There’s another set of mortgage rules coming this summer. CMHC sent out a notice recently with implementation dates for three policies related to OSFI’s B-21 guideline.
We knew this stuff was coming but these rules could nonetheless make it harder to get low-ratio insured variable-rate mortgages, self-employed mortgages and 100% financing.
Here’s what’s happening:
- The qualifying interest rate for low-ratio variable and fixed terms of less than five years will officially become the Benchmark Qualifying Rate (currently 4.64%). This change only applies to transactionally insured mortgages, not bulk insured mortgages, says CMHC. Effective date: “As early as possible after June 30, 2015, and no later than December 31, 2015.”
- Lenders will officially be required to obtain “third-party verification” of income for all borrowers, “including substantiation of employment status and income history.” CMHC did away with “stated income” financing many moons ago, but the private insurers still offer a form of non-traditional income verification (see Genworth’s program and Canada Guaranty’s program). We don’t yet know if/how their programs might change. For CMHC’s part, this announcement “is simply [meant] to add additional clarity and re-affirm CMHC’s position,” spokesperson Charles Sauriol says. Effective date: June 30, 2015.
- Cash-back down payment mortgages will be eliminated unless the borrower can come up with 5% down on their own. Ever since OSFI’s Guideline B-20 killed these products at the banks, this type of 100% financing has only been offered by a small number of credit unions. Effective date: June 30, 2015.
With this last rule, you might be wondering why people can borrow their down payment from a 20%-interest credit card but not derive their down payment from lender-provided cash rebates.
“To differentiate the two—in other words, use of lender cash backs versus borrowed funds to satisfy minimum equity requirements—lender cash-back mortgages are typically associated with higher interest rates charged to the borrower,” says Sauriol. That “translates into a larger insured loan amount and in the event of a default, into potential additional risks for the mortgage insurer.”
“In cases where funds are borrowed to satisfy minimum equity requirements, the borrowing is outside of the insured loan amount and is also factored in the total debt service ratio, and therefore taken into account for borrower qualification purposes.”
The end result is that the insurer incurs less severe losses on default (e.g., after five years, the loan balance being insured can be 3% to 4% less if the down payment was borrowed).
Unfortunately, borrowed down payments can also result in higher interest costs and/or payments for the homeowner, depending on what interest rate and amortization applies to the borrowed down payment. In cases where this makes it tougher for the borrower to debt service, that could theoretically increase the probability of default.
Sidebar: It appears none of these rules prevent a lender from offering an unsecured line of credit for the borrower’s down payment. It should be noted, however, that lenders scrutinize applications very carefully if someone is borrowing his/her down payment.
On Thursday, the Office of the Superintendent of Financial Institutions (OSFI) announced its complete B-21 guidelines for underwriting insured mortgages. But it didn’t stop there. The banking regulator also tweaked some of its B-20 guidelines, rules that shook the mortgage market when they were initially released in summer 2012.
This time around, OSFI’s actions will have far less impact on the housing market.
Finance Minister Joe Oliver met with the Canadian Association of Accredited Mortgage Professionals (CAAMP) on Friday. The meeting covered a range of mortgage hot-topics.
CAAMP President & CEO Jim Murphy tells CMT, “CAAMP’s key messages were to provide consumer choice, for example the need to support smaller lenders and monolines, a view that we have had enough regulatory changes and the economic importance of housing and real estate finance in terms of jobs and tax revenues.”
Banks are improving their disclosures on the drawbacks of collateral charge mortgages.
Effective January 31, 2015, the Department of Finance says banks will start warning individual consumers about the implications of collateral charge mortgages “before entering into the mortgage loan agreement.”
The DoF says “consumers require sufficient information in order to more clearly understand the costs and consequences of a collateral charge mortgage relative to a conventional mortgage.”
Not many lenders go on record forecasting a housing bubble, but what they say in private surveys is another matter.
FICO, a consumer analytics firm, released poll results on Tuesday that show just how concerned lenders are about housing overvaluation. But its data, which was picked up by multiple media outlets, featured responses primarily from U.S. respondents. The opinions of Canadian lenders, alone, haven’t been fully reported.
Today, however, we got our hands on Canadian-specific data, and it revealed some surprising expectations.
Jeffrey D. Sherman, Special to CMT
The function of Canada’s securities regulation is to protect investors. To help investors make informed decisions, regulated public markets require broad access to information on exchange-listed companies.
In the June 9 article entitled “A Threat to Private Financing,” it was noted that Ontario has restrictions on the sale of securities. These limit many investors to buying only publicly traded Mortgage Investment Corporations (MICs), and not private MICs. This is sound regulatory policy.
Last week CMHC eliminated some more mortgage insurance offerings. Effective July 31, for example, it will no longer insure amortizations over 25-years or $1 million+ properties with low-ratio transactional insurance. (More details here)
Canada’s largest insurer says this was a business decision. But most business decisions maximize profit and/or significantly reduce risk. These changes don’t necessarily do that, making it appear more like a political decision.
Wayne Strandlund, Special to CMT
Borrower choice and the success of mortgage brokers is tied to the availability of a wide variety of mortgage funds. Apart from conventional insured and uninsured mortgages, there are Alt-A and B, 1st and 2nd mortgages available through the private mortgage market.
For years, Mortgage Investment Corporation (MIC) lenders have provided billions of dollars of this private alternative mortgage financing. But under proposed regulations, this opportunity for borrowers and brokers will be severely curtailed, causing measurable economic harm.
CMHC surprised the market last week by eliminating its insured second home and stated income programs. Many believed that the Department of Finance (DoF) had something to do with it.
We asked the DoF directly. Here’s what they told us:
Since 2008 the nation’s largest mortgage default insurer has been on a mission to reduce its risk exposure. Yesterday that mission continued with CMHC announcing that it would stop insuring both second homes and self-employed borrowers without traditional proof of income.
Canadians have used these two programs for the last nine and seven years respectively.
But these are not the only adjustments CMHC has in store. It put the market on notice that “This is the first set of changes” we should expect, as a result of its internal insurance business review.
Thankfully, at least one private insurer is not making knee-jerk changes because of this news.
Andy Charles, CEO of Canada Guaranty, told CMT:
“We are currently reviewing the announcement and potential implications…(The) overall materiality of the change is modest but indicative of an evolving market dynamic…(We have) no current plans to alter our product offering but, as indicated, are reviewing…”
What’s behind CMHC’s announcement?
- Terminating these programs appears to be a business decision by CMHC.
- Sources tell us that the insurance regulator, OSFI, was not behind this decision. (OSFI doesn’t generally impose product restrictions on individual institutions.) Moreover, there is no indication that this news is directly related to the recently released B-21 guidelines.
- We’re also awaiting comment from the Department of Finance. In recent years its leadership has clearly indicated a desire to see less government involvement in the mortgage market. (CMHC is 100% backed by the federal government.)
- CMHC says these two programs only accounted for a combined 3% of its unit volume.
- It claims this should not have “a material impact” on the housing market. (Mind you, this is yet another instance where CMHC is withdrawing and/or limiting its programs. All of these “immaterial” changes may ultimately combine to slow the market further.)
- There is no word yet on whether the second-largest insurer, Genworth Canada, will follow suit. It’s in its quiet period before earnings so it couldn’t comment.
- Even before this news, it was clear in talking with CMHC sources that it plans to meaningfully reduce its insurance business. This will create further opportunities for private insurers and self-insured lenders (e.g., Equitable Bank, Home Trust, Optimum Mortgage, certain credit unions, private lenders, mortgage investment corporations, etc.)
- The last day to submit CMHC-insured “stated income” and second home mortgage applications is May 29 (but many lenders may set a cut-off date earlier than this.)
- The majority of Canada’s 2.7 million self-employed borrowers prove income in traditional ways (for example, using a 2-year average of income from their NOAs, grossed up by 15% to account for write-offs)
- Self-employeds who can’t prove income traditionally, and Canadians who buy a second home with less than 20% down, will be left with these options:
- Prime lenders who insure through private insurers (assuming the privates keep their “low-doc” and second home programs intact)
- Non-prime institutional lenders, who finance up to 85% loan-to-value (less in non-urban areas) at higher interest rates
- MICs and private lenders who finance up to 80% with even higher rates and fees
- Private lenders who offer second mortgages in urban areas above 80% loan-to-value
- Anyone with a CMHC-insured residence will no longer be able to obtain, or co-sign for, an additional CMHC-insured mortgage. There are two exceptions:
- Bulk-insured mortgages are not affected by this particular rule (“The rules apply to all transactionally insured homeowner mortgages, both high and low ratio,” says CMHC spokesperson Charles Sauriol. “The rule does not apply to loans that are bulk insured — (i.e., CMHC’s Portfolio insurance product.”) Lenders purchase bulk insurance on mortgages with 20% equity or more, typically so they can resell these mortgages to investors.
- CMHC-insured rental mortgages are also unaffected (“There is no limit on the number of CMHC-insured rental mortgages a borrower may have,” Sauriol adds.)
Rob McLister, CMT (email)