March 20th, 2012

On The Way: More Stringent Mortgage Qualifications

OSFIOSFI, Canada’s banking regulator, is leaning on banks and other federally regulated lenders to clamp down on underwriting practices. It released these draft recommendations yesterday.

After reading through 18 pages of changes in detail, our immediate reaction was frankly, concern.

That’s not because the guidelines are greatly imprudent. Some are unnecessarily rigid, but most are sound policy.

It’s because OSFI risks tightening too much, too fast.

If the government also decrees new insured mortgage regulations (like these), and/or rates rise significantly, and/or unemployment unexpectedly spikes, it could form the proverbial perfect storm that blows over housing valuations.

It’s one thing to induce a measured housing correction (which is probably needed in some regions), but a policy-initiated free-fall is another matter.

At this stage, OSFI’s proposal is not final. It is currently open for public comment, but if this draft guidance morphs into a firm set of guidelines, there could be broad implications for borrowers.

Here’s a rundown of the changes being discussed (our comments in italics):

*********

For All Borrowers:

Restrictions-on-MortgagesThe lending tap may be tightened for a variety of mortgagors. Among other things, OSFI is advocating:

  • That “cash back should not be considered part of the down payment”
    (This seems reasonable to most people. Ninety-five per cent loan-to-value is the maximum for standard purchase financing. If lenders apply OSFI’s guidelines literally, we may say goodbye to 100% financing using 5% cash-back mortgages. These products are currently offered by Scotiabank, Laurentian Bank, National Bank, and others.)
  • Use of the benchmark 5-year posted rate (“at a minimum”) for qualifying uninsured mortgages with variable or 1- to 4-year fixed terms
    (Many lenders currently use 3-year rates to qualify uninsured mortgages. This could make it harder for those with 20% or more equity to qualify for variables and shorter-term mortgages.)
  • That “the loan-to-value ratio should be re-calculated at renewal” based on the updated appraised value
    (OSFI tells us, “This is a new guideline.” To us, it raises the question of what lenders will do if housing prices drop and borrowers are underwater equity-wise. If the number of good-standing borrowers with negative equity increases, will banks start requiring more people to pay down their mortgages at renewal (to bring LTV within normal standards)? Doing so could theoretically trigger a negative feedback loop. In other words, some people would have to sell if they couldn’t come up with the money. That could push prices down further and put more borrowers underwater. OSFI says that this new guideline “does not change (the) dynamic” lenders currently face if prices fall, and that lenders “do not have to conduct the same level of due diligence at renewal” if they have an established relationship with a borrower. But, that kind of skirts the real issue, which is: What’s the point of “re-calculating” LTV and re-appraising a property if lenders aren’t expected to enforce standard LTV maximums?)
  • That home insurance be reflected in total debt service (TDS) calculations. (It currently is not.)
  • More conservative debt ratio calculations
  • More scrutiny (by banks) of non-bank lenders’ underwriting practices. This applies in cases where a non-bank lender is selling mortgages to a bank.
    (As a result, even though most non-bank lenders are not OSFI regulated, they may be forced to adopt many OSFI guidelines if they’re selling mortgages to a bank—which many are.)
  • “Limits on any (underwriting) exceptions”
    (Reasonable exceptions are granted by lenders all the time because lending is not a black and white science. It would be needlessly detrimental to well-qualified borrowers if this guideline were to make underwriters more afraid to apply common sense exceptions.)
  • In addition to the above, OSFI says it wants greater public disclosure of statistics pertaining to institutions’ mortgage practices. (Data junkies [like us] will love this one.) [More from the Post]
  • More reporting and accountability from management as to a lender’s adherence to prudent underwriting guidelines.
    (No argument here.)

HELOC-Home-ATMFor HELOC Borrowers:

  • OSFI proposes three important new guidelines:
    • A) HELOC limits should generally be set to a maximum of 65% loan-to-value.
      (Currently, HELOCs are approved for up to 80% LTV. If we’re to take this literally, it portends a big slowdown in HELOCs. HELOCs have been major growth areas for some banks, especially RBC and BMO.)
    • B) Banks would need to impose either:
      • “A clearly-defined period (e.g., 5 years), after which the outstanding balance of the HELOC converts to a fixed-term with a reasonable amortization period;
        (This would undoubtedly encourage some HELOC borrowers to switch lenders after five years.)or
      • “A set percentage of the outstanding balance of the HELOC (be made) due each month that equates to a reasonable amortization period.”
    • C)  “At a minimum, HELOCs should have an amortization period that is no longer than the amortization period that would be available for a similarly qualified residential mortgage.”
      (HELOC borrowers on the “never never” debt repayment plan won’t like these last two points, as they could potentially make interest-only payments history at some lenders.)

Self-employed-mortgagesFor Entrepreneurs:

Numerous lenders offer stated income mortgages. They’re designed to help Canada’s 2.67 million self-employed obtain financing in cases where legitimate tax planning prevents them from declaring income in a traditional manner.

To mitigate risk on “business-for-self” mortgages, lenders rely heavily on the borrower’s equity, credit score, and repayment history.

OSFI is not overly fond of this business model.

It says “Undue reliance on collateral” can be “traumatic for the borrower” and “costly to the lender” in default situations. Moreover, credit scores can be fallible if relied on too heavily.

OSFI also says it’s concerned about application fraud with stated income applicants.

As a result, it recommends that banks ask for “relevant income tax information” from self-employed borrowers. That means the equivalent of a T4 or T1 General accompanied by a Notice of Assessment (NOA).

Note:  It’s already common for lenders to ask for NOAs with non-income qualified applications. But, they often do so simply to confirm that no taxes are owing.

In this new regime, lenders will increasingly be looking at the income on those documents as well. More and more, if borrowers want a true stated income or equity mortgage, they may have to resort to non-prime lenders and pay higher interest rates.

*********

Mortgage-policiesIt’s worth reminding everyone that the above are draft guidelines, not regulations. In addition, once implemented, regulations technically have more teeth than “guidelines.”

That said, an OSFI spokesperson tells CMT, banks can expect OSFI intervention if they ignore important guidelines.

As well, Maura Drew-Lytle, a spokesperson from the Canadian Bankers Association, tells us: “Federally regulated financial institutions will be required to follow the final guidelines, whatever they may be.”

So, this all comes back to our first point. In aggregate, these rules (they’re not officially rules but they’re pretty close) are not a small pill for the market to swallow.

Hopefully there are regulators out there somewhere, asking themselves:

  • How many new lending “guidelines” can the market bear before it breaks?
  • Why have we allowed so few exceptions for responsible low-risk borrowers, for whom flexible lending policy provides genuine economic benefits?
  • Does the benefit of more restrictive lending outweigh the economic cost and housing repercussions?

It’s not unlike the speed limit analogy. Cutting highway speeds from 100 km/h to 60 km/h would save thousands of lives, but at a cost. Downshifting the mortgage market too quickly, has its own set of costs.

Drew-Lytle notes that: “One of the causes of the global financial crisis was the questionable mortgage underwriting practices of lenders in some countries. This clearly was not the case in Canada.”

“Canadian bank practices permitted them to avoid the self-inflicted financial difficulties of banks elsewhere,” she adds. “The sound management and prudent mortgage lending practices of Canadian banks meant that the government did not need to rescue them through bailouts.”

Mortgages-marketDrew-Lytle states that Canada’s strong lending performance is partly reflected in its arrears rate of 0.38%, which is among the lowest in the world.

“This number has been stable for more than two decades, in times of high and low unemployment, high and low interest rates and a strong or weak Canadian dollar. It is well below levels in the U.S. and the UK,” she said.

Of course, defaults will rise as home prices correct (as they typically do). But that is natural in any downward slope of the housing cycle.

Everyone is also well aware that the market is riskier today. Down payments are lower, prices are higher, and so are debt levels. Indeed, Canada’s housing market hasn’t been put under severe stress in many years (2008 was a mere blip on the price chart). As a result, one might expect defaults to double, if not triple, on a national basis in response to a serious downturn.

In any event, we’d close by noting that most of these measures are good common sense. In fact, many of OSFI’s recommendations are already employed by scores of lenders.

On the other hand, there’s a real risk that excessive rule-making will create more problems for housing than it solves. That’s especially true if it’s combined with additional housing “speedbrakes” (e.g., more amortization or down payment regulations, interest rate hikes, or rising unemployment). Regulators may find in hindsight that it’s sometimes better to take medicine from a spoon than a ladle.


Sidebar: Non-federally regulated lenders are not directly bound by these rules, which might give some of them an edge in offering more flexibility to qualified borrowers. The exception, per above, are non-bank lenders who must sell to banks. Those non-banks may be held to similar standards by their bank partners.


Rob McLister, CMT

89 thoughts on “On The Way: More Stringent Mortgage Qualifications”

  1. Thanks for another great article Rob! It’s hard to read the reports from economists, lenders, governments and so many others when they vary so much from week to week. How can the economy change on a dime – one week it’s on the upswing and the next it’s heading to the dumps again?! We’ve had so many mortgages changes imposed in the last 3 years; we need to actually evaluate and see how those changes have already impacted the market. Real estate transactions affect so many industries and businesses, that we could do more damage by making too many changes too quickly, thus having a greater negative impact! I truly believe it’s not mortgages that need to be regulated any further, but personal loans, lines of credit, credit cards, etc. This is the debt that becomes uncontrolable and gets people into trouble because it’s so easily given. The bank may say no to a mortgage, but will happily approve a can loan for $700 a month on a brand new vehicle! But the problem lies in the fact that these lending practices are so much more difficult for the government to impose restrictions on, so mortgages are targeted unfairly.

  2. Drew-Lytle notes that: “One of the causes of the global financial crisis was the questionable mortgage underwriting practices of lenders in some countries. This clearly was not the case in Canada.

    Are you kidding me? To paraphrase Warren Buffett, the tide is still out! Wait until it comes in, then we’ll see who’s been swimming naked.

    “Canadian bank practices permitted them to avoid the self-inflicted financial difficulties of banks elsewhere,” she adds. “The sound management and prudent mortgage lending practices of Canadian banks meant that the government did not need to rescue them through bailouts.”

    So what do you call the 69 billion dollars provided by the GoC to the Big 5 in 2008? A gift?

    Drew-Lytle states that Canada’s strong lending performance is partly reflected in its arrears rate of 0.38%, which is among the lowest in the world.

    Hmmm…there’s something about Canadian real estates prices (note, the word is prices, not values) that is different from the rest of the world. Oh, yeah, they have yet to collapse. Once they do, I suspect the arrears rate will go up a tad, no?

  3. Interesting article. However the logic doesn’t make sense to me.
    You say that these restrictions are more or less good common sense. Given that there are two scenarios.
    1. The market is sound and housing valuations are justified by fundamentals. Hence these new rules would have little if any effect, as all they do is trim out some higher risk options.
    2. The market collapses due to these changes, in which case we will know that all the talk about our healthy market was smoke and mirrors.
    You can’t have a healthy market that collapses due to some minor regulations.

  4. Watchdog
    Are you joking? That video is all American based (unregulated securitization, NINJA mortgages, option ARMS). Most of this stuff doesn’t apply to Canada so if you think this video depicts the Canadian broker market you are either incredibly ignorant or have an agenda against our industry.
    What a foolish comment.

  5. Get your facts in order. The $69 billion Insured Mortgage Purchase Program merely authorized CMHC to buy mortgages that were already insured. It was not a bailout because it added no additional risk to the system and because the government earned a handsome return on this investment.
    Oh ya. It also happened to save Canada from the devastation of the global financial crisis, but that’s just a minor detail to guys like you.

  6. So you think these are just “some minor regulations?”
    Posted rate for qualifying conventional mortgages?
    Forcing banks to reappraise and requalify people at renewal?
    65% LTV on HELOCs?
    Amortizing HELOCs after five years?
    Eliminating self-employed stated mortgages?
    You call those “minor?” LOL. You don’t have much lending experience. Obviously.

  7. How old would a person have to be to remember a time when all of these things were considered normal and prudent actions for a lender, and violating them was something that only hard money lenders did, in exchange for punitive interest rates?

  8. I just wish Flaherty would step up and address the real problem with credit in Canada … high rate and easy access credit cards. Magicians always take your eyes elsewhere while they fiddle with the real problem. By concentrating on Mortgages Flaherty is keeping our eyes diverted from the real problem. If there is a correction in the housing market (and I don’t call a 1-6 month blip of a couple of points a correction) the other credit vehicles will spike creating an even more explosive credit challenge for Canada. You may not wish to look at the bullet speeding your way but sooner or later our government will have to deal with it and that bullet is credit card debt not Canadians average 43% LTV mortgage debt.

  9. With the level of scrutiny lenders apply to broker originated deals and the support documentation related to those deals, it’s no wonder that the majority of “fraud” related incidences are originating from internal sources at Banks. Not suggesting that fraud does not occur in the broker channel, but the days of the wild wild west are long behind us.

  10. Before we go on, let’s have some context.
    Outstanding cdn credit card debt is $80 billion.
    Mortgage and HELOC debt is over $1 trillion.
    Are we really sure the $1 trillion is 100% “secured”?
    Discuss at will…

  11. How many new lending “guidelines” can the market bear before it breaks?
    It’s helpful to think of the market as a number of people, each of which will not be affected by the new guidelines, will qualify for somewhat less money, or won’t qualify for a loan from an OSFI regulated firm. If you think the latter are a big enough group to significantly impact housing sales and prices…
    Why have we allowed so few exceptions for responsible low-risk borrowers, for whom flexible lending policy provides genuine economic benefits?
    Your use of the word ‘responsible’ suggests an argument that goes to the Character of the borrower. The rule changes here seem mainly concerned with the demonstrated Capacity of the borrower to repay the loan.
    Does the benefit of more restrictive lending outweigh the economic cost and housing repercussions?
    At this point you really have to decide: Have you been making loans mainly to solid citizens with demonstrated cashflow who’ll keep paying the nut? Or has there been a large fraction of condo speculators and construction workers, who’ll dump properties and stop making payments in a downturn?
    The OSFI is concerned with the soundness of the lenders.
    To us, it raises the question of what lenders will do if housing prices drop and borrowers are underwater equity-wise.
    They’ll have to disclose their % of impaired collateral to the OSFI, which will gain a clearer picture of the health of their balance sheets. The question of what a lender does (and will do in future) with underwater collateral on the balloon payment date is a question everyone involved with a mortgage should have asked themselves long ago given the recent US experience and the Canadian ABCP glitch.

  12. OSFI, are they not allowing the banks capitalization benefits for cross-selling and making their products more sticky? We all now how fractional lending works, right?
    I do agree with some of the regulations, but it sounds a like they are looking to provide consumers with less options. Get real, there will always be idiots who can’t manage their finances, so why penalize those who can?

  13. As usual, a very well thought out article, stimulating and concise. A very real problem with the suggested changes in regulations and “guidelines” is that they are not happening in isolation but are a part of a government operating in ignorance and in fear.
    Combining severe belt tightening in federal budgets with similar cut backs in provincial budgets means that growth in the economy generally is already going to be negative. Previous stimulus is withdrawn, combined with deep cuts in expenditures in “operations” and in capital projects.
    When you talk about a potential perfect storm, don’t forget about the financial weather! We often forget that the US meltdown and the EU financial mess are all created by governments that didn’t have a clue about the potential consequences of their actions.
    The Conservative government is endangering the financial stability of the country because they didn’t create our stable banking system, and they don’t really understand how it works.
    By trying to be virtuous, they are making a mess.

  14. Rob, just terrific reporting and really fine commentary here. Great analysis, I do not know where you find the time to do this amount of work.
    The central issue is very simple, there is going to be property value reversal in Canada and the regulator wants to take action because it feels it has to. The fact that their actions may expand the problem as a result of the policy changes really does not matter to them. OSFI feels they must act because there are mortgage issues staring them in the face and its their job to deal with that. Regulators regulate, builders build and mortgage brokers rant against the inevitable.
    Canada has had a property value boom because:
    - we have super low interest rates.
    - we were a safe haven for foreign investment in an uncertain world.
    - we have an excellent system in place to allow low down payment real estate purchases.
    Factors both internal and external combined to cause a run up in property values and now the time has come to pay the piper. Come on folks, do you really think that the same house in Chicago should sell for half the price in Toronto because we are so special? Since all mortgage broker’s income is transaction based; the idea of doing far fewer transactions in the coming years is scary and rightly so. I think about it every single day.
    But we can’t fight the future. All we can do is plan for 65% fewer transactions in 2013, take actions to lower overheads and sock away as much as we can for the remainder of the year.

  15. This topic is premature and has yet to unfold, but I leave you with these two charts that must have made OSFI and Flaherty concerned as to what our banks are up to.
    http://i43.tinypic.com/194cat.png
    http://i42.tinypic.com/20f9s7a.png
    And some wonder why banks where rushing to insure ‘conventional’ mortgages and pushing to delay the Volcker rule. These bonds are pooled to default so they can profit again on their CDSs via OTC derivatives market.

  16. It will be interesting to see what Flaherty has in store for the real estate / mortgage industry when the budget is released next week, and how it jives with these proposals from OSFI. Especially if he lowers the max. amortization for insured loans to 25 years.

  17. Very well put. Thanks for the comment Ron. Hope myself it doesn’t end the way you are predicting but also trust you have great knowledge much like Rob since you are in the thick of it daily.
    May I ask you or Rob a question?
    I currently live in Burlington, Ontario. Money sense just came out with the article of greatest cities to live in Canada. Thankfully Burlington is number 2. Number 3 last year. Do you think a ranking like this can soften a blow to the housing correction if it comes. Seeing that we are ranked so high?
    Thanks so much and wouldn’t mind if anyone else would like to share for me.

  18. Nothing like a gut reaction instead of a well thought out response :( Would love to know if someone actually has facts & figures as it relates to defaults on programs such as the stated and flex down? Where does the 5% flex down come from? Obvs, the lender provides, but is it factored into profits because last time I looked, borrower not only had to qualify on posted, but GETS it for 5 years. Compared to a 2.99er who may be in for a pretty big payment shock at renewal. Do nothing and the market continues to plug along or there’s a problem. Make a bunch of changes and the market continues to pug along or there’s a problem. Would hate to simply roll the dice. I have this thought that there may be a response that isn’t so extreme and based on more facts. Tough to do an appraisal in Canada when you may be using US comparables.

  19. “The fact that their actions may expand the problem as a result of the policy changes really does not matter to them.”
    It should. We as citizens and home owners fund OSFI’s salaries. There is a fundamental problem when regulators make guidelines to cover their duff without weighing the overall repercussions.

  20. All seems like fairly reasonable changes when you think about it…aside from updating the appraised value at renewal. That’s a recipe for giving a client no options at renewal and paying posted at that time. That’s bad news…unless your on the receiving end of a lender’s profits of course.
    Also not crazy about reducing the LTV’s on HELOC’s to 65%, but savvy borrowers accessing that equity for the right reasons will know how to deal with that change.
    Also, to clarify some paraphrasing on this comment section, it doesn’t sound like they’re eliminating stated-income mortgages, it just sounds like their asking for some more financial documentation to determine reasonability. I don’t see what’s wrong with that.

  21. If our market does turn downward the updating of appraised value at renewal can only make a bad situation worse. People will not be able to come up with enough money to pay down the existing mortgage (even though they could still aford to make mortgage payments) and be forced from their homes. This should be an extreme concern for us all not as brokers but as an industry and an economy.

  22. Real Estate is local, each location and even what type of property will be a factor. An ebbing tide lowers all boats; I don’t really have an opinion on one area being better than others.

  23. OSFI people are saleried government workers with specific jobs to do. The economic policy matters are way above their pay grade. Governments make economic policy, OSFI is there to safeguard the banking system.

  24. The consensus from most bank and institutional reports that I’ve read believe the government will terminate the use of collateral backed by CMHC into covered bonds. This will force banks to i) make better quality loans ii) use private insurers iii) pay higher rates on bonds.
    In my opinion, there will be a trade off, whereby the banks are left to regulate themselves (provided with guidelines) and may continue market making in the OTC derivatives (to mitigate risk); in exchange, the government will withdraw CMHC insurance allowing private capital to determine market rates. At the same time, there is legislation being proposed to grant covered bond holders senior status in the event of a default. By this law, bond holders may be ensured on their investment which may lower a bank’s borrowing rate, however, this will also put pressure on the banks by their shareholders.
    Our banks need to return to private funding as the government can not longer guarantee the amount of liabilities relative to the size of the economy. With no effective action, we are on a path to insolvency.

  25. @Daryl
    Are you in the industry? If so, you should understand that asking for income proof on tax returns and NOAs defeats the purpose of a stated income mortgage!

  26. Really? Is that why OSFI took sides with our banks to delay the Volcker rule? When all the rule proposes is that customer funds may not be used for ‘market making’ profits for the banks. What kind of safeguarding is that?
    There are no rules anymore. What we have is complete nihilism.

  27. Watchdog, as usual sheer claptrap and tea-party foolishness. Many factors have come together that will lead to a value reversal in Canada’s real estate market but our banking system and mortgage insurance system have been the envy of the world and that is part of the reason for the value run-up.
    To push for the adoption of Ron Paul style non-governmental systems is just dumb. Our systems have worked so well for so long we just need to tweek them. We are going to have to suffer through 5 to 7 years of real estate doldrums and eventually we will come out the other end. There is no sense to doom the next generation to huge down payments, higher than necessary interest rates just to please Glen Beck free marketers.

  28. Banks are supposed to be very well paid to ration credit for its best use by the economy. For this to work CMHC needs to be acting at the margins of an independent market with 10-20% share, not 75%.
    CMHC also needs to be primarily funding cheap (under 400k) first homes: not condo empires or HELOC-funded entrepreneurship. We have commercial lending for that. OSFI is being forced by CMHC governance inaction.

  29. Instead of addressing the arguments, you keep throwing up seemingly irrelevant links and charts. You add nothing to the discussion by doing that. If you’re going to post something, a chart, video or whatever, at least explain how it makes your point.

  30. Isn’t OSFI part of the government? Some of these rules seem totally overboard. If the DOF steps in with more regulation, I have no doubt it will trigger an economic contraction and housing selloff. How does that “safeguard” the banking system?

  31. Credit is a priviledge not a right. If we actually enforced the rules we have on the books and lenders not made exceptions, there would be problem. All lenders were afraid of losing broker business or p’ing off a broker they kept saying yes and were too afraid to turn down an application. So here we are…That and too much reliance on credit approval software

  32. “There is no sense to doom the next generation to huge down payments, higher than necessary interest rates” and significantly lower prices…

  33. I would like to see those stats too. A couple of years ago I approached Genworth to gain access to some of their stats, but of course they would not share.

  34. None of those changes will cause problems for well qualified borrowers.
    All we’ve been hearing is how the vast majority of borrowers are well qualified. Unlike the US, we don’t have lots of marginal borrowers that are only buying because of loosened credit.
    So, if that is true, we have nothing to worry about. If it isn’t, then we have to worry, but the whole premise of a healthy mortgage market goes out the window.

  35. although the net effect of all the combined changes will likely be catastrophic to housing values, individually, those changes are all minor.
    individually, not one of the those proposed changes have the ability to be a market changer.
    Add them up and it’s gonna get ugly. i say bring it on. it’s about time this giant zit got popped

  36. LS you’re missing the point. It doesn’t matter how sound a market is. When you take demand out of any market it has a negative effect on prices.
    I would agree with others that these changes are not “minor” when taken together.

  37. actually, anyone in the industry would know that asking for tax returns and NOA is standard practice for stated income. they look at your stated income and compare it to your declared income and determine if it’s reasonable. it’s called the reasonability test. so Mr. Taxi driver that shows $5k/yr on line 150 of his NOA probably isn’t reasonably making $400k/yr that’s he’s declaring as “stated income” but i’m sure you already knew that because you’re in the industry. right.

  38. absolutely should be an extreme concern to the majority of home owners out there. but it’ll be great for business for those who do private lending. everybody about to be forced from their homes at renewal will have no choice but to pay the near criminal rates that private lenders charge. no matter which way the market goes, there will always be opportunity to profit from it. i believe that’s actually a realtors association motto

  39. >it could form the proverbial perfect storm that blows over housing valuations.
    You are giving away more than a bit of fear and doubt here. A perfect storm is more than turning away the marginal buyers, it is also China’s slowdown, looooong-term consumer debt buildup, and a shift in appetite for bonds.
    Nice overview though. Thanks for the legwork, as always.

  40. If it’s going to hit the fan because of this it is going to hit it anyway. Might as well correct before it gets even worse, no?
    [yeah, not welcome with comments like this, save your breath, I'll go away now.]

  41. Standard practice huh? I’d hate to be self employed and getting a mortgage through you.
    By definition, “stated income” means no income validation. Lenders can disguise fully qualifying programs and call them “stated income” all they want, but if they’re checking income on tax returns, it’s not stated income.
    Up until recently there were several lenders who didn’t require tax returns and NOAs for “stated income.” Now there are less, but there are still options.

  42. Sure. But the demand that those rules will take out is demand from marginal borrowers. That’s a good thing.
    The magnitude of decline will show us something about the quality of borrowers driving the market today. If the decline is large, then we will know that the borrowers were mostly marginal and forced out by these changes. If the decline is minor, then we know that the market was healthy and mostly driven by strong borrowers not affected by these changes.

  43. Can someone explain the need for stated income mortgages?
    I don’t understand in what legitimate situation someone would be unable to prove their income. If you’re making money, you have to pay taxes, and thus could show your income from those records.
    I make part of my money from my own business, and yet would not have a problem proving my income. It’s all declared for my taxes. All I’ve heard is that it can be hard to prove for “legitimate tax planning” purposes, but what are those?

  44. Just lost your credibility Watchdog. Been reading your posts and complex charts, and not really knowing which side to take. This shows that you are too emotional and bias to be trusted. Too bad. It is always good to see both sides, but you have to present it fairly.

  45. care to list those lenders? when’d you get in this business? last week?
    i know a taxi driver that needs a $1m mortgage. maybe i should send him to you.

  46. Here’s one that we run into every day. Say you operate as an Incorporated business and made a net profit after taxes of 500k. could choose to draw out say 50k in income and leave the 450k remaining in retained earnings/shareholder equity of the business or you could draw out 500k in personal income for that year. The fact of the matter is your personal assessment won’t show that you have ownership of an incorporated business and how much of the years profit was left in the business and how much was drawn into income.

  47. Here are some lenders I know who don’t ask for NOAs on stated deals. If anyone knows of others please post them.
    Merix
    Home Trust
    IC Savings
    MCAP Eclipse
    Equitable
    Scotiabank
    Optimum

  48. Housing is due for a correction on its own. It serves no one’s interests to add fuel to the fire with more regulation. Recovery time after a 20-25% correction is far longer than it is after a 10-15% correction.

  49. Banker, you are missing the point that the income “can be proven”, just not with one’s personal income tax return. The income can be proven with the corporation’s records and contracts etc very easily.

  50. I’m assuming the appraisal proposal for renewals is less about re-qualifying borrowers and more about assuring mortgage portfolios are “marked-to-market”. I would expect that these appraisals would all be automated.
    Nobody’s interest would be served by trying to bring LTV in line when somebody who is making their mortgage payments simply wants to renew; not the borrower’s, not the bank’s, and certainly not the broader economy’s.

  51. LivelyConsumer,
    Under normal guidelines, lenders and insurers won’t consider money left in a company to be personal income for mortgage qualification purposes. That puts self-employed business owners behind the 8 ball and it’s one of the reasons why stated income programs exist.

  52. Because if they let a property bubble continue to expand it will lead to greater problems. They have to stop the expansion of the valuation bubble.

  53. But banker and Up the 400, if you’re leaving the cash in retained earnings, you’re not supposed to be dipping into them to pay for your house, aren’t you?
    retained earnings are kept for use in the business, otherwise if you are drawing on them for personal use and not declaring them as paid to yourself as a salary, that is tax evasion, no?
    Stated income is clearly for those that evade taxes in their cash business. Many people with small businesses do that unfortunately and the government does not go after them. They usually belong to certain groups in this country that were not accustomed to paying taxes before, or to certain industries and professions whose income cannot be really traced.
    let there be no confusion for whom stated income is. It’s for those that suck the blood of our system without contributing their fair share to it in taxes. Do you want to reward those further with stated income mortgages?

  54. Kick out the lobbyists. Put a tax on the property and on the transaction. This will end the speculation and the socialization of any losses on to the backs of the general public. This is the fair and right thing to do.

  55. On the subject of tighter regulations Jim Flaherty says it best in the Globe and Mail this morning.
    Quote:
    On the issue of Canada’s housing market, Mr. Flaherty made comments Thursday that suggest he is not preparing new measures in the budget to cool prices.
    Mr. Flaherty said he would like to see if the market will “correct itself,” and noted that there are some signs that this is currently taking place.
    Some Canadian banks are calling on Ottawa to intervene – either by lowering the maximum amortization period for insured mortgages or by raising the minimum required down payment.
    Mr. Flaherty said he finds those suggestions “a bit much” given that the banks ultimately decide whether to approve a mortgage.
    End Quote.
    Banks set their own guidelines and lending tolerances and should not rely on further regulation to justify their lending practices. While I’m not advocating for an unregulated market (or very loosely regulated market, like the one that developed in the US) the suggestions by OSFI appear to be overly excessive.

  56. The answer to all your questions is no.
    Money that any business makes belongs to the owner(s). They can leave it in or pull it out at their discretion. Leaving retained earnings in a business is not tax evasion. It is legal and it is sound practise from a business, liability and tax standpoint.
    If you have a problem with that, you should write to your MP and complain about all corporations, doctors, dentists and thousands of good tax-paying Canadians who do the same thing. While we’re at it, maybe we should make it illegal to hold revenue in a business? Great idea. Now you’re thinking.
    Tax is always paid on the money when it comes out of the corporation. More importantly, small business owners take great risks with their capital. That benefits the economy (and indirectly, your interests). Don’t forget that small businesses are the #1 job creators. The government should do everything possible to support them.
    If you have a cushy government job you might not care about any of this. Or maybe you are unemployed, which would not be surprising given your attitude.

  57. I’m going to stick to the facts of the article and add my own comments as a Mortgage Agent.
    That “cash back should not be considered part of the down payment” — I don’t understand why they would do this. These home owners are paying posted or near posted rates which are used to qualify all other high ratio mortgages that aren’t 5 or 10 year terms. These folks are in fact, in better shape then someone who barely qualifies has 5% down and is getting a 2.99% rate at 43% TDS….
    Use of the benchmark 5-year posted rate (“at a minimum”) for qualifying uninsured mortgages with variable or 1- to 4-year fixed terms — This would be good risk mitigation for the banks and I think a prudent thing to do.
    That “the loan-to-value ratio should be re-calculated at renewal” based on the updated appraised value — I agree with Rob on this. This looks bad, and if enforced in a market down turn will just crush the market and the economy as a whole.
    That home insurance be reflected in total debt service (TDS) calculations. (It currently is not.) — If the professional that is helping their client get a mortgage isn’t already taking them through a budget well, that’s bad business. However, I agree with this as long as it is a standard amount since insurance rates move up and down based on many factors.
    More conservative debt ratio calculations — Rob didn’t comment on this, but if you are doing a budget with someone you can easily see how a 40% TDS can be difficult to manage.
    More scrutiny (by banks) of non-bank lenders’ underwriting practices. This applies in cases where a non-bank lender is selling mortgages to a bank — I just agree with Rob nothing to say on this.
    “Limits on any (underwriting) exceptions” — To expand on Rob’s comments an example is one I had this morning, client received a gift from their parents for the down payment, client also deposited some cash they had ($200) which means nothing to the transaction, the lender made the exception based on the reasonableness of the bank transaction. I don’t know what limits they are talking about here, but if they try and make it black and white this will cause large scale issues.
    More reporting and accountability from management as to a lender’s adherence to prudent underwriting guidelines. —- UH Yup..
    A) HELOC limits should generally be set to a maximum of 65% loan-to-value. — I don’t see a problem with this EXCEPT that it can lead to borrowers using higher interest borrowing rather then HELOC’s
    Banks would need to impose either:
    “A clearly-defined period (e.g., 5 years), after which the outstanding balance of the HELOC converts to a fixed-term with a reasonable amortization period; — As a Mortgage Agent this would be good, clients switching lenders after each term is good for business, but a pain for consumers. If they put this on HELOC’s the government should look at doing this to Credit Cards and Regular LOC’s….but hey we know that won’t happen.
    “A set percentage of the outstanding balance of the HELOC (be made) due each month that equates to a reasonable amortization period.” — People should be working to pay it down anyways…right?
    “At a minimum, HELOCs should have an amortization period that is no longer than the amortization period that would be available for a similarly qualified residential mortgage.” — Not a bad idea, but that just leads to clients switching lenders.
    Overall there is one solution that they should enact with these low interest rates. MQR should be used on all terms. The MQR is 5.24% today, 2.25% higher then the best 5 year fixed. This would help buffer out those who are marginal borrowers.
    Those are just my thoughts on the issue. Comment if you like.
    John Greenlee

  58. Did we all miss the part about the arrears in canada being consistently at .38%. WE DON”T HAVE AN ARREARS problem in Canada. Firnming up the rules for who….people who are already paying their mortgages as agreed? It seems these regulatory bodies feel the need to look busy, they certainly aren’t addressing any real problems as none exist. I suspect that even in a downturn only .38% of Canadians will have trouble. Why fix something that isn’t broken. Wonder what the default rate is on all that unsecured debt that is being forced on people?

  59. According to the insurance industry, 50% of arrears are because of death or disability.
    At least that’s what our friends at Mortgage Protection Plan have told us.

  60. Hi Whistler, Thanks for the post. That is certainly logical and likely the primary reason for this guideline. It does make one wonder, however, how OSFI and lenders will intervene when these more rigid marked-to-market accounting procedures start revealing ever-increasing numbers of negative equity borrowers.

  61. What a load of crap and smoke and mirrors what you are saying is.
    Money in retained earnings is NOT the property of the owner but rather the property of the corporation. Hence the name “Retained Earnings”. If the owner withdraws it and pays personal income tax on it, only then does it become the property of the owner. Right? That’s not difficult to comprehend is it?
    Why don’t you ask a tax auditor (or any accountant for that matter) what their response would be if you get audited and they find out that you are using your corporate cash balance to give a “loan” to yourself and come back to me with their response.
    and please save yourself from mudslinging public employees. I am gainfully employed in the private sector, and I can assure you I pay more income taxes than the vast majority of Canadian households, and my wife is a dentist thank you (i.e. self-employed as you are saying), but I don’t see how it is of any relevance here to slam public employees.

  62. The data in at least the second link is false. If you take a look at the sedar filings for the Bank of Nova Scotia’s covered bond program or on scotias investor relation website you will see that the condo composition of its covered bond program is not even close to the ~80% outlined in the graph. Sure the data is from September 2011 but the composition of a securitized portfolio, especially mortages does not shirt drastically in a few months. Post links to your source data if you want credibility, instead of manufactured charts. I myself think that there is too much risk in the mortgage system but fabricating inacurate information is no way to bring any positive attention to the issue.

  63. That is only true when the loans are not insured by the government.
    If you want to see your dream come true as outlined above, get rid of CMHC and watch the banks suddenly become more concerned with their lending guidelines.

  64. “If the decline is large, then we will know that the borrowers were mostly marginal and forced out by these changes.”
    The cause and effect relationship asserted in that statement is preposterous.
    Home prices react to supply and demand. Each has a myriad of influences and trying to predict them in advance is the height of futility.
    Furthermore, all available data refutes the premise that marginal borrowers are dictating home prices. One could cite average down payments, equity levels, homebuyer debt ratios, median credit scores, and go on and on. You will find little to support your position.

  65. Isn’t the arrears rate more of a lagging indicator that starts increasing when things go wrong? Certainly in the USA their arrears rate didn’t start going up until home prices had been falling for a couple of years.

  66. I believe the recalculating of LTV is meant for conventional mortgages without insurance, specially for people with HELOC connected to them and show no equity paid down. If you have insurance this is a mute point cause your covered if you default anyways and banks and insurance companies would give you the chance to get out of a negative equity situation over the term of the mortgage rather than force you to sell at a loss and lose profit and put you through a mess of a situation if you could afford the payments easily.

  67. You’re wrong….again.
    [You must hear that a lot?]
    If an entrepreneur owns all the shares of a company then by default he or she controls that company’s assets. A loan has nothing to do with it. We’re talking about a business owner’s prerogative to keep their hard-earned profit in the business, which is a legal right in this country. Anyone with a corporation can do this. When dividends are paid, the owner then must pay full taxes at that time.
    If you really are employed in the private sector, you should appreciate that small businesses make the greatest contribution to net job creation. Go spew your garbage about small businesses not pulling their “fair share” elsewhere. When you are fired for insolence someday, and desperate for a job, you’ll be glad small businesses exist to give you a second chance.

  68. Dizzle,
    You might want to re-read this:
    “This (arrears) number has been stable for more than two decades, in times of high and low unemployment, high and low interest rates and a strong or weak Canadian dollar.”

  69. OSFI doesn’t say recalculation of LTV is for conventional mortgages only. I think it’s for all mortgages.
    I’m curious why they are requiring this. Why would OSFI want lenders to re-establish the LTV and then not expect them to take action when thousands of mortgage holders suddenly owe more than their property is worth?

  70. well, then if it is true that the % of arrears has been stable for two decades, then you cannot say that the fact it is stable means we don’t or won’t have a problem. THat’s because you’re saying that it was also stable in the crash of 1989-1992. If it was still stable then and house prices crashed then, then it is not an indicator of the health of the market.
    agreed?

  71. First, it is clear a more meaningful relationship between REALTOR and Mortgage Broker is needed in order to better serve Canadian Homeowners. Reading comments from CMHC and the banks clearly demonstrates there visions are both short sighted and self serving.
    Next, is home valuations. They cleared legitimacy back in 2004. Hearing CMHC reference a 13 year historical window means the devaluations of the mid 80s and early 90s is not accounted for in the electronic system.
    Finally, today’s homeowner with low equity levels have a different attitude towards, payment failures and bankruptcy. These homeowners do not think about delinquency like their parents did and 10 years of advertising by debt consultants have changed how Canadians think.
    Any property that has an accumulated Valuation in excess of 4% per year compounded since 1995 is at risk of a correction. Even reducing to that generous 4% amount will create massive consequences to homeowners. Giving clients proactive recommendations to insulate or insure themselves against the potential consequences of the coming correction would hold both REALTOR and mortgage broker in better stead with her clients.
    BTW I am a 25 year REALTOR, 3rd Generation in the profession who has used mortgage brokers exclusively since 1990.

  72. I do not agree with your conclusion.
    While arrears have been stable overall, they are clearly affected when home prices correct. Case in point: Arrears went from .18% in January 1990 to .65% in February 1992.
    Rest assured, arrears will reflect imbalances in the market when they exhibit themselves.

  73. all i know is that alot of 5% down folks are in for a big surprize , canada will be a bigger burst than US .. and i personnaly think its about time there were too many dead beats getting rich of this ponzi scheme every bubble burst !!

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