Pre-Approvals: A Dying Breed?

Pre-approvals are something many lenders could do without. The problem (from a lender’s perspective) is that people get pre-approved and then frequently don’t close.

One bank that recently did away with pre-approvals in the broker channel was rumoured to be losing $20 million a year on them.

Pre-approvals are pretty expensive, and the return for lenders is debateable. In most cases, less than one-third of pre-approvals actually close. Meanwhile, the lender is tying up human resources to process the applications, as well as capital to hedge the rates (if rates move adversely, the lender is on the hook, so lenders pay to lock-in the interest rates using derivatives).

In recent weeks, some very big-name lenders have halted pre-approvals--either altogether, or in the broker channel. Two of the most prominent have been FirstLine (a division of CIBC) and TD.

There are still some good lenders doing pre-approvals but their numbers are dwindling. Among the best is ING. ING has solid rates, great perks, and they do a full rate look-back (meaning: if rates fall and then rise again, you automatically get the lowest rate during the pre-approval period).

It’ll be interesting to see what the future holds for pre-approvals. If we had to guess, more lenders may eventually either:

A) Eliminate them; or,

B) Start charging rate premiums (some lenders, for example, already charge 0.10% more for pre-approvals).

We’d love to hear your thoughts and predictions!

The Six Human Emotional Needs

Have you wondered why it is seems so difficult to change our habitual behaviours? The reason is because our decisions and behaviours are driven by our emotions more than by our logic. Logically, we want to stop smoking or stop overeating, and yet, we still find ourselves repeating the pattern of behaviours. Why do we do this? It is because smoking and over eating meets our emotional needs.
At the same time, we all logically want to have a great relationship with our spouse or friends. And yet, we sometimes find ourselves getting into the same patterns of arguments and conflicts. Again, this is all caused by a mismatch of emotional needs between well-intentioned parties.
To change any kind of behaviour, you must first understand that as human beings, our decisions and actions are almost ALWAYS driven by the need to meet six human (emotional) needs. This is why we sometimes do things that don’t make any sense at all. We do it simply to meet these 6 human needs (by the way, this was developed by Anthony Robbins). So, what are these 6 human needs?
Human Need 1: Certainty
The first human need is the need for CERTAINTY. We all need to feel a sense of security that things will be okay. Certainty gives us peace of mind and assurance.
Although we all have the need for CERTAINTY, we use different behavioural strategies to meet this need. For example, when you feel stressed, worried, unsure and uncertain, how do you meet your need for certainty?
Some people use destructive strategies like over-eating, smoking or drinking alcohol. Don’t some people do these things to relieve the stress of uncertainty and get into certainty? Others get certainty by controlling other people (becoming a control freak) or by losing their temper. In one episode of Oprah, she interviewed a woman who handled her stress of being sexually abused by creating a multiple personality disorder.
At the same time, there are useful strategies to get certainty. Some people pray/use religion to get that sense of certainty. Some people, adopt empowering beliefs like, ‘ I know I will get through this’ or ‘everything happens for a reason’ or they simply have faith in themselves. Others get certainty through exercise, meditation or confiding in a friend.
So, think about this? How DO you meet your need for certainty? Is it constructive or destructive to you?

Human Need 2: Uncertainty
Now, here is the big paradox! As human beings, we have a second emotional need that is in direct conflict with our first need. We all have a need for UNCERTAINTY!
Think about it. If you had absolute 100% certainty in your life where you knew exactly what was going to happen, when it was going to happen, how it happens, before it happens every single day, how will you feel? You will feel BORED TO DEATH. This is why there are multi millionaires who have all the money and all the possessions in the world, but are depressed! Their life is so certain that they have no more challenges or surprises. No more uncertainty!
This is also why a woman/man in a perfect marriage where everything is routine and predictable will eventually get so bored, that they will unconsciously start picking a fight, having an affair or leave the marriage. There is no more excitement and stimulation that we all need emotionally.
So, how do people meet the emotional need of uncertainty (i.e. challenge/surprise/variety) in their lives? Again, some people do destructive things like having an affair, starting arguments, picking up one-night stands, taking drugs, smoking when bored and drinking to get high (yup, smoking and drinking offer both certainty AND uncertainty).
Some of us do neutral stuff like watching a movie, playing sports, changing jobs, making new friends or partying. This gives us the stimulation and variety we all need.
Some constructive strategies would include taking on new challenges (e.g. going mountain climbing, traveling, starting a business, writing a book). So think about it, how do you meet your need for uncertainty?

Human Need 3: Significance
The third human emotional need is the need to feel significant/special/unique/important/needed. We all hunger for this need and again pursue it in different ways.
Some people feel significant by attaining qualifications (e.g. MBAs, PhDs etc..), achieving success, buying lots of toys (e.g. bigger house, bigger car, country club, Rolex watch etc…) or pursuing status symbols.
Others get significance by putting other people down, dressing in a unique way or tattooing every conceivable part of their body. Again, others feel significance by having children (and making sure they excel and do them proud) or flaunting their wealth. Some people get significance by being proud of certain identities they adopt like being a Christian, a Muslim, an Army Officer, a Vegetarian etc…
Many people have asked me why I continue to work so hard to write so many books, spend hours writing posts on my BLOG and speak at so many seminars when I clearly don’t really need the money anymore. The answer is that I am driven to all these things because it makes me feel significant (useful, special, needed) and provides me the uncertainty (challenge & variety) that I crave. It also, gives me the 4th human need, connection and love and the 6th human need, contribution.
Again, think about how YOU meet the need to feel significance?

Human Need 4: Love and Connection
The 4th human need is in direct conflict with the 3rd human need of SIGNIFICANCE. Think about this. If you felt TOTALLY significant where you were so unique, so special and so different from all the people around you. Would you be happy? No! You would feel disconnected from the people around you.
One of our strongest needs as humans in the need to be accepted, to be loved and connected to the people around us. Once we become so special and unique, we will start to find ourselves losing that connection to our peers. I can tell you that I feel that way sometimes myself. At times I find it difficult to really be myself, connect with people I meet because people keep expecting me to be this perfect guru, with all the answers.
Have you ever wondered why a superstar like Britney Spears with all the fame, money and talent in the world could end up screwing up her life by engaging in destructive behaviours like drink driving, drug taking that would lead to 2 divorces, losing custody of her children and ending up in a mental institution? My guess is that although she felt total significance, she felt unloved and disconnected from everyone around her.
She probably could not be herself, always having to put up a front and feeling that all the people around her were just using her. Her need for connection and love probably drove her to mix around with the wrong company (i.e. Paris Hilton) and engaging in destructive behaviours that would get her the love/connection and sympathy she was lacking.
We all need to feel love and connection and again get it through different means. Some people get connection by getting into a relationship, getting married, making love, joining clubs, playing with their children, having pets, prayer (connection to God) or hanging out with friends.
Sometimes, people even ‘try’ to get love and connection by self-abuse and falling sick (studies show 90% of all illnesses are psychosomatic). This gives them the sudden outpour of sympathy and love that they yearn for. How do you get love and connection in your life?

If Your Relationship is Not Happy, Here’s Why…
I have found after working with many couples that whenever a marriage breaks down, it is always because partners are not meeting each others emotional needs.
A man (or woman) often wants to leave the marriage either because he/she no longer feels significant, loved, certainty or uncertainty by his/her partner. What is a very very common scenario is that after a couple has a child, the man no longer feels the same level of significance anymore. It seems that his wife spends all the time with the kids, that he is no longer important. So what happens? He rather spend his time in the office where he feels more significant or find a girlfriend who makes him feel special again!
So, here is a point of reflection. How well are you meeting your partner’s emotional needs?

If Your Staff Are Leaving Your Company, Here’s Why…
As a boss of my own company and a person who trains other companies in bringing put the best in their employees, I have found that your staff will only be happy and motivated to give their best when they feel significant (they are praised often and recognized), certainty (sense of security of their future in the company), uncertainty (their jobs gives them variety and challenge) as well as connection (they love the people they work with and have a sense of belonging).
Similarly, people leave a company not only for monetary reasons. They leave when they feel a lack of security (certainty), lack of challenge (uncertainty), lack of connection (they hate the people) or a lack of significance (unappreciated).
Reflection: if you are a boss/team leader, are you meeting your staff’s/colleagues emotional needs to bring out the best in them?

If You Have An Addiction that You Cannot Change, Here’s Why…
Finally, I have found that if you have a negative behaviour that you find hard to change, it is only because it is being used to meet two or more of your emotional needs. For example, if you find yourself constantly losing your temper, it is because it gives you a sense of significance and certainty.
If you find it difficult to stop smoking, it is probably it meets your needs for certainty (relaxes and de-stresses you), uncertainty (smoke when you feel bored), connection (especially if you smoke with friends to ‘fit in’) and significance (makes you look ‘cool’). Often, when a behaviour meets more than 2 needs, it becomes an ADDICTION.
In my patterns of excellence programs, I show people how to break limiting patterns of behaviours by first finding an alternative way to meet their needs. If you do not find a new useful alternative behaviour to replace it, you will find yourself going back to the old habit/addiction.

The Last Two Human Needs: Growth and Contribution
You are probably wondering what the last two human emotional needs are. Understand that the first four needs MUST be met by us constantly. It is what drives our daily behaviours.
However, to be truly fulfilled and happy, we need to meet the last two needs of ‘growth’ and ‘contribution’. We need to constantly grow by learning more and challenging ourselves to become better. The moment we stop growing, we start dying emotionally.
Finally, we all need to contribute beyond ourselves, This is why people like Bill Gates and Warren Buffett make all the money in the world only to give most of it away to charity. contribution is what gives us ultimate purpose and fulfillment in life.

Don't handcuff your mortgage

Gary Marr, Financial Post Published: Saturday, June 13, 2009

Would you like to pay an extra $300 per month on your mortgage? Not likely.

That hasn't stopped a number of Canadians, with the deal of a lifetime on a variable-rate mortgage, from switching over to a more expensive fixed-rate product and paying the extra freight.

A fear of rising rates is driving the rash decision. But if you've finally managed to pin your banker to the ground, why on Earth would you let him off the mat?

More than 28% of Canadians have a variable-rate product tied to prime, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP). If you negotiated a deal before October of last year, chances are you are now borrowing money for as little as 1.35%. That's based on deals that at one point saw the banks giving 90 basis points off prime. Prime is now 2.25%.

The average sale price of a home last month in Canada was $306,366. Based on a 25% downpayment and a 25-year amortization, your monthly payment would be $962.61 at 1.35%. Convert that to a five-year fixed-rate term and you're probably going to have to consider a 4% mortgage rate and a monthly payment of $1,289.04.

Rates are rising fast. Most major banks upped their five-year rate by 40 basis points this week, although discounters were still offering 4% this past week.

"It's not a mass rush yet, but we are starting to see ... people locking in. But variable rates are still so good," says Joan Dal Bianco, vice-president of real estate-secured lending, TD Canada Trust. She stops short of questioning why a consumer would pull out of these "deals" that are no longer available on the market.

Try to get a variable-rate mortgage today and the best you can probably hope to get is 60 basis points above prime, or 2.85%.

The landscape changed dramatically in October during the credit crunch. As the Bank of Canada lowered rates, the major banks reluctantly lowered prime because of the massive amount of customers with variable-rate products negotiated under the old, higher terms.

"Bonds yields are going up rapidly and people are starting to realize the rates are going to go up," Ms. Dal Bianco says. Throw in the fact the Bank of Canada used the weasel word "conditional"(on inflation rates)when it promised not to raise rates until June, and you can understand why some people think today's record-low prime rate might not hold.

But if you're someplace between 60 to 90 basis points below prime, the rate is going to have to go up pretty fast to justify locking in today at 4%, even though that is just slightly above the all-time low hit last month for a five-year term.

"I don't understand why you would lock in," says Jim Murphy, chief executive of CAAMP. "Sure, if they start to rise, but [Bank of Canada governor Mark] Carney says they won't rise, so you've got another year at that prime-minus rate."

Don Lawby, chief executive of Century 21 Canada, says even when rates do start to increase, they are not going to jump significantly right away. You are not going to get 4% on a fixed rate again, but double-digit rates seem unlikely. "The only logic two locking in would be for someone very sensitive to any rate change and they just want to be secure," Mr. Lawby says.

But at what price? If you're using the "feeling secure" logic, why not go for the 10-year fixed-rate product? Rates on that product can be locked at 5.25%, ridiculously low by historical standards. Yet fewer than 10% of Canadians consider a 10-year product.

There are some compromises you can make. For starters, there is nothing to prevent consumers from having a blended mortgage at most Canadian banks. Some banks will let you take half your outstanding debt and lock it in. Diversity is preached for stock portfolios, but few people seem to adhere to the same philosophy when managing their debt.

Consumers might want to take their cue from business. Few companies would want all of their debt coming due at the same time -- it presents too much risk. The other option is knocking down principal: Make payments based on a 4% rate and have that extra $300 go straight to your principal every month.

The bottom line is if you've got a deal on your mortgage, why would you give it back?

Dusty wallet Double check your credit card statements. DW is in a bit of a skirmish with Visa over a taxi cab bill. Of course, DW is too cheap to use cabs, but does succumb to them to get to and from airports on vacation. Last trip, the family took an airport limousine and paid the $56 charge. Guess what? The same amount was billed a month later. So far, the taxi cab company has yet to produce a second receipt. In the interim, DW had to pay the second $56 charge.

gmarr@national-post. Com

Fed not likely to raise rates

Peter Hodson, Financial Post

Recently, there has been some loud talk about inflation and how the U. S. Federal Reserve is going to have to start raising interest rates soon in order to nip inflation in the bud.

When first confronted with this news, you may have said, "Hogwash! No way in this economic backdrop could the Fed raise rates, slow down growth and risk sending us into a steep 'double-dip' recession."

That certainly would be my view. It's unclear at this point even if we are coming out of recession, so it really would be premature to slow things down at this point before any growth traction has been achieved.

However, let's not just make assumptions. Let's delve into history to see what the Fed has done in prior cycles.

The last U. S. recession was from March, 2001, to November, 2001, a period of eight months. The Fed funds rate was 6.5% from June, 2000, to January, 2001. In January of that year, the Fed lowered the rate to 6%, then went on a 12-month lowering frenzy during the recession and in the aftermath of the 9/11 attacks. By year-end 2001 the Fed funds rate was 1.75%, with the Fed still maintaining an easing bias.

Despite the official ending of the recession in November, 2001, the Fed maintained very low interest rates for almost three more years. In fact, it kept lowering rates, down to 1% from June, 2003 to May, 2004. This strategy of keeping rates low despite no recession is now widely blamed as the reason for the creation of the housing bubble that popped in 2007. The Fed finally raised rates in June, 2004, a full 30 months after the recession had ended.

In the recession of July, 1990 to March, 1991 (eight months) the Fed had been easing or maintained a neutral bias since February, 1989. At the start of that recession, the Fed funds rate was 8.25%. By the end of the recession, it was down to 6%. Again, despite the recession being over, the Fed kept jamming rates lower, all the way down to 3% in December, 1993. The Fed didn't raise rates again until February, 1994. In that recession, again the Fed kept lowering rates for 30 months after the end of the recession.

Going back further into history, in the recession of July, 1981 to November, 1982 (16 months) the Fed acted a little more quickly. In May, 1981 the Fed rate was 20.0%. By December of that year, the Fed had moved rates down to 12%. In the spring of 1982, though, rates were back to 15%. But, showing signs of confusion, by the end of the summer 1982, rates were much lower, at 9.5%. The Fed was tightening rates again by September, 1982, and for a period of time investors had no idea what to expect, as the Fed moved rates up or down seemingly at random for a period of 18 months.

In the energy crisis of the early 1970s, the recession lasted from November, 1973, to March, 1975 (16 months). In November, at the start of the recession the Fed funds rate was 9.00% but by May, 1974, because of inflation fears the Fed had already raised the rate to 13%. Recession fears, however, ultimately ruled the day, and by year-end 1975 the Fed rate had been cut in half, to 4.75%. The tightening began anew, however, in April, 1976, 13 months after the official end of the recession.

What can we conclude? One, it seems sometimes that the Fed is just winging it, moving rates at random in response to short-term events. But it does seem the Fed is unwilling to raise rates too quickly after any recession.

Based on the severity of this economic downturn, you would have to conclude the Fed is unlikely to risk a double-dip recession, and will keep the Fed funds rate very low (now 0% to 0.25%) for a long time.

This may, of course, cause inflation, but for the time being, that is still better than a giant de-leveraging economic death-spiral.

peter@sprott.com--- - Peter Hodson is a senior portfolio manager at Sprott Asset Management.

Have a great day!