Mortgage-Backed Securities

Mortgage-backed securities are pools of residential mortgages that have been securitized – that is, grouped together and resold to institutional and private investors. These securities trade in the
secondary market. Introduced in 1986, MBS issues have become a routine part of the mortgage industry.

Canada Mortgage and Housing Corporation (CMHC) is the main creator of mortgage-backed securities in Canada, although private companies may issue them, too. CMHC guarantees the payment of interest and repayment of principal on its issues.

Similar to the underlying mortgages, these pools can be closed (which means that no prepayments, or the opportunity to pay off the mortgage before maturity, are allowed) or open (prepayments are allowed, which increases the risk to the investor).

Most common are the five-year pools that are denominated in multiples of $5,000. MBSs earn returns that are comparable to GICs and are typically higher than Treasury bills or other
Government of Canada bonds with similar terms.

With consistently low mortgage rates over the last five years, variable-rate mortgages and adjustable-rate mortgages have gained considerable popularity with home buyers. This has led to
an increase in the demand for products offering variable-rate and adjustable-rate mortgages.

Mortgage-backed securities are attractive to income-oriented investors since investors receive a cheque every month. Although they are low risk, since most are guaranteed by CMHC, investors
should be aware that liquidity in the secondary market for certain issues can be poor.

Gross Debt Service Ratio and Total debt service ratio

How the banks calculate how much house you can afford They use GDS and TDS Gross Debt Service (GDS): The percentage of the borrower’s income that is needed to pay all required monthly housing costs (mortgage payments, property taxes, heat and 50% of condo fees). Total Debt Service (TDS):  The percentage of the borrower’s income that is needed to cover housing costs (GDS) plus any other monthly obligations that an individual has, such as credit card payments and car payments.  The acceptable ratios for both have generally been 32% and 40% respectively. For people with very high credit scores, GDS requirements are often waived and the TDS maximum is slightly higher (44% as of January 2011). GDS RATIO (Gross Debt Service Ratio): The percentage of gross annual income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes and sometimes include secondary financing, heating, condominium fees or pad rent. TDS RATIO (Total debt service ratio): The percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards.  Example - GDS - Gross Debt Service Ratio Monthly mortgage payment:  (principal and interest)* $1,191.84 Property taxes: (monthly) $150.00 Heating costs: (monthly) $105.00 Other:** $50.00 Total monthly payments: $1,496.84 Gross monthly household income: $6,000.00 GDS = Total monthly payments  (x 100)            Gross monthly income   GDS = $1,496.84  (x 100) = 24.95%            $6,000.00    * Principal and interest must be based on the total insured loan amount, including CMHC insurance premium (if you choose to add the premium to your mortgage and not to pay the premium up front).  Mortgage payment is based on a $200,000 mortgage, 5.25% interest rate, 25 year amortization. ** If you are purchasing a condominium, you must include 50% of the monthly condominium fee.  If the mortgage is for a mobile home (chattel mortgage) include 100% of the monthly site (pad) rent.   Example - TDS - Total Debt Service Ratio Total monthly housing payments:  (from GDS calculation):* $1,496.84 Other debts:  (personal loans, car loans, credit cards, etc.):  $350.00 Total monthly debts: $1,846.84 Gross monthly household income: $6,000.00 TDS = Total monthly payments  (x 100)            Gross monthly income   TDS = $1,846.84  (x 100) = 30.78%            $6,000.00

Real Estate Bidding Process

In a bidding war, the terms of all offers are kept confidential between the seller, their agent and each individual buyer and their respective agent. 

All offers are usually presented separately, but in one session, and normally in the same order as they were registered with the listing brokerage. The seller's agent should allow each buyer rep to present their client's offer. By doing so, the seller's agent can question the buyer agent about their client's offer and obtain valuable information to assist the seller to fairly compare and choose wisely between the multiple bids.

After an individual presentation, the buyer agent is asked to leave the presentation room, with the listing agent retaining a copy of the offer. Each buyer agent is permitted the same opportunity and this continues until all competing bids have been presented.
Then, with the guidance of the listing agent, with a copy of each of the competing bids spread before them, the seller makes a decision. Typically, but not always, the seller will be advised to return all offers to the respective agents with the instruction to ask their buyers to ...

Improve Their Offers

Thus, everyone is given a second chance. And when all offers are re-registered, the entire process begins again. After consultation with the listing agent, the seller usually accepts what they perceive to be the best offer.

Aside from increasing the offer price, there are other  Options Available to a Buyer

... to increase the attractiveness of their offer. If a buyer is comfortable with doing so, conditions may be removed from their offer, a closing date altered to comply with a seller's preference, chattels could be excluded, seller requirements eliminated or deposits increased. Usually, though, it comes down to ... 

Conditions and Price

Sometimes, the seller may simply reject what they perceive to be the worst offers and work with only the top few. A seller may retain some offers, provided the irrevocable dates allow it, and counter-offer to that buyer. If that buyer accepts that seller offer, the deal is done. If not, the seller may counter the next one, being wary of irrevocable dates and times to avoid the possibility of committing to more than one buyer. A seller will usually continue this process until one is accepted by a buyer.