20 Observations on the New Mortgage Rules



Jim-Flaherty-Mortgage-RulesThree months ago, Finance Minister Jim Flaherty told banks to tighten lending on their own. Now he’s doing it for them.

The Department of Finance (DoF), in concert with OSFI, released a buffet of mortgage rules Thursday. By our count, there are eight salient changes that, when combined, will have a measurable impact on housing.

See: New Mortgage Rules and OSFI Guidelines [B-20] for rule summaries.

The motivation for these moves is captured in Flaherty’s press briefing comment: “I have been listening to the market, and quite frankly I don’t like what I hear.” Loose translation: The debt and housing train is in danger of running off the rails.

The DoF’s solutions to this problem will influence our market for years to come. Below are 20 musings on the new mortgage rules, sprinkled with a few tips and predictions:

1. Hurried Implementation:

mortgage-rule-implementationThe government knew full well that borrowers would try to front-run these restrictions. So it provided only 18 days lead time until the changes take effect. Most lending execs had no idea that new mortgage insurance rules were imminent. As a result, lenders were not fully prepared.

Because of this, and because banks like to appear prudent to regulators, there’s a chance some lenders may implement rules (like the 25-year amortization restriction) before the July 9, 2012 deadline.

2. The Stampede:

Mortgage-rule-rushSeemingly every mortgage adviser in the country is blasting out emails advising clients about these changes. The sense of urgency will spike mortgage volumes near-term. But high-ratio borrowers who rush to get a 30-year amortization or 85% loan-to-value (LTV) refi should be warned:

  • Underwriting during the interim period (June 21-July 8) may be especially vigilant, in an effort to weed out the marginal borrowers who spring from the woodwork
  • For the next three weeks, the lenders with the best rates, or those that are less efficient or less staffed, could have abnormal underwriting delays (keep that in mind if you have financing condition deadlines)
  • In most cases, mortgage rule changes are not a reason to rush a home purchase.

3. Rate Warfare:

Battle tank cutoutIf you’re a well-qualified borrower, you’ll be happy to know that you just became more appealing to lenders. These rules will shrink the pool of prime borrowers. As a result, we’ll see bankers and brokers battle harder for your business. That means the rate wars that Flaherty “discourages” will intensify, whether banks publicize it or not.

4. Side-Effects:

affordabilityShorter amortizations, higher qualification rates and lower debt ratio limits will restrict buying power. To that, Flaherty says: “Good. I consider that desirable.”

Canada’s 9.6 million existing homeowners, however, may not deem it so desirable—not if these actions trigger a bigger or longer-than-normal selloff that jeopardizes their home equity.

Equity is the biggest source of retirement savings for millions of Canadians. For this reason, even Flaherty would admit that these proposals are essentially a calculated gamble.

On the other hand, waiting for the market self-correct has its own risks, namely a much longer economic recovery if the speculative balloon is punctured.

Either way, the market is propelled by payment affordability. Reducing buying power will weigh on prices. Whether other supply/demand factors offset this pressure is unknowable.

The DoF wants Canadians to believe the side-effects won’t be extreme. And, if market reaction is anything like the 2008, 2010, and 2011 mortgage changes, it won’t be.

Flaherty states that “less than five per cent of new home purchasers” will be affected by these changes. If he simply means buyers of brand new homes, five per cent equals ~9,600 people a year (based on CAAMP’s 2012 housing starts estimates).

If Vegas made an over/under line on that 5% figure, we’d bet the “over.”

In the new-build market, there are 95,000 first-time buyers each year alone. If you include new and resale purchases, there are roughly 261,000 newbie buyers annually. These are people who are disproportionately affected by these changes, albeit a minority of them.

On top of this you have a minimum of five per cent of repeat buyers (20,000+ a year) that will likely be curtailed by the rule changes to amortizations, qualifications rates, stated income, and debt ratios.

5. The Amortization Effect:

Reducing amortizations to 25 years from 30 chops the maximum theoretical mortgage by roughly 9% (versus ~7% when amortizations dropped from 35 to 30 years). That’s equivalent to paying almost 1% more on your mortgage rate.

Put another way, a qualified family earning $75,000, with no debt, will qualify for $49,000 less mortgage by being forced to take a 25-year amortization.

amortization-comparisonAccording to CAAMP, 40% of new mortgages last year had amortizations over 25 years. Of all the new rules, this will have “the most direct impact on the Canadian housing market,” states RBC. It “will raise the barrier to entry into Canada’s housing market.” (That is Flaherty’s point, of course.)

TD thinks it could take up to a year for changes like this to negatively impact prices. But some expect a more imminent result.

Robert Kavcic of BMO Nesbitt Burns notes: “After the 35-year amortization was eliminated last March…existing home sales fell by more than 3 per cent over the subsequent two months.”

6. Market Stability:

Most industry observers, ourselves included, believe in the merits of shifting some housing risk to the private sector and building savings rates. “Our economy cannot . . . depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” explains BoC chief Mark Carney.

The government adds that these new rules will bring “long-term stability” to Canada’s real estate market. Note: They say “long term” because they know the effects could be adverse in the short term. The DoF calls that risk “manageable,” however.

Home prices, which are already self-correcting in various regions, will see additional pressure as payment affordability drops. (Ironically, a correction in prices would then, in theory, improve affordability.)

Flaherty has “tapped the brakes at precisely the right time,” says BMO CEO Frank Techar. From our viewpoint it’s more like stopping short than a little tap.

All one can hope for is that the brakes don’t lock up, with mortgage affordability being so intimately related to home prices.

That’s partly why the Canadian Association of Accredited Mortgage Professionals (CAAMP) feels the government has “overreached” with this latest round of changes. In a statement Thursday it said:

“CAAMP believes that Canadians understand the importance of paying down their mortgages. These changes, together with new OSFI underwriting guidelines…may precipitate the housing market downturn the government so desperately wants to avoid.”

But heck. With housing-related activity comprising 1/5 of GDP and resale housing adding ~$20 billion in spending and 165,000+ jobs this year, what’s the worst that could happen?

7. So Much for High-Ratio Refis:

Refinance-MortgageRefinances above 80% LTV will soon be a memory at prime lenders. Refinance volumes will then fall off a small cliff. The last time the Ottawa lowered LTVs on refis, insured refinances tumbled 22% (source: CMHC).

The result will be more people being saddled with high interest debt that they can’t refinance. (Insert your favourite home-ATM analogy here.)

We’ll also see home improvement spending slow. The renovation business is a $66 billion industry and $17+ billion a year is financed with mortgages and HELOCs. (Reining in overleveraged and chronic home renovators is healthy. They are a small wedge of the refi pie, however.)

If you own an average priced home, you’ll be able to refinance $18,780 less debt to your mortgage. If your rate on that debt is 19.99%, for example, the 80% LTV refi restriction could cost you an extra $9,000+ in interest (or more if it takes greater than five years to pay off that rolled-in debt).

On the upside, a loan-to-value ≤ 80% would save you $5,587 in default insurance premiums.

Now more than ever, it will pay to have a competant mortgage adviser run the math and compare all your refi options.

8. Non-Prime is Where It’s at:

ProfitAlternative lenders like Equitable Trust and Home Trust are lovin’ life. Their target market has just expanded as regulators force banks to turn away more near-prime borrowers.

If alternative lenders can manage defaults through the eventual housing downturn, they’ll profit handsomely from this volume boost. We’re talking borrowers who are less rate sensitive (because they have fewer options) and at least three times more profitable than “A” borrowers.

In addition, given greater demand for Alt-mortgages and a constant funding supply, we may see “B” lenders exert more pricing power for a period of time.

From a broker perspective, this growth in near-prime lending is the silver lining of these rule changes. Comparison shopping is important for prime mortgages but it’s utterly essential when it comes to non-prime mortgages. And brokers are the only significant source for this service.

9. Exceptions:

new-BFS-mortgage-rulesIf you need a mortgage and have less than 20% equity, then as long as you apply before July 9, you will qualify under the old rules.

That’s true even if your purchase offer isn’t final. “…The new parameters will not apply, even if the conditions of [a purchase] agreement have not been waived,” says the DoF.

If your application does not conform to the new insured mortgage guidelines, however, you’ll have to close by December 31, 2012. (See: these rule FAQs.)

Note: If your income situation, debt ratios or loan amount change, and you need to modify your mortgage after July 9, you may be bound by the new rules (even if you were already approved under the old rules).

10. Pre-approvals:

Pre-approvalIf you get pre-approved before July 9 and want to avoid the new rules, you’ll need to:

a)  Have a purchase agreement dated before July 9, and

b)  Apply for a full mortgage approval before July 9.

11. HELOC Pullback:

HELOC sales will drop once banks implement the B-20 guidelines. The reason: Fewer homeowners will meet the lower 65% loan-to-value (LTV) limit and higher qualification rates.

Fortunately, HELOCs_OSFI tells us it will not require existing HELOC holders with LTVs over 65% to drop down to 65% LTV.

Borrowers are still able to submit HELOC applications today at 80% loan-to-value. There’s no telling for how long. As the October 31, 2012 implementation deadline approaches for the big banks, we’ll see 80% LTVs start disappearing. It could happen sooner than some expect.

In the coming days, we’ll run a piece on how HELOC LTV changes impact the Smith Manoeuvre and similar leveraged investing strategies.

12. CB D/Ps R.I.P.:

Cash-back-mortgageAccording to one high-level bank exec we spoke with, Cashback downpayment mortgages look to be dead, effective October 31, 2012 (possibly much sooner). But no lender has announced anything on this, as of yet.

Cashback refinances, however, may live—unless the DoF ends up restricting them too.

Barring that, cashback refis may get more common as time goes on.

Borrowers can use CBs to refinance to 85% LTV, via an 80% LTV mortgage plus 5% cash back. They’ll have to pay a cashback interest rate (1.70%+ higher on 5-year terms), but the “free” cash effectively reduces that rate premium to about 50 basis points. CB users also avoid the insurance premiums that typically apply to 85% LTV refinances.

Just beware of the cashback clawbacks if you get one of these mortgages and discharge it before maturity.

13. Debt Ratio Double-Whammy:

debt-ratio-calculations-mortgageDebt ratios are one measure of how much mortgage you can afford. The new 39% gross debt service (GDS) limit will only impact high-ratio borrowers with a 680+ credit score. (High-ratio borrowers with scores below 680 are already capped at a 35% GDS.)

Dropping from 44% to 39% will restrict a subset of the market. Most people won’t be affected, however. The reason we say that is because the typical high-ratio buyer has a total debt service (TDS) ratio in the mid-30% range, according to analyst research we’ve seen. The latest CAAMP data on the subject estimates the TDS for all buyers combined at 32.5% (as of 2010).

That said, not everyone is immune from this GDS restriction. The new 39% cap will lower the maximum theoretical mortgage by roughly $57,000, or 12%, for a household earning $75,000. (This assumes a 3.09% 5-year fixed rate with a 25-year amortization, no debt and 5% down.)

If you combine that with the amortization reduction (from 30 to 25 years), it’s quite a one-two punch—amounting to a 20% reduction in maximum theoretical purchasing power.

You better believe that will impact home prices, other things being equal. The good news is that the number of people this effects is relatively small and a 10% price drop would largely offset it. As mortgage rates rise, however, the GDS limit becomes more constraining.

14. Long-am Options:

Mortgage-Amortization-ComparisonAfter July 9, there will still be some lenders offering 30-year amortizations to people with 20% equity. But not the major banks.

If history is a guide, banks will enforce 25-year amortizations on all mortgages. Some might even do it before July 9.

15. Bundles:

According to OSFI, lenders will no longer be able to offer “a combination of a mortgage and other lending products (secured by the same property) in any form that facilitates circumvention of the maximum LTV ratio limit…”

bundle-mortgageThere is question on how this will impact “bundle mortgages.” A bundle refers to an 80% LTV non-prime mortgage with another lender’s 5% second mortgage behind it. This lets non-prime lenders offer 85% LTV lending solutions.

Bundles exist partly to avoid mortgage insurance. Federally-regulated lenders must insure mortgages over 80% LTV by law. If another lender holds the 5% second, it’s a way around that limitation. (Borrowers can also arrange 5% seconds on their own if they like.)

As a side note, and slightly unrelated: This 80% uninsured LTV limit is rumoured to be one reason why TD shut down TDFS. The speculation was that OSFI didn’t like the fact TDFS was offering 85-90% LTV uninsured mortgages—albeit through a structure that was technically onside of the regs.

The OSFI spokesperson we asked wasn’t able to offer clarity on the bundle question, other than to say, “The language in the guideline is clear.”

We can tell you, however, that many in the industry are anything but clear on it.

If one interprets OSFI’s rule as preventing lenders from promoting bundles (as we’ve defined them), that would seem unreasonable. The risk to the regulated first mortgage lender is negligible because the highest risk money (the extra 5% LTV) comes from a totally separate, private and uninsured lender with segregated capital. Moreover, the first mortgage lender underwrites its risk as if it were lending at 85% LTV or above anyway.

16. Million-Dollar Babies:

…are going down with the bathwater. People buying $1 million-plus properties will soon have to plunk down 20%. Otherwise, they’ll no longer qualify for high-ratio insurance.

iStock_000013379755XSmallThat said, the Department of Finance tells CMT: “…$1 million properties with a down payment of at least 20% would still be eligible for (low-ratio) mortgage insurance offered by CMHC and private mortgage insurers.”

Flaherty says that wealthy people’s access to mortgage insurance is “not my concern…If someone can afford to pay a million dollars…they don’t really need CMHC. That’s not what CMHC is there for.”

If that’s true, Jim should probably update CMHC’s mandate. Last time we looked, its mandate was: “to allow as many Canadians as possible to access home-ownership on their own” and “in all parts of the country.” Vancouver and Toronto happen to be parts of the country, and they’ve got more $1+ million homes than homes under $300,000.

From a nationwide standpoint, high-ratio million-dollar mortgages are a small fraction of the pie. In Toronto and Vancouver, however, million-dollar home sales are 6-18% of the market respectively. 53% of single-family homes in Vancouver-proper are over a mil. (for now anyway).

By all accounts, a cut-off at $1 million is purely arbitrary. A million-dollar mortgage buys a lot less than it used to. Granted, it implies you’re better off than most, but it doesn’t make you “rich,” especially if you have to live in a major city.

There’s no public data on insured million-dollar mortgages, but CMHC tells us: “Of our total insurance-in-force distribution, five per cent of our mortgage portfolio had a loan amount exceeding $550,000 at origination. This includes high-ratio, low-ratio and multi-unit.” As a pure guess, high-ratio million-dollar mortgages are probably near or less than one per cent of CMHC’s overall portfolio.

Of course, even a fraction of one per cent of Canada’s 9.85 million homeowner households is tens of thousands of homes. If this news spooks a portion of those owners into selling more urgently, or concerned buyers defer buying, or buyers who need high-ratio insurance can’t get it, some high-end markets will suffer.

It’s worth noting that many million-dollar borrowers have sufficient net worth to make a 20 per cent down payment. They simply prefer to leverage their capital in other ways. Where that buyer has assets, impeccable credit and strong employment, those are very profitable low-risk insurance premiums for the government—premiums the government will no longer collect.

At day’s end, assuming strong underwriting and conservative appraisals, the justification for this change is questionable. Alternatives could have been:  (a) setting the $1M threshold higher, (b) raising premiums on $1M+ properties, or (c) scaling back insured loan-to-values over $1 million.

17. Appraisals:

appraisalOSFI says, “In general, FRFIs should conduct an on-site inspection on the underlying property…” Lenders can still use automated appraisals, but OSFI expects them to use live appraisers if an application is deemed higher risk.

It will be interesting to see if more high-LTV mortgages are appraised. Currently, lenders and default insurers rely on auto-valuation systems on most of these applications.

18. Renewals:

mortgage-renewalIf you have a high-ratio insured mortgage with an amortization over 25 years, you shouldn’t have a problem renewing with your existing lender.

You’ll also still be able to switch lenders and keep an existing amortization over 25 years, assuming:

  • You don’t increase your loan amount.
  • Your loan-to-value doesn’t increase (which could happen if home prices dive), and
  • You have a regular mortgage (i.e., it’s not a collateral charge mortgage).

Of course, if you need to increase your mortgage in the future and have less than 20 per cent equity, you’d be limited to a 25-year amortization. People should keep that in mind if they’re buying with a 30-year amortization today and thinking of upgrading their property down the road.

19. Changes for Self-employed:

Self-Employed-Mortgages-WomenBanks who still have flexible business-for-self (BFS) underwriting policies today (there aren’t many left), probably won’t for long. OSFI has put more pressure on lenders to obtain “reasonable…income verification” from self-employed borrowers, such as an NOA and business formation documentation. Banks have been checking those docs very closely for income reasonability.

Mainstream lenders may stiffen BFS qualifications in other ways as well. As a result, many self-employed borrowers who tax-manage their earnings (i.e., don’t pay themselves enough salaries or dividends) will find mainstream stated income programs ineffective. That’ll force some otherwise-qualified borrowers into the arms of alternative lenders with much higher interest rates.

Some critics might ask, “Why should the government take risk for self-employed borrowers?” To that, one could argue, why should the government take risk for any mortgage borrower?

The answer is beyond the scope of this article (which is long enough already), but in a nutshell: There are substantial economic and social benefits to making home ownership accessible to low-default-risk borrowers who contribute to job growth and pay a profitable insurance premium to the taxpayers of this country. Default risk is not linked to one-factor (income). It’s determined by a borrower’s total credit profile (assets, debts, cashflow, income stability, equity, beacon score, and so on).

20. Interest Savings:

interest-savingsThe DoF’s press release heralded the “$150,000” that “typical” families could save in interest, thanks to it winding amortizations back to 25 years. That’s great, but this is no consolation for qualified borrowers who are forced to allocate cash flow towards a mortgage instead of better uses.

The fact that shorter amortizations save interest is simple mathematics. But that doesn’t make a 25-year amz the optimal strategy (or lower risk) for all.

Many qualified borrowers are better off with a long amortization and lower payments. They can then budget that money towards a higher-returning use, which might include education, retirement investing, a small business or a contingency fund.

Flaherty says that “most Canadians” borrow responsibly. Unfortunately, those responsible people will be restricted by these rules nonetheless.

Ottawa could have made borrowers qualify at a 25-year amortization, and leave the option of 30-year amortizations for payment flexibility. Like it sometimes does, however, the government took an easy shotgun approach to regulation with few provisions for exception cases. But it wasn’t really about that. The real aim behind the amortization change was to slow the market, plain and simple. Policymakers probably barely considered the micro-economic repercussions for individual borrowers.

*******

Despite the short-term pain and any critical comments above, it is clear that housing volatility will be reduced by these moves, over the long term. And that’s a positive…if you look far enough out.

The questions are, how long is long-term, how unpleasant are the side effects, and could those side effects have be minimized by a more incremental implementation?

Whatever the case, credit is due to the DoF, OSFI and Bank of Canada on two fronts:  #1) They want to do the right thing, and #2) they are by no means intellectually challenged. All three consulted with some of the top minds in the country before making these decisions.

Their analysis has led them to conclude that deflating the housing market is appropriate at this uncertain juncture. Hopefully, their decision to substitute mortgage regulations for monetary policy works out. As Flaherty told reporters Thursday, it all comes down to a “judgment call.”


Robert McLister, CMT

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Comments

  1. Comment avatar

    Sudip Adhikari    

    Good coverage Rob. Now I am not going to cover this anymore – I shall simply link to your post.
    On the million dollar mortgage insurance – the move looks and feels like a departure from political philosophy – I could be wrong though.

     
  2. Comment avatar

    gokou3    

    Pretty balanced article. Regarding #16 “Million $ babies”, I have to say: CMHC is ultimately a subsidy of the government (i.e. taxpayers) to the homeowners. I am all for cutting off mortgages to $1M+ homes.
    The “many million-dollar borrowers” who “have sufficient net worth to make a 20 per cent down payment” can now use their substantial networth and not the taxpayers’ subsidies for their home purchase, instead of “leveraging their capital in other ways.”
    And please don’t get started arguing it’s not a subsidy since CMHC is making a profit, etc.

     
  3. Comment avatar

    Island Advisor    

    Hey any volunteers that want to help me start a support group for those who will be negatively affected by these changes?
    As a mortgage professional I have probably had 20 buyers in the last year buy a home with 5 – 10% down that they just sqeuaked in at 44% GDS/TDS and would not qualify under the new rules…
    No matter the amount of coaching around how to plan and be financially responsible… LIFE HAPPENS and no can plan for the unexpected!
    For those who have their hearts out for those homeowners that may find themselves unable to find a reasonable solution in the future… Positive support for those who are underwater to refinace under the new rules or in other ways stuck, will be necessary!
    An example is providing those who need to consolidate a reasonable plan to approach their own families… like how to seek private investment from family using a family members self directed RRSP’s to put private mortgages up to 95% of the new house values etc.
    Or simply how to budget better, find savings opportunities, locate unsecured consolidation, or just plain feel like you are not alone!
    Rob’s got my email – so feel free to connect off line if you GENUINELY want to work on a project like that.

     
  4. Comment avatar

    John    

    It was about time such restrictions to be introduced. Otherwise soon a condo will cost 2 million.

     
  5. Comment avatar

    John    

    Go and protest with the Montreal Students :).
    Protest about what ? That you can’t make profit from unqualified borrowers ?

     
  6. Comment avatar

    Bravo    

    Hands down. Impressive analysis.
    I think we’ll find that Flaherty & co. made a very big mistake here. His mismanagement of the housing market will be his legacy.

     
  7. Comment avatar

    Dave    

    While we’re at it, why don’t we ban minorities from getting insured mortgages? Statistics prove they are higher risk. We can’t have taxpayers shoulder that burden.
    What you advocate is just as stupid.
    We need one mortgage system for all. Equal in every way. This country is socialized enough as it is. If someone wants to get a $5 million mortgage and they pay on time, I’m all for it.

     
  8. Comment avatar

    CB1    

    Just so that we’re clear, is his mistake in shortening amortization lengths back to historic norms and tightening credit now, or was it when he loosened them in the first place? I do agree that one of those was an epic policy blunder

     
  9. Comment avatar

    realisticrealtor    

    A few observations:
    a) this is partly driven by the longer low rate horizon; since at least part of the negative cash flow impact from these changes can be offset through a lower rate -I expect we’ll see more people taking variables.
    b)with the low Canada 5 year yields, banks also have lots of room to drop 5 year fixed rates & therefore the qualifying rate. I expected RBC to jump by now, but maybe the Moody’s downgrade has made them gunshy. Hopefully someone (BMO?) steps up to the plate next week.
    c) the high home 68.4% ownership rate some people like to use as evidence we’re going to hell in a handbasket (often just before they repeat a tired ATM/house cliche) came from the 2006 census – before mortgage conditions were loosened. The ownership rate soared from 1996, but it was almost all due to new buyers getting condos and nothing to do with easier mortgages.

     
  10. Comment avatar

    Sudip Adhikari    

    Wouldnt it be better if those are left for the market (lenders and borrowers) to judge? Too much restriction may bring trouble elsewhere. All government has to do is to tell BOC to rev the printing machine down. I don’t think that the real businesses will be effected by that a lot.
    If a condo is two million and if there are buyers then let it be… What do you think?

     
  11. Comment avatar

    CB1    

    I don’t suppose that “tired ATM/house cliche” would have to do with the absurd claim that Canadians are using their homes as an ATM?
    That is absurd. I mean, the US hit a peak home equity withdrawal rate of a whopping 9% aggregate PDI while in Canada it’s currently running at a much more conservative 9%. Wait a minute.
    But at least we didn’t see consumer spending as a percent of GDP surge in the past decade on the back of debt-fuelled consumption like those crazy yanks. Wait a minute.
    I’m getting all confused. I’d better leave it to a “realistic realtor” to explain what part of that story is cliche.

     
  12. Comment avatar

    Island Advisor    

    Hey John,
    Sorry no protest here… Rather compassion for those people who bought a first home in the last 5 years. Especially the ones who bought with minimal speculation and entered the housing market for a place to live because of advise that “It was the best thing they could do!”
    Clients often seek the help of a mortgage professional after they have already hit a hard place and seek advice on how to get out. With these changes we may have more and more people we cannot find a formal soultion and need to go “outside the box” for.
    Sincerely any other industry professionals that want to do some brainstorming on ways to help once the rules take affect… This information will benefit us all and our clients.

     
  13. Comment avatar

    gokou3    

    Let’s replace “mortgage insurance for $1M+ homes” with “same income tax rates for all incomes” or “same child care benefits for all incomes”.
    Still advocating “equal in every way?” I rested my case.

     
  14. Comment avatar

    furoley    

    Yeah.. good call! let’s leave the market forces alone to work and … let’s remove the guiding hand. Let’s remove politically inspired and tax payers-subsidized CMHC insurance. Let banks, sellers and buyers regulate themselves on their own and let them find the real market equilibrium.
    Is that you call?
    I bet you it would stabilize just at a fraction of current real estate market prices.
    It was not you nor buyers who suddenly became wealthy enough to “allow” a condo to cost 2 millions. It is not their merit. All that richness was materialized by stupid policy makers, those socialists, who wanted to make houses affordable to everyone…
    Sure they did their best. They made it affordable in that time. But they were not smart enough to foresee what would happen next, 15-20-25 years later, as a result of their socialistic stupidness.
    The guy who set a goal “let’s make houses affordable to everyone” is responsible for all this mess we are going to face.
    Those realtors, who now complain about government affecting their “stable and balanced market” are either stupid or not honest enough to understand or to admit that the whole … thing what they now call the real-estate market was created and inflated by the government’s moves, decisions, rules and agencies . There is no free market, guys. You are playing with bubbles in government’s backyard. Those were inflated for you by them and the only reason why a condo can now cost 2 millions is because the government ( and not buyers) allowed it.

     
  15. Comment avatar

    Stats    

    There were maximum house price limits on CMHC-backed mortgages in the past (pre-2003 I believe), so I DO NOT see a $1M limit as any kind of departure – more like reverting to the proper restrictions.
    Given that part of CMHC’s mandate is also to ensure *affordable* housing, backing $600B in high-ratio mortgages and backing speculative “investing” on homes seems like where CMHC went away from their mandate.

     
  16. Comment avatar

    NewAlgier    

    I work in the oil business, and there is no question that low oil prices are clearly positive for the rest of the economy. Yet people in my business hate low oil prices, because it means that we get less.
    Similarly, these changes are unquestionably positive for the economy. As a taxpayer, I’m furious that my money and credit backstops million-dollar mortgages. High home prices are a sin, not an opportunity.
    I sometimes wish for 15% interest rates like the good old days: I can avoid mortgage interest by paying my debt off, but I cannot avoid the mortgage principal required by a housing bubble.
    I own a home. It’s value just dropped 20%. I don’t care. These changes are awesome.

     
  17. Comment avatar

    bubu    

    so US limit is $625,500 for jumbo mortgages and $1M in Canada is not enough? Ridiculous…
    NewAlgier.. I totally agree with you comments..

     
  18. Comment avatar

    gokou3    

    NewAlgier, if more people think like you do (i.e. “sacrifice” yourself for the greater good), the whole human race is better off.

     
  19. Comment avatar

    TheRagingRanter    

    They received very bad advice.

     
  20. Comment avatar

    TheRagingRanter    

    And you’re OK covering the defaults on $5 M mortgages? Millionaires go bankrupt too. It happens. Governments should not be sharing that risk with all of us. Beyond a certain level of income and asset value, you should be responsible for your own risk.

     
  21. Comment avatar

    realistic realtor    

    CBI, CAAMP’s latest report states that only 16% of equity takeouts went for consumption (including education). Over 59% went to investments and renovations. You or I might not like the investment or renovation, but its not quite the same as buying a Hummer.
    Also looking through five years of reports, the biggest reason – making up 1/3 of the more than $150 billion funds pulled out – is debt consolidation. I’m sure excess consumption played its part in increasing the need to consolidate debt, along with medical costs, marriage break-up, job loss, business failure and life, but its a bit facile to blame this whole crisis on the consumer’s desperate need for that third big screen tv.

     
  22. Comment avatar

    Ralph Cramdown    

    Debt consolidation is mostly consumption, no? I’d say much of this debt being consolidated isn’t student loans, it’s car loans and credit card balances, both consumption. If you’re renovating the kitchen or bath and you plan to live in the place for another 10-20 years, that’s consumption, too. And if the ‘investment’ is more real estate, that’s pyramiding.
    Conclusion: If Canadians’ use of HELOCS was as responsible as you claim, thay’d be considerably richer and more diversified than they appear to be.

     
  23. Comment avatar

    John    

    They were left to market to control in US. It’s not sustainable when the income doesn’t grow with similar pace. But you know that.

     
  24. Comment avatar

    realisticrealtor    

    Perhaps consumption is in the eye of the beholder. I guess you could argue that taxes, interest, medical costs, food and shelter are a form of consumption, but I don’t think its the way most people think about it.
    Debt consolidation might reflect past sins -maybe buying too much, or getting sick at the wrong time, or working for the wrong employer or picking the wrong spouse or having the wrong kids. Regardless though, the key issue is that we’re all better off if people can manage through theire problems by lowering their interest payments and spreading out their amortization to improve their cash flow.
    Or we can just let them go bankrupt. Its working pretty good in the US where two-thirds of the $587 billion in household debt reduction is due to insolvency and where 2/3rds of prime mortgage holders are still trapped paying above market mortgage rates.
    If this crisis is really all about bad consumers there’s a simple solution. Take away their credit cards and raise the HST. That’s a much faster way to kill consumption. Turning house equity into a stranded asset isn’t helping anyone.

     
  25. Comment avatar

    Eric Putnam    

    Outstanding post Rob that I will be sharing. I would have liked the 30 year am to have been kept but maybe qualify on basis of 25 years to give consumers choices as to how they manage their overall finances.. Restricting refi to 80% max and heloc to 65% will only force some to use unsecured borrowing at much higher rates (government has completely missed the boat on tightening unsecured borrowing rules ) A large # of self employed Canadians who are good overll risks will be forced to use non prime lenders at higher rates when obtaining a mortgage in the future with the changes made by OSFI. Only time will tell how these changes wihen added up will effect home values but hopefully not by as much as some predict in the media.

     
  26. Comment avatar

    Steve    

    This will foresure separate the broker contenders from the pretenders. The broker party is officaly over and the hang over is just beginning.

     
  27. Comment avatar

    Ralph Cramdown    

    Turning house equity into a stranded asset isn’t helping anyone.
    That was traditionally the deal with real estate: You got to control a large asset with a small initial outlay, on the condition that you slowly but steadily paid it off. That’s how it worked (and worked well, I might add) for hundreds of years up until very recently.
    Your conception, shaped by recent HELOC policy, is quite different. You see a house as a large asset which consumers should be allowed to control with little equity, to be paid down or extracted as necessary. This experiment has been running long enough that we can see how it has worked out. Some people use this flexibility as a bridge over rough spots where they’d otherwise have to sell the house, others extract price gains to finance consumption which their income wouldn’t support, others use HELOCs to delay the inevitable, and eventually have to sell the house after draining much of the equity out of it — they’d have been better off selling and downsizing earlier.
    Your conception of a 5% down continuously readvanceable world is more akin to the commodity futures market than the traditional eventually-pay-it-down housing market. Commodity markets have also been working fairly well for hundreds of years, so why don’t we adopt that model? You put up 5% of initial margin, and the bank periodically values your house, depositing or withdrawing money from your account as necessary to ensure you never fall below a defined equity threshold. What, highly leveraged commodity trading is dangerous speculation, you say? Exactly.

     
  28. Comment avatar

    ENG    

    Austerity…Canadian style!

     
  29. Comment avatar

    Doug    

    This is such crap! It was already hard enough for new buyers to afford to get a home but now it will be next to impossible for those who even make a decent living to ever get into one. So what if a couple has a child and the mom doesnt work anymore so she can watch the child and even though father makes a good living, his income alone will no where near qualify for a new mortgage under these rules. What? They dont deserve a home of their own? It just rediculous that because of friggin politicians sitting behind a desk make a decision to do something stupid, millions of people will not be able to own a home. Its the most basic need for humans, food, water, SHELTER!!! And forget about the tighter restrictions for self employed. As if things arnt made hard enough for them already, lets tighten the noose some more. At this rate business and services offered are gonna drop to nothing because its just become rediculously hard to get financing even if you do make good money.without financing all the little guys are gonna die out. But whatever, they are just names on paper right?!!!!!

     
  30. Comment avatar

    Ralph Cramdown    

    The buyers set the price
    The buyers set the price
    Hi ho, the derry-o
    The buyers set the price

     
  31. Comment avatar

    realisticrealtor    

    actually I’m mainly concerned with the collateral damage from The Great Deleveraging. There is absolutely a need to pay off consumer debt and bring housing price/income and price/rent ratios back to a 1990s trend line. But what frustrates the hell out of me is that the golden opportunity we have to reduce some of the misery through an orderly withdrawal using the ultra low long term rates is deliberately being eliminated. Also making a market more illiquid is dumb at the best of times. Just ask the ECB how cheap it is to clean up the Greece and Germany mess.

     
  32. Comment avatar

    Ralph Cramdown    

    I’m not sure I understand. Consumers had plenty of opportunity to refi and/or consolidate debt using cheap home equity, and they still do, but only for another two weeks. Years of cajoling by Finance and the BoC did nothing about continuously increasing indebtedness. What would you have done differently, with the caveat that merely ASKING consumers to pay down their debts wasn’t working?
    Me, I’d have the governments embarking on large infrastructure projects to cushion the unemployment blow and offset the effects of consumer deleveraging, with the great side effect of actually getting infrastructure, financed, as you say, at ultra low 30 year rates. But no, apparently we can’t afford subways, despite doing the best job of weathering the financial crisis.

     
  33. Comment avatar

    EX-Edmonton Mortgage Broker    

    excellent point. leaving the lid off the cookie jar and simply asking the child to keep their fingers out, while you leave them unattended will only result in a fat kid.
    it’s human nature. we’ve been told and reminded often to curtail our excessive debt driven consumerism. who can resist the newest shiny ipad when you can roll it into your mortgage?
    the new lending rules have finally addressed part of the issue.
    next target should be credit cards and personal lines of credits.

     
  34. Comment avatar

    Now THIS is ridiculous    

    “these changes are unquestionably positive for the economy….High home prices are a sin, not an opportunity.”
    You are probably 1 in 10,000 homeowners who perverse enough to celebrate losing money on their house. People don’t work their azz off to build equity in hopes that their home will become devalued. Your statement is obtuse to the Nth degree.

     
  35. Comment avatar

    Facts    

    What kind of poser calls himself “Stats” and then posts inaccurate statistics?
    $600B is CMHC’s insurance-in-force limit. It’s actual insurance exposure is $570B and three quarters of that is low-ratio with 20% or more equity.

     
  36. Comment avatar

    Stats    

    You further proved the point: why is CMHC backing low-ratio mortgages? How is that a part of the “mandate”?
    I’ve never read a CMHC mandate that says “we should guarantee virtually every mortgage dollar loaned from 2006-2012”.

     
  37. Comment avatar

    Stats    

    Aren’t home renos essentially consumption at some level? (yes, you’re often adding paper value, but many are superficial and/or are repairs that dont’ necessarily add value)
    Doesn’t consumption lead to consumer debt, which leads to debt consolidation?

     
  38. Comment avatar

    Facts    

    The only thing I proved “Stats” is that you speak without concern for facts.
    Everyone who reads your posts should keep that top of mind.

     
  39. Comment avatar

    LS    

    Their support group may be the next federal election. Will underwater buyers realize they were led into a trap by Flaherty, and when they went in he slammed the door behind them?

     
  40. Comment avatar

    LS    

    Both. The first was a mistake because it artificially inflated the market. The second was a mistake because it risks triggering a crash.
    The whole experiment was an unmitigated failure.

     
  41. Comment avatar

    LS    

    People don’t work their azz off to build equity
    What work? Most of the equity in the last 10 years has come from generally increasing home values. There was no work involved in that equity gain. People should not be surprised when that equity disappears as easily as it was created.

     
  42. Comment avatar

    Ralph Cramdown    

    It’s a little more complicated. CMHC does write insurance on low LTV mortgages (why?) but some of the insurance in force is on mortgages that started as high ratio and are now low ratio. Their loss risk is, of course, much higher on more recent high LTV loans than on seasoned, low LTV loans, and whenever anyone quotes stats like “three quarters of that is low ratio,” you have to ask if that’s three quarters of the number of loans, or of their value? And of course, their VaR models account for low LTV loans generating less losses.

     
  43. Comment avatar

    LS    

    Its the most basic need for humans, food, water, SHELTER!!!
    If only there was some way to obtain shelter without buying it… Perhaps some sort of arrangement where you could use someone else’s shelter in exchange for some sort of payment. Nah it’ll never work.
    its just become rediculously hard to get financing even if you do make good money.
    People that make good money will be paying good taxes. And thus they will have no problem getting financing with their tax return.

     
  44. Comment avatar

    James Bennett    

    Sudip you hit the nail squarely on the head. The $1M cutoff is pure optics and 99% political. Capable buyers who purchase $1 million homes are no more likely to default than a capable buyer of a $200,000 home.

     
  45. Comment avatar

    Ralph Cramdown    

    Not true. http://www.nytimes.com/2010/07/09/business/economy/09rich.html?_r=1&hp=&pagewanted=all
    Even if it was true, equal default rates would not mean equal loss rates, nor would it justify the government being the guarantor of last resort for people able to afford million dollar houses.

     
  46. Comment avatar

    realisticrealtor    

    The trouble is there are two overlapping issues: house prices are rising too quickly and people’s debt carrying costs are too high for their incomes
    The solution to the first problem is to temporarily raise the transaction cost and make it more expensive to buy. Or find a way to make it cheaper to rent.
    The solution to the second is to get people to reduce their net debt carrying costs, by lowering their interest rate or cutting back on other expenses. Or finding a way to raise their income.
    Any approach would be much more effective if it was targetted. High debtors causing the debt problem can be as easily identified as the GTA & Vancouver condos that are causing the pricing mess.
    This is very important. Just like brain surgery. Unfortunately our surgeon prefers to use a snow plow as a scalpel. I’m sure he’ll remove the tumour, but he’s leaving a lot of blood behind.

     
  47. Comment avatar

    Bo Xilai    

    If new buyers can’t afford to buy, what do you think is going to happen to prices? Simple Supply and Demand… Doug, remember Econ 101? Do you think sellers will just forego tax-free capital gains just to maintain an artifically high price? Of course not. Prices will adjust lower…

     
  48. Comment avatar

    The_Iceman    

    Mortgage “professional”? …you must be kidding me!
    You have described the problem: too many people at the margins borrowing money. It is precisely people like this who bid up prices when, in actuality, they should have never been given the means to borrow in the first place (…making real estate unaffordable for people like me who do manage their credit well).
    It is for this reason that sanity has totally been thrown out the window and why we have crack-shacks in Vancouver costing in excess of a million dollars. Any real demand/supply economics have been discarded because demand has been artificially pushed-up by unscrupulous lending practices (and by people not realizing what they were getting themselves into).
    For you to have counselled people who “just” qualify to purchase a home is, frankly, bordeline unethical.
    As far as anyone who is affected by these latest changes, all I can say is “too bad”. Rather than looking for someone to blame (CMHC, the feds, the bank, etc…), keep in mind that it was the guy in the mirror who signed the Offer to Purchase.
    Enjoy your latest purchase, knowing that with fees included, your are probably going to be ten of thousands of dollars underwater for the next several years. (So much for “professional” real estate agents and mortgage brokers looking out after your best interest!)

     
  49. Comment avatar

    Steve    

    It’s that type of thinking that got the Americans into a housing collapse. The truth is this artificially low interest rate environment has created a housing bubble that if not stopped will result in an epic housing disaster . . . my fear is that it is too little too late . . . kind of like closing the barn door after the horse is already gone . . .

     
  50. Comment avatar

    Steve    

    I call BS on this one. I personally know several friends who have million dollar mortgages, and they are using their HELOC’s to make the payments, speculating on ever rising real estate prices . . . they are the reason we need to put a stop to this stupidity . . .

     
  51. Comment avatar

    VJ    

    Ralph are you oblivious or simply biased and dishonest?
    Do you really expect knowledgeable readers to fall for you posting US mortgage statistics to make a point about Canadian default rates?
    For the laypeople reading Ralph’s misleading comment, understand that Ralph has intentionally omitted differences between US mortgage financing pre-bubble and Canadian financing today.
    In the US, someone could make up their income with no documentation and then be qualified on a teaser payment that was 50-60% less than their actual payment. At the time, maids and pizza drivers were getting million dollar mortgages.
    If you think Canadian lenders underwrite million dollar mortgages like that you are sadly ill-informed.
    On your last point, defaults can be minimized by thorough underwriting and careful appraisals. Losses are also partly offset by greater premiums and can be offset further by raising premiums.
    I realize that truth doesn’t sway radicals and you probably don’t care about what I just said. But try to be honest with people, and yourself.

     
  52. Comment avatar

    VJ    

    And I call BS on you’re totally unsubstantiated and anecdotal comment.

     
  53. Comment avatar

    Ralph Cramdown    

    You obviously didn’t even read the article.

     
  54. Comment avatar

    Suzanna    

    @The_Iceman
    Just curious why you single out mortgage brokers? What about mortgage salespeople at banks and credit unions?
    In addition, do you mean to say that no mortgage professionals look out for people’s best interest? That’s quite a prejudiced viewpoint if so.

     
  55. Comment avatar

    Andrew    

    It’s very reasonable for people who buy houses to expect higher prices over the long run. Just because prices go up a lot doesn’t mean they have nothing to lose. Home owners work hard to build equity through principal payments. It’s pretty callous and feeble-minded to suggest otherwise.

     
  56. Comment avatar

    Ex-Conservative    

    Many countries have a flat tax for all and it works quite well. So your point is lost on me.
    Dave makes a good point. A $1 million limit is subjective discrimination against people who work hard and earn a good living. Flaherty is biting the hand of successful Canadians who feed him. These people will not forget his and the Conservative’s betrayal.

     
  57. Comment avatar

    Long Term Planner    

    #18 Renewals…
    This could affect A LOT of people. If they’re only making the minimum mortgage payment, your real estate value could easily drop more than what they’ve payed towards the principle over a typical 5 year term. For a 25 year amortization at current rates, that’s about 14%. It’s only 11% for a 30 year amortization!
    People will be stuck with the ‘above-market’ posted rates at their current lender. Lenders will finally make a decent profit from mortgages, but many consumers will be left with less cash, which isn’t good for the economy.
    Yearly inflation is already higher than many annual salary increases.
    The middle class continues to become poorer… and I believe that’s a significant proportion (and strength) of our country.
    Yes, many people rode the real estate wave… but recent first time buyers were not so lucky. I finally bought in 2006 when I was 32 and starting a family (but I still had student loans).

     
  58. Comment avatar

    banker in an ivory tower    

    Doug, its not the 50’s anymore where anyone with a HS diploma and a pin striped suit would get a good paying job and single handedly support their family. Most families today need two incomes to survive and especially when they want a nice house, 2 cars, Iphones, big TV’s, vacations, retirement savings and financially assist their kids through Uni.

     
  59. Comment avatar

    banker in an ivory tower    

    What about the benefits of CMHC’s mandate and government actions of past.
    • Availability of low cost financing
    • Home ownership accessibility
    • Stable financial markets
    • High quality housing
    • Personal net worth growth
    Without counterpoints, the above viewpoints are bias and easily dismissive.

     
  60. Comment avatar

    Stats    

    Is it or is it not true that there were CMHC mortgage maximums in place up until 2003?
    Is it or is it not true that the vast majority of CMHC’s insurance in force was added since 2006? (representing a major departure from the historical mandate)
    Those are the facts, and arguing over whether the current CMHC insurance in force is sitting at $570B vs. $600B doesn’t change that this number was more like $100B just a few years ago!
    A decent summary of the departure of CMHC from its traditional (much smaller) role in the Canadian mortgage market is here:
    http://whispersfromtheedgeoftherainforest.blogspot.ca/2012/06/flahertys-folly.html
    The most telling stat may be: CMHC mortgage securitization has accounted for 90.5% of all growth in total Canadian mortgage credit outstanding since 2007.

     
  61. Comment avatar

    Crazy Canuck    

    To be fair here, both sides of the argument are offering anecdotal evidence.
    It’s my belief that those who could afford million dollar homes in the first place will still be able to afford those homes – those who were borderline now cannot. In my opinion, this isn’t a bad thing.
    Don’t forget that those million dollar homes today might be $900k a year from now. I can understand that doesn’t offer much comfort today – but we still have to see how this all plays out.

     
  62. Comment avatar

    LS    

    It’s very reasonable for people who buy houses to expect higher prices over the long run.
    Yes, they could expect higher nominal values over the long term. Or rather, they can expect their house to match inflation over the long term. But it is not reasonable to expect their house to appreciate faster than inflation over the long term.
    Home owners work hard to build equity through principal payments. It’s pretty callous and feeble-minded to suggest otherwise.
    Then you didn’t read my comment. I said most equity has come from home price appreciation. Some has come from principal payments, which was worked for. Of course just because you worked for it doesn’t mean you should expect not to lose it. Just like I don’t expect never to lose money in the stock market even though I worked for every dollar.

     
  63. Comment avatar

    will    

    Wow it amazes me every time I see people whine over the simplest things. Oooh I can’t afford a house RIGHT NOW…..well guess what, neither could a lot of the first time buyers since 2006….. to bad you couldn’t get your stuff together in time or you missed out because you were to young to buy into the market before the gravy train stopped. Count your lucky stats you didn’t get involved in the latest scam. It’s about time we start making people actually save and appreciate the house they buy instead of trading it in every 5 years like a new car. This generation has a hard lesson to learn and they better get used to dream vacations in their head because for most that’s how they will be taking them.

     
  64. Comment avatar

    LS    

    All those benefits are short term only.
    Yes, when the max term was increased from 25 to 40 years, and min downpayment decreased to 0%, the maximum that the average family could afford suddenly skyrocketed.
    For a short time, houses were far more affordable on a monthly basis because people were able to buy much more house for the same monthly outlay. But then house prices rose to fill the gap so current buyers no longer benefit from the increased affordability.
    So buyers and owners benefited when credit was being loosened, but in order to continue the benefit it needs to continue loosening, which it clearly can’t.
    It’s a short term effect only. In the long term the market will adjust and affordability will not be improved. Now that credit has been tightened again, the people that were only in the market because of the loose restrictions might be in trouble.

     
  65. Comment avatar

    Ham    

    For those with a variable rate could this be a strong signal that rates aren’t going up any time soon? Assuming the DoF is acting because the BoC can’t or won’t…

     
  66. Comment avatar

    banker in an ivory tower    

    Short term? CMHC and their mandate has been impacting Canadian housing for over 65 years. Your gloomy assessment that the RE market will adjust and revert to where it was before recent CMHC programs were initiated is quite ridiculous.
    If you want to know what the RE market would be like without CMHC, just look to countries like the Bahamas where many Canadian banks operate and where today, 40% minimum down payments, 7-11% mortgage rates and poor quality housing is the norm for the best qualified applicants.

     
  67. Comment avatar

    Canada isn't the US    

    Most US jumbo defaults were either on purpose (strategic defaults) or the borrower was never qualified properly in the first place.
    In Canada, high end buyers are underwritten sensibly and they usually have other resources to lean on. They are also unable to escape CMHC in a default situation.
    CMHC can take your tax refunds and garnish wages until paid. Your only way out is to declare bankruptcy and most million dollar buyers would rather amputate a pinky than go BK.

     
  68. Comment avatar

    emmi    

    >Re: Bundles: The risk to the regulated first mortgage lender is negligible because the highest risk money (the extra 5% LTV) comes from a totally separate, private and uninsured lender with segregated capital.
    The borrower who puts down 20% of their own money is a very different borrower than the one that does not.

     
  69. Comment avatar

    emmi    

    The Bahamas doesn’t produce mass lumber, mine copper, and have a mere 10 people per square mile of dirt. What a comparison to choose.

     
  70. Comment avatar

    2Frank    

    People are too harsh on the government.
    Who really knows what is a reasonable amortization? Were there more defaults when the amortization period went from 25 to 30 to 40?
    So the government thought it would be a great idea to help citizens buy a house. When is buying a house and paying it off a bad idea? Especially in major metropolitan cities. The price of the houses go up in the long term and so does the rent. If you pay off your house before retirement, you don’t have to worry about rising rent on a fixed income.
    CMHC insurance is actually brilliant. How many government entities actually make money instead of being a black hole for our tax dollars? So brilliant that the private insurers want a piece of the action. That is a sign that they are doing something right. However, if the majority of the Canadians feel that CMHC is taking too much risk, maybe CMHC can slowly back out of the insurance business and let the private firms take over. We would loose the tax revenues but eliminate the risk. Most people believe that private companies are better run than public ones anyway. They might generate more profits and contribute more tax dollars to the government. Then there is the separate ideological argument of whether the government should be in the business of making money, building ferries….anyway.
    Sure the availability of cheaper funds drove the prices up and made it unaffordable to some but that is supply and demand. These prices represent the equilibrium. No matter what the policies would be, there will be people who cannot afford a house. Doesn’t mean it is bad policy. However, price appreciation caused by speculators/investors, I am not too keen on. Maybe the government shouldn’t be supplying CMHC insurance to investors/speculators. No reason why the government should help people with enough money for a second home, so that they can drive up the prices for the people that don’t have a home.
    Now the government sees a high level of debt, a horrific US example and insanity in Europe; and decides it is a good idea to err on the side of caution. Not such a bad and unreasonable idea. I personally don’t think we need this many restrictions, because I don’t think our situation is that similar to the states. Canadian banks did not make billions of dollars of fraudulent sub-prime mortgages with teaser rates. Canadian investment banks did not pools them into mortgage back securities and collateralized debt obligations. They were not rated triple A and sold to financial institutions all over the country and the world. Canadian insurers also do not have trillions of dollars of insurance policies written to back those MBS and CDOs when they actually didn’t have enough money to back them. The really only danger is a massive recession with massive job loss.
    Is it going to happen? Who knows? But if it does, it would be nice if the housing market didn’t collapse. Will these measures prevent that? Not if Europe causes a global recession this year. But the longer we have, the better we would be because as a whole we would be less in debt. We can only cross our fingers now. Best of luck everybody.

     
  71. Comment avatar

    smartin.transglobalmortgage@rogers.com    

    My question is this…Nowhere have I seen that the DoF and the Minister are forcing private insurers to follow their lead. The DoF is regulating”government insured” meaning CMHC insured mortgages.
    Perhaps I missed it in all the discussions, and in the press release, but cannot private insurers still offer insurance for a 30 year mortgage?

     
  72. Comment avatar

    Mort-Mgr    

    Default rates on 80% and 85% LTVs are reasonably comparable. The borrowers are not that different, other things equal.

     
  73. Comment avatar

    hafeez    

    if condo is 5 million let it be, why does tax payers take the risk through CMHC… let the bank manage the risk…

     
  74. Comment avatar

    Minghui    

    Personally, I think the best solution to tackle hot real estate market is to set limits on foreign money.
    That says, foreign money must stay at domestic bank’s saving or investment account for at least __ years before it can be used as down payment to purchase residential property.
    I know most banks presently have 6 months requirement for foreign money as down payment.

     
  75. Comment avatar

    Ralph Cramdown    

    My original point was that, contrary to assertions, jumbos experience higher default rates than do smaller mortgages, and loss rates would be higher regardless.
    Along comes you, claiming most US jumbo defaults were strategic, or on poorly underwritten loans. Sources? Jumbos have always been harder to get and more stringently underwritten in the US than have conforming loans, and in many states, loans are recourse. In the remainder, only purchase money loans (i.e. not refis) are recourse. Note the special cases of Homestead laws and Texas, but you know about those, right? Still, jumbo default rates were higher than conforming.
    Got any more bald, unsubstantiated and incorrect assertions for us?
    N.B. Even on the fattest of fatcats, you’re unlikely to get a pound of flesh from just a pinky.

     
  76. Comment avatar

    Ralph Cramdown    

    Dude, the Bahamas GOVERNMENT has to pay 7% for money (rated BBB), AND it has a national equivalent to the CMHC. Double fault.

     
  77. Comment avatar

    Stats    

    Yes, if it wasn’t for CMHC, the Canadian Mortgage Market would be like a third-world country’s!
    You’ve officially lost your mind.

     
  78. Comment avatar

    Tomas    

    Good news for bank shareholders over on mortgagebrokernews.ca:
    “Brokers: mortgage rules pave way for agent cull”
    http://www.mortgagebrokernews.ca/news/breaking-news/brokers-mortgage-rules-pave-way-for-agent-cull/123889/
    Tick, tock…

     
  79. Comment avatar

    banker in an ivory tower    

    Dude, stop pretending that you know something about everything. The Bahamas Housing Agency is not CMHC’s equivalent or comparible in any way to CMHC in size, programs or accessibility. Yes, Bahamas has 1/100th of the population of Canada but their insurance cap is a measily $110M verses $600B for CMHC alone.
    Anyways, I was not seriously suggesting that Canada would be like Bahamas without CMHC. Just that without them, we would not be where we are today which overall is a great position, IMO.

     
  80. Comment avatar

    Calum Ross    

    Rob – I am increasingly impressed by the level of detail and thorough investigation that you do as it relates to consumer mortgage issues. Your understanding of the intricacies and broader based long term market implications is impressive to say the least. You have completely wowed me with the excellence of this piece.
    The Canadian mortgage industry needs more people like you. Keep up the great work!

     
  81. Comment avatar

    Steve Fournier    

    I don’t think “Facts” was arguing over $570B vs. $600B insurance in force. He was saying that your claim of $600B in “high-ratio” insurance is inaccurate, which it is.
    We all have to get our data right before taking a position. There is enough noise in this discussion as it is.

     
  82. Comment avatar

    Paul    

    “demand has been artificially pushed-up by unscrupulous lending practises”
    What grounds do you have to make such a sweeping statement? There are bad apples in every barrel but I personally have not seen the widespread shadiness you claim, and I see a lot of applications come past my desk.

     
  83. Comment avatar

    Long Term Planner    

    Yes, it would’ve been great to get on the ‘gravy train’ before it stopped, but that wasn’t my point.
    Some people talk about a market “correction” as if it isn’t “real money”. While that may be somewhat true for those currently looking at their home equity for retirement, it could be a harsh reality for those first-timers that are underwater when they need to renew.

     
  84. Comment avatar

    Ralph Cramdown    

    The guarantors are quite different, other things being equal. If a lender finds itself in the unfortunate position of being owed money by CMHC, it is unlikely to need to hire a skip tracer.

     
  85. Comment avatar

    Long Term Planner    

    http://www.canadianmortgagetrends.com/index.php/tougher-mortgage-qualifications-on-the-horizon.html
    “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?)”
    Foreclosures are already on the rise… it’d be interesting to know the details (are they mostly investors, or are they young families with only 5% down?).
    http://www.cbc.ca/news/canada/british-columbia/story/2012/02/15/bc-okanagan-home-foreclosures.html

     
  86. Comment avatar

    Linda    

    Those are agents who do almost no volume anyway.
    As a broker, I think it’s healthy to thin the ranks and provide consumers with the most professional service possible.

     
  87. Comment avatar

    Vince    

    Your point about CMHC is irrelevant to this discussion of non-prime lending.
    Higher risk is offset by higher pricing and more specialized underwriting. That is how alternative lenders work, in case you didn’t know.

     
  88. Comment avatar

    Nick    

    CMHC has done a tremendous job supporting Canada’s housing market. All of its policies have been endorsed by the politicians we elect and the financial markets that fund Canadian mortgages.
    CMHC’s role during the credit crisis forever established its vital role in our economy. Without the market’s confidence in CMHC, Canada’s market would have succumbed to global pressures and put our entire economy at risk.

     
  89. Comment avatar

    Ralph Cramdown    

    (?) Is my screen borken? When did the conversation switch to subprime?

     
  90. Comment avatar

    Robert McLister    

    Hi Calum,
    Really appreciate the thoughtful post. This was probably our longest story ever so I’m glad the info came in useful to some degree.
    Thanks again,
    Rob

     
  91. Comment avatar

    Bill in Winnipeg    

    So is now the time to lock into a 10yr mortgage and have 10 years of not worrying about re-qualifing and rate hikes? is paying a little extra on the premium worth it. Rate is 3.8% Not sure that interest rates will be much higher in 5yrs but 10 I think so. I am planning on retiring soon and will have some mortgage debt for a few more years I just have to factor in always having mortgage payments. Money in houses is still better than the markey even with all the controversy.Thanks for any advice or input anyone might have.

     
  92. Comment avatar

    Vince    

    No but your understanding may be broken.
    Bundles are non-prime products. emmi probably didn’t know that either.
    I think you guys talk a little too much about topics where you know much too little.

     
  93. Comment avatar

    homeowner    

    You assume that the market is actually “free and open”. Mortgage brokers and real estate agents care only for their cut of the sale. Hence, why they have an incentive to pump prices and the market. When the market is falling, brokers and real estate agents say “good time to buy, prices are low”. When the market is rising, brokers and real estate agents say “good time to buy before you are priced out”. Increasing interest rates will impact the entire economy. Changing amortization rules impacts only a portion of the economy. As well, the gov’t has no say in what the BOC does in terms of fiscal policy/rate policy. If you are also saying that the market should determine price, then I’d argue that CMHC needs to go as well since it stacks things in favour of the lenders by forcing the borrowers to pay for insurance on borrower losses.

     
  94. Comment avatar

    homeowner    

    One more point – “I don’t think real businesses will be effected by that a lot”. Define real businesses? Any businesses that have LOCs, etc. to assist in things like financing the cost of raw goods, procurement of services, etc would be impacted by a rate hike. I can’t think of many businesses that would not be impacted in fact. Clearly your agenda is the simply sell mortgages and that’s that.

     
  95. Comment avatar

    Ari    

    Borrowers aren’t “forced” to do anything. What a stupid comment. If someone wants to buy a home with less than 20% down, it is their option. Insurers perform a service. Who else is going to pay for that service?

     
  96. Comment avatar

    Long Term Planner    

    Although the reassessment at renewal was in the OSFI draft, it doesn’t look like it was adopted. Who knows what they’ll do in the future (they’ve certainly considered it). I think it would be a REALLY bad idea.
    The US Federal Reserve extended Operation Twist for another 6 months and our 10 year bond rates are about 20 basis points lower than they were earlier this year (when rates came down), so I’m hoping our long term rates will go even lower!
    http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/
    I’m still riding the crazy variable rate (prime-0.75%) and putting as much as I can (25% payment increase) towards principle.
    But yeah, even considering the extremely low prime rate over the last 5 years, the average over the last 10 years is still 4.1%. So the 10 year security is certainly very enticing. When you look at the historic fixed rates, it looks even better!
    The market will certainly go up at some point, but it may not be anytime soon. The Federal Reserve doesn’t plan to increase their prime rate until 2015. So you could probably ride the variable for quite some time (maybe indefinitely) and come out ahead. But of course NOBODY knows what the future rates will be!

     
  97. Comment avatar

    www.facebook.com/profile.php?id=570225856    

    I think that everybody should take a deep breath, and calm down. The sky is NOT falling and the end of the Canadian housing dream is NOT over.
    The value of real estate is ALWAYS a function of government regulations, land use rules, mortgage market restrictions and opportunities, etc. These rules function in a complex, unpredictable way.
    The federal government may be triggering a housing crash, but I actually doubt it.
    What is true for sure is that changing the rules will be good for some and bad for others. If a person is smart then what they should do is to try to figure out how to make the most of the changes, and reduce to a minimum the negative impacts of the changes.
    One thing hasn’t changed. Information is power, and obtaining a clear picture of just exactly where you are is the first step towards a better future. Running around like chickens with their heads cut off isn’t helpful, nor is celebrating the loss of other people’s financial security morally acceptable.
    There are many who want the housing market to crash so that they can finally say that they were right for the years when they predicted collapse the market just kept on growing.
    Fortunately, for the rest of us, the market will survive, and most of us will make a way through any difficulties it portends.

     
  98. Comment avatar

    Adam Smith    

    If someone wants to put an iPad on their mortgage that’s their decision. If they pay that mortgage without fail, that’s all anyone should be concerned about.
    Stop trying to legislate spending habits and use your time for something productive.

     
  99. Comment avatar

    49er    

    “There are many who want the housing market to crash so that they can finally say that they were right for the years when they predicted collapse the market just kept on growing.
    So true. Timing is everything. Any idiot can be right on a prediction, given enough time.

     
  100. Comment avatar

    Tomas    

    Please, please, please…tell me how a smart person should “make the most of the changes”?
    Should I sell, should I buy, should I re-finance? What?

     
  101. Comment avatar

    Kyle    

    You have depicted three negative uses of HELOCs with no acknowledgement of any positives. Can you ever make an objective point Cramdown? Everyone knows you’re a perma-bear but if you can’t be unbiased then your posts are just hot air IMO.

     
  102. Comment avatar

    www.facebook.com/profile.php?id=570225856    

    Of course, the correct answers to your questions are not very different than at any other time… it depends on who you are, where you are, your current financial and life situations, etc. That’s why the smart person seeks out professional advice from an Accredited Mortgage Professional and gains the most perspective possible to achieve his/her goals.
    Personally I think it’s a good time to buy in some markets, and a good time to sell in others. Bla Bla… there is not single pat answer, even when things have been royally mixed by government fiat.

     
  103. Comment avatar

    Albert    

    Just sold my Condo and question i have is to rent till the market cools off or buy right away? Thoughts???

     
  104. Comment avatar

    Mark Nelson    

    There’s one angle of reporting I still haven’t heard anyone explore yet. I believe the 600 billion ceiling the CMHC had / has is the biggest factor for any of these changes…. follow the money

     
  105. Comment avatar

    hard working canadian    

    Is renovating a brand new house (majorioity of the housing market) not consumption?

     
  106. Comment avatar

    LenderBe    

    It may have been a factor in the end but it wasn’t the biggest factor. Flaherty was saying we didn’t need more rules long after the $600 billion limit became an issue. In addition, CMHC and private insurers were on record last winter, saying they had plenty of headroom under the current limit.

     

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