CMHC Drops 100% Financing and 40-Year Amortizations

This will be a big surprise to many.  The Department of Finance has just announced that it will no longer back the following:

  • 100% financing (5% will now be the minimum downpayment on an insured mortgage)
  • 40 year amortizations (35 years will be the new maximum on insured mortgages)

The government will also require the following with all new mortgages it backs:

  • A new 620 minimum credit score requirement
  • 45% maximum TDS ratio
  • New loan documentation standards

The new rules will take effect October 15, 2008.  This affects CMHC insured mortgages as well as mortgages insured by Genworth, AIG, etc.  Insured mortgages are generally those with less than 20% down.  Certain conventional mortgages are also insured, however.

In a statement earlier today, the Department of Finance said, "Today’s announcement marks a responsible and measured approach by the
Government to ensure Canada’s housing market remains strong and to
reduce the risk of a U.S.-style housing bubble developing in Canada."

These new rules pertain only to new, government-backed insured mortgages.  This will not affect existing mortgages.

  1. Well, this is pretty huge.
    You mentioned the new 620 credit score requirement. What was the low bar previously?
    I’ve always had a feeling that having a “really good” credit score doesn’t help you at all when getting an insured mortgage. I could understand a bank giving a better rate to someone with a 800 score who was putting down 25% and going uninsured, but what difference does it make to the bank once they know you have the CMHC insurance?

  2. One other question. A media story on this says that the Oct 2008 cutoff is to allow people with existing pre-approvals to close their deals.
    So can a guy who wants to get into the market now still get the 40 year or is that gone altogether?

  3. The worst thing about this is that Garth Turner somehow feels that this vindicates his alarmist housing bubble theory.

  4. Next questions:
    They are limiting borrowers to a debt service to 45% of gross income.
    What was it before? I thought that it was 32% a few years back. If it was still 32% before this announcement then the CMHC is actually going to be offering a lot more credit than before, no?.
    Also, how is the market for mortgage backed securities full of 40 year mortgages? Is the govt really “cracking down” here or is the CMHC just no longer selling what the MBS markets no longer want anyway?

  5. A small step in the right direction, but almost undoubtedly it’s too little, and most importantly, too late.
    And I am also curious about the MBS for Canadian mortgages….is there anywhere we can get statistics on how many Canadian mortgages are sold off as MBS?

  6. Al R,
    I think 32% was, and is, the limit on GDSR, not TDSR.
    But I thought the limit on TDSR was 40%, which means raising it to 45% is odd.
    Can anyone confirm or explain this?

  7. Wells Fargo Financial is a self insured mortgage company and will still be able to offer 40 year amortizations and 100% financing on refinances even up to a 50% TDSR.

  8. Probably is a good thing to be tougher on this; however, what will happen to the people who actually go through with the 100% financing with 40 years mortgage 5 years from now when their mortgage is up for renewal? They probably should be looking to sell their house 4-5 years from now?

  9. Kyle,
    Even with a 40 yr amortization the principle payments are enough that they will have paid down 4-5% of their mortage in 5 years.

  10. wells fargo financial CANADA that is, candian funds, canadian operated.
    the fact of the matter is that some 40 am products that are offered are not required to be renewed not just after 5 years but the whole amortization.
    wells fargo has the best reputation inlight of the housing crisis in the U.S. warren buffet is a major shareholder and he makes good investments

  11. What would Fargo’s best interest rate be right now for 100% financing?
    Does Xceed still offer it too?
    Any others?

  12. According to the CMHC they raised TDS scores to 44 on beacon scores 680 and above in Jan 2007.
    With the new limits at 45, are they actually tightening?
    My understanding was that even with a min TDS of 44, the CMHC was letting higher scores through. I found this quote from a few months ago: “CMHC continues to consider applications with total debt service ratios beyond 44% where considered warranted by an Approved Lender.”

  13. I’m little confused by this announcement; I can’t quite understand how taking buyers out of a market helps avoid a bubble. If that is even a risk?
    With Real Estate inventories expanding quickly and sales nationally down 20% or more, won’t eliminating buyers make it harder to sell a property and thus contribute to an over supply on the inventory side and as a result have us into a bubble from the back door?
    I don’t think we’ve heard the last word on this.

  14. Ritchie,
    I think the intention is to protect the most vulnerable buyers from overexposing themselves to a bubble.
    It may indeed contribute to an initial downturn, but it prevents that downturn from devastating a 40/0 buyer who maxed out their purchasing power.

  15. Genworth and AIG can continue to insure 40 year mortgages, right? It’s just that this insurance will no longer be guaranteed by the Federal Government.
    Wasn’t Genworth’s original foray into the 40 year insurance market on its own accord, ie. it didn’t have the Fed’s backing? Then when the CMHC replied a few months later with their own 40 year product, Genworth’s product was granted the same government guarantee?

  16. Simon,
    The only thing that counts for CMHC is loan losses and their impact on profits…if the losses are higher than the actuaries anticipated then raise the premiums or the qualifications; anything else for any other reason is responding to the front page of the (mostly Toronto) press

  17. I have a number of problems with the new federal policy changes for mortgage insurance, but the biggest concerns I have is with the government now deciding to make hard and fast rules on subjects previously open to discretion on the part of the insurance companies and the lenders.
    To me it doesn’t matter if the hard number for a Beacon score is set at 620, 580 or even 680. What matters is that the government has given over control of the mortgage insurance industry and insured lending to private companies, Equifax and TransUnion, that are only accountable to their own shareholders.
    Credit Scores are an arbitrary and unfair tool to be used to determine eligibility for mortgage insurance, and therefore for prime mortgage loans.
    I have many problems with these unaccountable private agencies who have godlike powers already, without seeing them gain even more influence in the credit granting marketplace.
    One of my complaints is that a person’s single largest debt, a mortgage, is generally NOT reported to the credit bureau, which means that the Credit Score is based on how a person deals with a minority of their personal debts – indeed a perfect mortgage payment record is not referred to at all.
    In fact, a person can have a perfect mortgage payment record and have no reported Credit Score at all, unless they have trade credit, ie: credit cards or installment loans of other kinds.
    Errors on files are also not corrected except by a persistent and determined consumer who can prove that they are NOT guilty of an offense. There is no presumption of innocence here… even a collection effort is a black mark on a person’s credit score without reference to the merits of the collection case at all.
    Even if someone wins relief from a collection, the collection report still is negative on the Credit Bureau report.
    And the federal government has now given these organizations an absolute power to destroy an individual’s ability to borrow money for a prime mortgage.
    So that’s one of my concerns.
    The other concern is that the government has also made a hard rule about debt service ratios, setting a ceiling at 45% where previously there was some discretion by lenders.
    Removing descretion is an obvious sign of a lack of confidence in the judgment of the banks and other insured lenders to make good reasoned decisions regarding these matters.
    Does the federal government know something about the conduct of Canadian insured lenders that we don’t? Is there a wall of foreclosures coming as a result of that discretion?
    Personally, I doubt it. It is another example of the Conservative Party in power, imposing draconian rules wherever they can, whether there is any reason whatsoever for the new rules. In this case the new rules will tend to make things worse, and hasten any crisis in mortgage that might be brewing.
    But then, that is the Harper tradition. If there is a fire burning out of control, throw gasoline on it, and then cry from the sidelines that they did their best!
    As usual they show that they don’t trust the public, despite their words to the contrary.

  18. Valid points above. The credit agencies are a joke, I have seen bureaus 700+ beacons and the only credit is 7 mos. on a Canadian Tire card for a 22 year old that’s never made a rent payment–living at home with parents, then you see someone with 10 years of credit with a 560 beacon–never missed a mortgage payment or payment on bureau, just has some debt that’s going to be paid off in a refi and save 2k a month-hence bureau picked up debts as being at or near limit and high utilizer of credit–not taken into any consideration that this customer is about to close those cards, retire all the debt and increase monthly cash flow considerably, Canadian tire guy will get approved, second guy–no. I would rather lend my money all day long to the 2nd customer.
    To your second point–Garth Turner has certainly been a complete turncoat on this industry. Does anyone remember he used to do the “mortgage minute” on ctv–he used to be a pawn to the mortgage companies in these segments, he also used to have a saturday real estate show–it was presented as a show but really was a paid infomercial for whatever company would pay for it, I remember back in the day Ivan Wahl–Xceed being on the show–Garth took the money and ran, I wish someone would bring all this up to him, I do believe 100% ltv and 40 year amms were a joke though, I just don’t like Garth talking out of both sides of his mouth.

  19. RS: “And the federal government has now given these organizations an absolute power to destroy an individual’s ability to borrow money for a prime mortgage.” How, do the new changes do this?

  20. Maybe he means the government’s new 620 minimum credit score will prevent a lot of people from getting high-ratio mortgages at good rates.

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