double-digit year-over-year price increases we saw for most of 2010 have ended. The average sale price of a home in Toronto last month was $435,034, an 8% increase from a year earlier.

“With more to choose from in the second quarter, many home buyers have been making less-aggressive offers. This has resulted in less upward pressure in the average selling price,” said Jason Mercer, senior manager of market analysis for TREB, who said price increases will remain in single-digit territory for the rest of 2010.

New listings continue to put pressure on the Toronto market. New listings were up 13% in June from a year ago while total active listings climbed 28% during the same period.

In Vancouver, the total number of properties for sale is up 32% from a year ago. Prices in Vancouver were up 11.8% from a year ago with the board’s housing price index benchmark price climbing to $580,237 from $518,855. In Calgary, the average price of a home sold in June was $483,240, an increase of 8% from a year earlier.

The existing home market may get a break from the fact it looks likes builders are ramping down on construction. Statistics Canada said the value of building permits applied for in May was off 10.8% from a month earlier. Housing permits were off 4.4% from a month earlier.

“If there is hope for house prices in Canada, it lies in curtailing supply. That’s where any room for optimism lies in an otherwise bleak report that displayed widespread losses in value and volume terms within both the non-residential and residential categories,” said Derek Holt, an economist with Bank of Nova Scotia.