10/30 Mortgage Rules

Mortgage-Rules Jim Flaherty’s remarks about tightening mortgage requirements ignited a slew of public opinion this week.

For those who missed it, Flaherty speculated that the government may increase minimum down payments (from 5% to perhaps 10%) and reduce maximum amortizations to 30 years or less.

Here’s what some people had to say about it:

  • BMO economist, Doug Porter:
    • “The fact that the finance minister is talking about it suggests to me that the government has been seriously looking at ways to cool the housing market without necessarily resorting to interest-rate increases.” (via Yourhome.ca)
  • Two-thirds of CEO’s polled by BDO agree that the government should “urge mortgage lenders to tighten up on their terms, requiring significantly higher down payments.”
  • The MBABC says:
    • “…The market is going to self correct…because the affordability [of housing] isn’t there anymore, and really, the economic news isn’t that strong.” – MBABC president Joe Santos
    • 10/30 mortgages would “be detrimental to BC’s real estate market…First time buyers drive the housing market. Raising interest rates and reducing amortization periods will severely impact affordability for this important demographic group.”
    • Down payment and amortization tightening would “potentially cause home values to decrease, penalizing people who have bought into the market over the last two or three years with a 5% down payment.”
  • Some seniors advocates suggest that if 10/30 rules end up hurting home prices, seniors could suffer. Many older Canadians lack sufficient registered retirement assets, making home equity critical to their ability to generate income.
  • Central 1 Credit Union economist, Helmut Pastrick, says:
    • 10/30 mortgages “Would have quite a negative impact.”
    • Today’s record-low rates will soon increase and that itself will have a dampening effect on real estate.
  • Home builders in BC and Ontario are concerned that tighter mortgage rules would combine with higher rates and the July 1, 2010 HST to kill new housing demand and construction.
  • From CIBC (via the Globe):
    • “We support the minister in reviewing this now to ensure consumers are not taking on more debt than they can handle in a more normalized rate environment.” – Sonia Baxendale, CIBC’s head of Canadian lending operations
    • “My message to the government is to be careful not to overshoot,” he said. “You do not kill a fly with a hammer. Housing is a very important part of the economic recovery, which is still very fragile. You do not want to ruin that market.” – CIBC economist, Ben Tal
  • Real estate critic, Garth Turner, says:
    • Canada has a real estate bubble and it’s “a mother of a gasbag.”
    • As a result, action must be taken to curb borrowing. Any industry participant who argues against “an end to government subsidies for buyers without money, or more prudent lending limits, is making an argument against their own industry and future.”
  • Toronto mortgage broker, Marcus Tzaferis:
    • If 10/30 rules take effect, “25% of buyers–these people who are buying with 5% down and those who are buying with 35-year amortizations, won’t be able to purchase anymore.” (CBC Video)
  • TD economist, Don Drummond:
    • “We probably won’t see the housing market cool off for the next several months because people will be rushing out” to buy before mortgage rules change. (via Yourhome.ca)
  • If 10/30 rules came into effect, it would have an immediate impact, says Invis’s Gary Siegle:
    • “It’s just a question of mathematics that there will be people who qualify today who wouldn’t be able to qualify if those changes come into play,” he says.
    • “It would be really nice if they (are) going to make that move, (that) it would be 7 1/2 instead of 10 (per cent)…a kind of middle-of-the-road solution” so that the marketplace isn’t impacted so dramatically.

All this said, Flaherty says a change in mortgage rules isn’t a given. He states: “There would have to be clear evidence of an asset bubble in residential real estate in Canada, which there is not right now.”

  1. If mortgages became harder to get many would suffer. Millions of Canadians rely on stable home prices. Countless construction, finance, and service jobs would be lost if these rules became law. I hadn’t even thought of the impact on senior citizens until I read this. Housing prices will fall enough on their own once rates start going up. There are other ways to deal with weak borrowers besides imposing new down payment and amortization rules on everyone. It is as easy as raising qualification standards during the application process for fringe buyers.

  2. A. Paulson
    From Flaherty’s perspective, its a dilemma of suffer a little now versus suffer more later. He’s not saying 10/30 for popularity.
    It is as easy as raising qualification standards during the application process for fringe buyers.
    Is this really an easy thing to do? I know the finance minister can easily change the limits on financing, since he did it once already last year. Can he just as easily change the qualification standards?
    Besides, what’s the difference if it comes now in the form of 10/30 or in 6 months with a 1% rate increase? If its that tight right now, then maybe he should take this “baby step” to let some air out of the market.

  3. it is amazing how much control has the goverment over real estate in this country? Why should we as taxpayers subsidize other peoples morgages through CHMC? The market is so distorted and the bubble so overblown with cheap morgages from CHMC that when the goverment wants to tighten a little, it is criticised for interfieering with the market! what market? Housing in this country is goverment policy, thats all! As soon as norgage vigilantes stert waking up, the almost 1 trillon morgages in CHMC books will bring this country to its knees. We have blown this bubble much more than our cousins in the south.

  4. Some things just can’t continue forever; we have to choose between recognizing it now or being forced to recognize it later when we have even more depending on it. If some people haven’t invested enough for their retirement that’s unfortunate, but the next generation will be supporting them in one way or another. I’m sure there are better ways than supporting inflated home prices for a generation and giving new buyers nearly permanent debt. If millions of Canadians rely on home prices continuing to keep growing unsustainably that’s an accounting error – the same as the people who relied on their Enron stock for retirement. You can protect them buy only by lying to many more people.
    If there are too many construction and finance jobs then they will be lost eventually (which is exactly what’s hurting Spain’s economy now). At least I hope we have better things to do than keep building and selling houses no one actually needs. Besides, as a business owner and prospective house buyer maybe I could be creating more jobs if I wasn’t saving up to buy something that has almost tripled in price over the last 6 years. The government can influence the market in the short-term but it will be a long time before we know the real cost.

  5. The recent talk by Flaherty and Carney is just preparing the stage for the announcement on CMHC lending requirements. Let’s take a trip down memory lane…
    Flashback to 2008
    Reuters – Canada’s Flaherty: no housing bubble
    The Canadian government changed the rules for government-backed mortgages last week to avoid a U.S.-style housing market decline, even though the domestic market remains solid, Finance Minister Jim Flaherty said on Wednesday.
    Officials were concerned about a recent trend towards long mortgage amortization periods and low down payments, which prompted the rule changes, Flaherty said in a Calgary speech.
    “There is no bubble in the Canadian housing sector, that has not been our concern,” he told reporters after the speech. “Our concern has been a tendency for longer amortization period of 40 years and purchasers putting very little money down.”
    The changes, due to take effect in October [2008], include ending government-backed mortgages with 40-year amortization periods, and a new requirement that buyers have a minimum down payment of 5 percent.

    Flaherty is singing the same song now. My bet is for an announcement to 10/30 in late January or February.

  6. To ValueMonkey … “Is this really an easy thing to do? I know the finance minister can easily change the limits on financing, since he did it once already last year. Can he just as easily change the qualification standards?”
    Yes. It is very easy. CMHC simply increases the minimum credit score for 95% financing, like they did in Oct. 2008.

  7. Thanks A. Paulson. Your comment enticed me to review the minimums.
    So how do you know changing the qualification standards won’t have the same effect as changing the downpayment and amortization rules? Last time they did all of this at once, so its hard to tell what had the real impact. In fact, it appears none of it had any impact at all.
    And again, I don’t see a big difference if it comes now in the form of 10/30 or in 6 months with a 1% rate increase. If the market is more closely correlated to cheap financing rather than asset valuation, then its dangerous to let it go unchecked.

  8. Down payment and amortization rules effect all home buyers, even those who are very qualified. That is unjustified because it penalizes many who are responsible for the actions of a few who are not.
    Rates are going up regardless. That will moderate home prices and any excesses.
    Imposing higher down payments and lower amortiations, amid rising rates, is overkill. That is much more dangerous to our recovery and Canadian’s net worth than anything else.

  9. Tweaking the rules may slow the market, but Flaherty is considering the lesser of two evils. Slow the market now or watch an asset bubble implode in the future. Carney may not raise interest rates right away. So Flaherty is considering the tactics available. An imploding asset bubble may be more dangerous to recovery and net worth in the long run.
    You see it as a penalty. The finance minister sees it as a pin for an asset bubble.
    Keep in mind this amortization period only came into existence 3 years ago. If what you say is true, its scary that the market is so closely correlated to innovations in finance that didn’t exist a few short years ago.

  10. “Why should we as taxpayers subsidize other peoples morgages through CHMC?”
    @Casanova – The word subsidize implies taxpayer money is being SPENT for other people’s mortgages. Nothing is further from the truth. As a crown corporation, CMHC earns a PROFIT for you and every other Canadian, every single year. If CMHC did not exist you would pay HIGHER taxes.

  11. Urgh..come on…what can they do !!!! Recent first time homebuyers or existing mortgagers already kidnapped the government in a way that if mortgage rates goes up (since most of them are on variable right now and will not be prudent on fixed)..government, CMHC and banks will suffer with depreciated asset value (which it means cdn banks may need to raise capital or bailed out) and to tighten lending rules, its just a way for someone to borrow more from the sidelines to go into the market when government has no such a way (as an alternative) to bring these asset prices down…when everyone of us (who are on the boat) are hoarding homes and cheer up with rising home prices !!! Look at your new year party..90 % of you are celebrating home prices going up more and more vs..going down…and govt is happy…why they want to burn down the party ???

  12. 2ndTake,
    It’s insurance. Your argument only holds if it has been priced properly. Just because there has been no catastrophe for the preceding years, doesn’t mean it is profitable business. Time will tell. But your argument as written is flawed.

  13. CMHC is enormously profitable for Canadian taxpayers. In fact, it is one of the most profitable companies in Canada. CMHC has made billions of dollars a year for several years and also pays taxes on these earnings. CMHC has never posted a loss that I can remember. Many think it is too conservative because its provision for claims is way above actual claims.

  14. Sigh…
    As I said…it is insurance.
    All insurance is profitable until there is a disaster.
    I work in the Catastrophe Reinsurance business. Prior to 9/11 we were getting paid 0.5% of the face amount. And even then, our clients complained it was too high and we were making windfall profits. But 9/11 ate up all the profits we made, and a whole lot more. After 9/11, the premiums were ten times higher for the same cover.
    One of the best barometers for when an insurer is writing bad business is when you see a dramatic increase in their market share and premium volume.
    When I take a look at the changes (read increases) in CMHC’s premium volume over the past several years, warning bells start going off in my head.

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