Financial Update

Toronto stocks tumble into correction territory

Ottawa changes rules for government guaranteed mortgages

· TSX -198.93 A late day retreat pulled the TSX main index into an official correction. The index has tumbled 10.2% from the life high reached in the beginning of June, putting it in the general definition of a correction (a 10% fall from the peak level)
· Dow -236.77 On Wall Street, stocks were battered by credit loss worries, as well as falling tech shares after Cisco Systems' chief executive raised fears of a prolonged U.S. economic downturn.
· Dollar -.77c to $98.90US
· Oil + $.01 to $136.05US per barrel.
· Gold +$5.30US to $928.60US per ounce

Financials, energy send TSX down 199 points; mortgage sector worries depress NY
By Malcolm Morrison, The Canadian Press TORONTO - It was a volatile session on the Toronto stock market Wednesday, where a rally in energy and financial stocks fizzled, sending the TSX down sharply.

Financial sector concerns and a downgrade in the tech sector sent New York indexes packing despite a better-than-expected earnings report from aluminum giant Alcoa Inc.
Toronto's S&P/TSX composite index fell 198.93 points to 13,610.84 after running up as much as 171 points earlier in the session. New York's Dow Jones industrial average tumbled 236.77 points to 11,147.44.

The TSX had run ahead 97 points Tuesday - but that was preceded by two days of triple-digit losses that dipped the benchmark index into negative territory for the year.
"I think the pullback was warranted to a degree," said Gareth Watson, associate director and Canadian equity adviser at ScotiaMcLeod, who thinks the TSX will be limited to single-digit returns this year.

"You're going to see strength out of materials because I'm still a believer in the agriculture story, still a believer in the gold story for the second half, so I think materials will lead any type of increase here, potentially along with energy."

Canada Mortgage and Housing Corp. reported that the seasonally adjusted annualized rate of housing starts was 217,800 units in June, down from 227,700 in May. For the first half of 2008, starts were up 1.5 per cent from a year earlier.

A negative analyst note about Cisco Systems Inc. weighed on the technology sector. Cisco fell $1.30 to US$21.58 after an RBC Capital Markets analyst cut his price target on the network equipment maker. Cisco's CEO recently said technology spending will recover later than previously thought and its shares declined $1.30 to US$21.58.

The New York financial sector was sharply lower as U.S. government-sponsored lenders Freddie Mac and Fannie Mae continued their tumble. Freddie fell $3.20 to US$10.26, while Fannie fell $2.31 to US$15.31. The two companies have been dragging the broader market lower amid worries arose about their cash levels.

"As we go into earnings season, it's going to be much of the same as the first quarter," said Scott Wren, senior equity strategist at Wachovia Securities. "Financials are going to suffer the worst comparisons again."

On the financials, I think the outlook is still relatively neutral at this stage," said Watson. "But depending on what we see in the next quarter coming up, if in fact we can start to get a better gauge as to whether we have hit an inflection point, and that perhaps if the global economy starts to pick up some steam going in the fourth quarter . . . that could be a source of some strength for the Toronto market."

After the market closed, the federal Finance Department announced it's tightening the rules for government-backed mortgages. The maximum amortization will be limited to 35 years and the minimum deposit will be 5%. (see Article Below).

Ottawa changes rules for government guaranteed mortgages

By Craig Wong, The Canadian Press

OTTAWA - Ottawa is tightening the rules for government-guaranteed mortgages that will limit the maximum amortization period to 35 years and require a minimum down payment in a bid to prevent a meltdown like the one in the U.S. subprime mortgage market.

The Finance Department said Wednesday it will no longer guarantee 40-year mortgages and will require a minimum down payment of 5% of the value of a home.

Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent - in other words the buyer has borrowed all the money to buy a home and then gets insurance coverage on the whole amount.

The changes announced Wednesday will cut this ratio to 95%. Borrowers may still borrow the 5% down payment, but it will not be insured under the new scheme.

Finance spokesman Jack Aubry said the moves will strengthen the Canadian housing market and reduce the risk of a housing bubble.

"Limiting the use of 40-year mortgages and requiring a minimum downpayment will help ensure that people build real equity in their home faster," Aubry said.

The new limits, which are set to take effect Oct. 15, will affect only new government-backed insured mortgages.

Canadians who already hold mortgages won't be affected by the changes.

In April, Bank of Canada governor Mark Carney raised his concerns about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.

In other words, mortgages that are designed to take 40 years to fully repay if the borrower sticks to the regular schedule of installment payments.

Carney told a Commons committee that the central bank was watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.

In the United States, imprudent lending by banks and financial companies to high-risk borrowers at low rates created a housing bubble that eventually exploded when mortgages renewed at higher rates and borrowers couldn't pay and defaulted.

In Canada, defaults of bank-originated mortgages are extremely low - well below one per cent of the total, according to figures compiled by the Canadian Bankers Association.

The collapse in the U.S. housing market led to broader troubles in the U.S. economy, reducing demand for Canadian exports such as lumber and autos. It also led to a corporate and consumer credit crunch that is still being felt by ordinary Americans and companies.

In Canada, the government said Canadian banks and other lenders have not written many government-backed mortgages to borrowers with low credit scores, but to ensure this continues the changes will establish a credit score floor of 620.

Economists have noted a cooling in the Canadian housing in recent months after several years of strong growth. Higher loan-to-value ratios and longer amortization periods are believed to have prolonged the cycle by opening the market wider.

Scotiabank senior economist Adrienne Warren called it a "modest tightening in credit conditions" could exclude a few people at the margins from buying a house.

"We were already in a process of where we're seeing things cool off and I think this will just reinforce that," she said.

Warren added that most Canadian lenders have been more conservative than their counterparts in the United States.

"It's essentially a sort of cautious move and reaction to the difficulties we're seeing in the global housing market and particularly in the U.S.," she said.

Jason Scott, a mortgage associate with Urban Mortgage in Edmonton, said the changes will make it more difficult for younger buyers who are looking to get into the market.

"Reducing the maximum amortization is going to put people who are at the fringes of affordability out, 40-year amortization has been very popular with younger people who are purchasing their first home," he said.

The changes Wednesday also set a maximum of 45 per cent for the proportion of gross income that is spent on debt servicing and housing-related fixed or essential payments.

And mortgages that begin with "interest-only" payments and home equity lines of credit will also not be covered by the government guarantees. Ottawa noted that reducing amortization from 40 years to 35 years on a $200,000 mortgage with a 6% interest rate would increase the borrower's monthly payment by $41. The borrower would also save $49,000 in interest payments