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S&P warns it expects more mortgage fraud in Canada

Briefing highlights

  • S&P expects more mortgage fraud
  • Several companies shun the NRA
  • Markets at a glance
  • What to expect in Morneau’s budget
  • What to watch for from the new Fed chief
  • What to expect in Canadian GDP report
  • What else to watch for this week
  • Weinstein Company to file for bankruptcy

S&P sees more mortgage fraud

Standard & Poor's is warning it expects more mortgage fraud in Canada amid "high and steadily increasing" consumer debt and house prices.

The warning from the big U.S. credit rating agency is yet another threat to add to the angst over certain frothy housing markets that policy makers and politicians alike are grappling with.

"Recent years have witnessed accumulating reports of fraudulent information corrupting the inputs used in the underwriting process for Canadian RM originators," S&P said, the RM meaning "residential mortgage."

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Citing some earlier examples, S&P said it believes that "high house prices and household debt relative to household disposable income increase incentives to fraudulent activity, such as overstating the borrower's income in order to meet a lender's qualifying criteria."

"In addition, data compiled by Canada Mortgage and Housing Corp. (CMHC) estimated the broker share of first-time-buyer home purchases involving RM financing at 55 per cent in 2017, up from 48 per cent in 2012, and the broker share of repeat-buyer purchases involving RM financing at 44 per cent in 2017, up from 32 per cent in 2012," the agency added.

"As brokers do not bear credit risk for the RMs they initiate, and are generally compensated primarily on the quantity (not quality) of RM applications they process, we believe brokers have less incentive than a lender's own staff to prevent fraud."

Thus, "we expect more evidence of fraud in Canadian RMs could emerge."

It cited some recent examples, though it changed no ratings.

Corporate America and the NRA

Yes, they actually said that.

It took another shattered school for U.S. companies to begin shunning the NRA. But shunning them they are, in increasing numbers.

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As The Globe and Mail's Joanna Slater reports from Florida, some companies cut their ties with the NRA in the wake of the tragedy at Marjory Stoneman Douglas High School in Parkland. This grew over the weekend amid a boycott campaign, bringing the number of those abandoning the group to about a dozen.



The companies didn't go into detail, but rather simply announced their decisions.

"Customer feedback has caused us to review our relationship with the NRA," said a spokesman for First National Bank of Omaha.

"As a result, First National Bank of Omaha will not renew its contract with the National Rifle Association to issue the NRA Visa Card. At this time, we are not commenting beyond this statement."

There is, of course, something amiss when a group like the NRA has its own branded credit card, but at least First National got the ball rolling. Now, groups including airlines, insurers, car-rental firms and others are joining the exodus.



This, as you can imagine, angered the group, which took its own stand, as it has oft done before given what has happened in the U.S., saying it won't be scared off.

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Here are other parts of its weekend statement:

"The more than five million law-abiding member of the National Rifle Association have enjoyed discounts and cost-saving programs from many American corporations that have partnered with the NRA to expand member benefits. Since the tragedy in Parkland, Florida, a number of companies have decided to sever their relationship with the NRA, in an effort to punish our members who are doctors, farmers, law enforcement officers, firefighters, nurses, shop owners and school teachers that live in every American community."



Yes, there's more to the NRA statement:

"The law-abiding members of the NRA had nothing at all to do with the failure of that school's security preparedness, the failure of America's mental health system, the failure of the National Instant Check System or the cruel failures of both federal and local law enforcement … Let it be absolutely clear. The loss of a discount will neither scare nor distract one single NRA member from our mission to stand and defend the individual freedoms that have always made America the greatest nation in the world."



As Ms. Slater writes, it appears to be different this time. You can expect other companies to join the effort against the NRA, either for beliefs, PR reasons or backlash.

President Donald Trump would arm teachers, but others in the U.S. are joining the #BoycottNRA campaign, which, among other things, has companies as its targets.

There are other groups that stream NRATV, for example, that are coming under intense pressure to drop the group and help end what has become a horrific realtiy-TV show.

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Markets at a glance

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Morneau's diner budget: The week ahead

This week is all about dining: Juicy economic readings, appetizing bank earnings, meaty testimony from the new Federal Reserve chief, but a lean federal budget.

Finance Minister Bill Morneau releases what observers expect to be a not-overly-fatty budget Tuesday afternoon.

Because, politically, he doesn't have to impress us with a fancy steak dinner when a diner will do just fine at this point.

(Unlike his Liberal Ontario counterpart, who's heading into an election. Having said that, the opposition there is now ground beef.)

Minister of Finance Bill Morneau speaks to media after meeting with private-sector economists in Toronto on Feb. 16.

For Mr. Morneau, the timing is perfect for a "placeholder" budget, said CIBC World Markets chief economist Avery Shenfeld.

"The Liberals will want to be much closer to 2019 before unveiling new budget measures that will form the backbone of their platform for the election that year," Mr. Shenfeld said.

"If you're worried about higher taxes on capital gains, hoping for Ottawa to match the U.S. on immediate expensing of capital equipment, or advocating something big on the spending side, wait until next year."

There's no huge pressure from the fiscal and economic side, either, Mr. Shenfeld said, particularly given that the Liberals have already brought in much of what they'd proposed and unemployment is below 6 per cent.

And, for that matter, the only things left are "some overdue details" on small business taxes.

"Having reached full employment, this isn't the time in the cycle for a stimulative boost to government spending," Mr. Shenfeld also noted.

"Unlike the U.S. Congress, the Liberal government seems reasonably well versed with Keynes," he added.

"We still have plenty of infrastructure dollars coming, and potential stimulus from election year budgets in Ontario and Quebec. Better to save some federal spending power for the next recession."

As for the deficit, Capital Economics expects Mr. Morneau to unveil a slimmer-than-expected gap of about $18-billion for fiscal 2017-18.

This doesn't all mean there will be absolutely no meat on the bones.

"From a policy perspective, the recent chatter has surrounded measures to promote gender equality and, from an economic perspective, that could cover issues such as equal pay and labour market participation," said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist, and his colleague, senior economist Robert Kavcic.

"Also, we'll have a keen eye on any measures taken in response to the sweeping tax reform (and resulting competitiveness pressure) recently enacted south of the border," they added in their lookahead to the budget.

"Finally, keep an eye on the infrastructure program, which has been slow to roll out, and the pressure could be on to get more funds flowing ahead of a fall 2019 election."

The calendar:

Monday: Slim pickings

There's a reading on January new home sales in the U.S., which observers expect to show a gain of 2 to 4 per cent, annualized, and a handful of corporate earnings reports, including one from PrairieSky Royalty Ltd., but not much else.

Tuesday: A lot to digest

Besides the federal budget, markets will be digesting House committee testimony from Jerome Powell, the new Fed chair.

Jerome Powell, the new head of the U.S. Federal Reserve, at his confirmation hearing in Washington on Nov. 28, 2017.

Watch for signals of a rate hike at the next meeting of the Federal Open Market Committee, the central bank's policy-setting group, though investors already expect that.

"Recall that last week's minutes indicated that 'most members noted that recent information on inflation along with prospects for a continued solid pace of economic activity provided support for the view that inflation on a 12-month basis would likely move up in 2018 and stabilize around the committee's 2-per-cent objective in the medium term,'" said economists at Deutsche Bank.

"In short, Powell will likely convey the message that with an improving growth and labour market outlook, the Fed continues to gain confidence that the inflation side of its dual mandate will soon be met."

Markets will also get another U.S. real estate reading via the S&P/Case-Shiller home price index, expected to show a gain of 0.4 per cent in December from a month earlier, and 6.5 per cent from a year earlier.

In Canada, BMO and Bank of Nova Scotia pick up where Canadian Imperial Bank of Commerce and Royal Bank of Canada left off last week, with reports on first-quarter results.

Wednesday: The breakfast club

Mr. Morneau kicks off a breakfast tour to sell the budget, today to a business crowd in Otttawa, and Thursday in Toronto.

There's also a second helping on the U.S. economic front, with another reading of fourth-quarter growth expected to show a revised annual pace of 2.5 per cent, compared to the earlier measure of 2.6 per cent.

In a similar vein, India reports fourth-quarter growth, and Shilan Shah of Capital Economics expects to see a year-over-year rate of 7 per cent.

There's also the "flash" estimate of inflation in the European Union, which is expected to be cooler.

"The lack of inflation in Europe has been one of the more puzzling aspects of the resurgence in economic activity across the region in recent months," said CMC Markets chief analyst Michael Hewson.

"While GDP suggests the economy is in rude health, consumer spending has remained subdued," he added.

"With the [European Central Bank] on course to exit its asset-purchase program this year, a higher euro will continue to cause problems for the ECB in meeting its inflation target."

National Bank of Canada and Laurentian Bank of Canada report results, as do Equitable Group Inc., Pengrowth Energy Corp., Salesforce.com Inc. and Valeant Pharmaceuticals Inc.

It's also the last day of February, time to take stock of a tumultuous month in the markets.

"With month-end approaching it seems likely that markets in Europe will see all the January gains wiped off," said Mr. Hewson.

"U.S. markets may well fare slightly better but that doesn't change the fact that all the January optimism of record highs has taken a knock."

Thursday: Leftovers

Like eating cold pizza the next morning, the Fed's Mr. Powell continues his testimony, this time to a Senate committee.

There are also manufacturing index readings from around the world, and Statistics Canada's report on our current account deficit, which BMO expects to show a narrower $17.5-billion in the fourth quarter from the third quarter's 19.3-billion.

Earnings: Calfrac Well Services Ltd., Canadian Natural Resources Ltd., Crescent Point Energy Corp., Husky Energy Inc., Toronto-Dominion Bank, TransAlta Corp. and Transcontinental Inc.

Friday: Indigestion

We know that Canada's economic growth has been slowing after a string of heady gains.

And so Statistics Canada's look at gross domestic product for December and the fourth quarter will highlight that indigestion.

"The Canadian economy maintained its slower second half pace after a torrid four-quarter run (2016 Q3 – 2017 Q2) where growth averaged 3.6 per cent, the strongest since 2010," said BMO's Mr. Reitzes and Mr. Kavcic.

Economists expect the report to show tiny growth in December, and an annual pace for the quarter of about 1.7 to 2.1 per cent.

"Consumer spending appears to have continued to increase in Q4 but at about half the outsized 4-per-cent pace over the prior three quarters," said Royal Bank of Canada economists, who expect an overall reading of 1.9 per cent.

"Residential and business investment both appear to have posted large Q4 increases – although both also may have been temporarily boosted by new regulations," the RBC economists said.

They were referring to the home buyers who in late 2017 rushed to beat new mortgage qualification rules that came into effect two months ago, and businesses that bought equipment ahead of new emissions regulations on imported machinery.

There are some corporate earnings, as well, including those from George Weston Ltd. and Sleep Country Canada Holdings Inc., the latter reminding us that we just might need a nap by now after such a heavy meal.

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