The Latest Talk On Policy Changes

mortgage-policies From the rumour-mill:

  • Sources say the Finance Department is considering mortgage qualification rule changes, which could potentially be announced with its March 4 budget. (We’ve found no confirmation on this.)
  • The government is evaluating standardized qualifying rates to ensure variable-rate mortgagors can afford payments when rates rise. (Globe story)
  • Finance Minister, Jim Flaherty is reportedly not fond of broad-based rules to increase minimum down payments and decrease maximum amortization.  Some say he may introduce more targeted rule changes instead.
  1. I say raise the minimum to 10 or 15% for a home over the cost of a certain price (say $200K). If you cannot put down that money then you should NOT be buying a home.
    However, changing the rules so all lenders must assess borrowers the same way is nothing but the way for the banks to eliminate competition from the other lenders who are taking their market share with variable mortgages. The number of mortgages that are variable is such a small portion and think I’ve seen statistics that people taking variable mortgages are actually better financed. There is also the fact that except for a handful of periods in time – variable mortgages have been “better” options for consumers. I think there is more risk with the people taking low fixed mortgages that will be double in 5 years when they expire. The banks don’t care about protecting Canadians in this case. It is simple a matter of market share they want to monopolize.

  2. Moody’s warned last month that expanding consumer debt levels could leave Canada in a worse position than the United States in the next few years if current trends continue.
    “We believe the housing market is the principal driver of this expansion,” said the report by Peter Routledge, senior vice president at the rating agency. “We have the uneasy sense that we have seen this movie before…. As witnessed in the United States, this movie does not end well.”

  3. Why is it a problem to raise minimum mortgage down payments to half of where they were in 2006?
    Isn’t this essentially arguing that house purchases prior to 2006 were “too conservative”???

  4. I understand the wisdom of a larger down payment. If you have capital interest in a property then one would be concerned, and protective of their loss, but l think the credit score of a person is a better indicator of prudent financial management and responsibility.

  5. @ Howard.
    i live in Calgary, and the average home price is ~450k. Starter homes that are 600-800sq ft duplexes/townhomes are upwards of 300 in the seedy neighborhoods, and closer to the mid 300’s in lower crime neighborhoods..
    So you think people should get out of college, and be looking to put down 35-50k on their starter home???
    That seems reasonable….we it does seem reasonable if you are a slumlord.
    Broad strokes dont work in this in this housing environment..sure 10-15% wasnt bad if your house was 125k, but not know…
    And the counterpoint of all this being good for canada..
    With policy like this, how many home builders will have to fold up/minimize their staff to be able to function? There would be a lot of unemployed people out there…again.

  6. For all his talk, Flaherty’s not going to up the minimum downpayment from 5% to 10%. If it precipitates a downward correction in real estate (and it would), the Conservatives are going to get the blame. Not only that, but property taxes would decrease, and already suffering government coffers would be in even worse shape.
    Government is stuck between a rock and a hard place right now. I suspect they know that there’s a real estate bubble that could seriously hurt the economy if it pops… they just don’t want to be the ones to pop it.

  7. @ Howard – why is someone categorically not fit to buy a home if they don’t have 10-15% to put down? Because you say so? As has been pointed out ad nauseum, down payments on their own have little to do with repayment risk. I’m getting a little tired of people making blanket subjective statements like this. Let’s see some metrics.
    @ T.O. Resident – surely you could put less than 20% down 4 years ago? Are you specifically referring to mortgages requiring default insurance?
    @ Aston Lau – that’s not how property taxes work. Municipalities set out how much they need to raise, and then based on the relative value of your house to others in your municipality, you pay a certain proportion. If house values tanked by an even 10% across a municipality, people would pay exactly the same the next year, plus any increases passed by the municipality.
    Al R

  8. Show me proof or backup the claims that 10% down benefits the market? You can’t turn back the clock without changing all the other parameters.
    Kids graduating today have 5 times the student debt of 20 years ago so all I do know is 10% down will insure that without parental donation, they don’t make it out of their 1 bdrm. basement rental and into the market for a very long time.

  9. Underwriters look at a deal from several angles. Credit and debt ratios are the two most significant risk variables. If you read insurer guidelines you’ll notice that someone in the low 600s (credit score) can buy a house with 5% down. However, they cannot leverage to a 44% total debt ratio unless they have strong credit (>= 680). This indicates how important debt service ability is compared to down payment.

  10. Hey Al R, people not having minimum 10-15% is the reason we are in the mess in the first place. And if you think we are not in the midst of a housing bubble then you are burying your head in the sand. The 0/40 mandate passed a few years has made housing unaffordable for all. And if you want metrics I got em.

  11. @VJ – If you take the time to read my comment again, you’ll find that I said nothing about a housing bubble. I stated that the size of one’s down payment does not have a strong relationship with default risk.
    Moreover, don’t you think you’re being a wee bit reductionist? Do you think, for instance, the market may be hot because of current monetary policy? Perhaps ratcheting up interest rates (coming soon!) will have a dampening effect on the market?
    It’s been said 1000 times before on this site, but what the heck… There are more effective and efficient methods of achieving desired results without imposing blanket restrictions that penalize low-risk borrowers from entering the market.
    Al R

  12. AlR…
    “I stated that the size of one’s down payment does not have a strong relationship with default risk.”
    Agreed. No correlation. I am merely suggesting it’s a cause of the mess we are in. It’s economics 101. More demand equals…blah blah
    “Do you think, for instance, the market may be hot because of current monetary policy?”
    Well yeah…duh.
    “There are more effective and efficient methods of achieving desired results without imposing blanket restrictions that penalize low-risk borrowers from entering the market.”
    yes that sounds wonderful. I want to change the world too but what do you suggest? What are these measures? Because the more you have the more the more you have to police. Just ask the SEC. Minimum downpayments is the path of least resistance. They were good enough a few years ago why not now?

  13. I believe the answer is being missed in this discussion.
    The answer to cooling the housing market along with reducing defaults is to lower the allowable TDS from 44% to 42% for borrowers with 680+ beacons, and to lower TDS for sub 680 beacons to 40% TDS from 42%.
    I think most experienced brokers are uncomfortable with salaried clients borrowing up to 43.5%. We we all know after tax income is shrinking year after year due to increasing goverment fees, insurance premium hikes, food and fuel costs, heating, etc.
    A marginal decrease in TDS ratios would bring the market back into line to what was traditional and reflects the growing living costs that consumers pay that is not being taken into account.
    It is a rather benign solution that will only affect more risky borrowers, forcing those in this category to improve their finances without severely impacting the market.

  14. I own several rental properties and in one case a tenant purchased a home by raising their Credit Card limit to make the down payment. Has anyone else been seeing this kind of thing? I was surprised to know how they made the purchase but they believe the market is on a upswing and can cash-out at anytime.

  15. @VJ – Regulators have criteria other than what works and ease of administration, which is why most analysis has supported the view that focusing on down payment levels and amortizations is misguided at best and counter productive at worst. Even economists who believe there is a bubble, like Derek Holt of ScotiaBank, think this would be a bad move.
    If you recognize that interest rates have a significant role to play in the current strength of the market, and that this effect will be gradually removed in the short-term, I’m not sure why you’re singularly focused on down payments. Other than the fact that it’s “the path of least resistance”, of course.
    This isn’t rocket science. If regulators decide that they need to cool down the market, they can target metrics that have a strong relationship with default rates (i.e. TDS, beacon score, or a combination of the two).
    Al R

  16. Let’s get one thing straight … home ownership is a privilege … NOT a right. A student graduating from college not being able to buy a home til he/she saves a 10% downpayment is the furthest thing from a bad thing. Learning to live within one’s means is a concept lost on the people who demand graduating college students should be buying 400K homes/condos. In fact, most graduating college students will be better off renting versus buying especially if they actually live within their means. I know the latter is a foreign concept to many of you.
    The ability to withdraw from an RRSP to purchase one’s first residence is already in place to help with down payments. Home prices will decrease if everybody cannot run out and buy a home with practically no $$$ down. This will help to alleviate any concern that putting 10% down is some sort of huge effort.

  17. This a conversation that doesn’t illuminate the subject much at all.
    Arbitrary rule changes that change the fundamental economic variables in purchasing a property with a high ratio mortgage might be a good thing, or possibly a bad thing. It might cause the price of houses to go down (which some people think would be a great idea)and it might permanently eliminate some other people from owning a home at all. Even.
    The real problem is that the value of residential housing is already fairly arbitrary, based a balancing act of income vs costs, and savings vs investments.
    But since property ownership is generally considered a public “good” in Canada, I think it probably is a good idea to make it as easy as possible for people to buy a home, and to keep the cost of owning that home reasonable.
    Upping all of the inputs to that purchase merely harms everybody. Who wants that?

  18. AlR…
    So tell me…what happens when all those people who opted for 0/40 mortgages(Zero meaning No Downpayment) go to renew in a couple years when said rates begin to rise and they find themselves in a negative equity situation. Since all this crowd is doing is paying the interest, a 10-15% correction would be devastating. Will No Downpayment seem like a good idea then? Now THIS is not rocket science. Good to see Howard has brought some sanity to the discussion. AlR…are you a Mortgage Broker by any chance?

  19. Howard, you seem intelligent, abet cautionary in your views, so let me ask you, should your basis apply to everything? How about a 10 or 20% down payment and a good credit history that shows you can afford to pay off student loans before your accepted into a University program?
    In my view, home ownership is neither a privlege or a right! If you have good credit standing, can afford to finance and pay your default insurance premium(CMHC), how much you contribute should be the least of relevant factors. I have to agree with Al R, there are many ways to slay a dragon and what is proposed seems a bit draconian and unnecessary at this time.

  20. @ VJ – I’m not a mortgage broker; just an interested observer. Although you’ll be pleased to know that when I bought my house, I put 10% down, and my amortization was less than 35 years…
    I guess we’ll have to agree to disagree. IMO, the extreme examples that are typically brought up are not characteristic of the average buyer. Time will tell.
    Al R

  21. Donald Wilson wins the prize for comment most likely to come from a George W Bush speechwriter.
    Homeownership for all! Let’s bring 0% down interest-only loans back! How about 50-year amortizations!

  22. What’s wrong with 0% down interest-only mortgages for an 800 Beacon 35% TDS borrower making $200,000 a year?
    You need to put everything in context T.O. Resident.

  23. ok, so let me see if i have this right. you buy for $200k put $20k down, and have a $180k mtge+ cmhc fee payments on that about $980 pm. Now you only have 5% down, on that $200k = $10k down, and $190k mtge + cmhc fee. payments $ 1030 pm. you loose your job. Is it really going to make a difference if your payment is $980 or $1030? come on.
    look at the default rates, how much $$ does CMHC have in it’s Coffers, from all those premiums?

  24. If you make 200K a year then why can’t you put 10% down??? I think that is more worrisome than whatever his credit score is or his TDS.
    While I agree that home ownership is a good thing in Canada — there is NOTHING to say it has to happen immediately upon graduation of school. Enough with the sob stories of people graduating with student debt who cannot afford to BUY a home! If we are not in a real estate bubble then there is a major brainwashing going on in this country that home ownership is the be all and end all in life.

  25. Highly qualified borrowers should have the right to choose what they do with their money. Maybe I have an investment opportunity where that extra 5% could be better used. Or maybe I have a higher interest student loan. The point is, you cannot tell responsible people how to spend their money Howard. Nor should the Canadian government.

  26. Actually, the Canadian government can tell responsible people how to spend their money and they do it all the time. The discussion is about whether they “should” not about whether they can. The 200K earner may not “like” it but I don’t like paying taxes and yet the government makes me. It is funny how all the examples against it are either they rich (200K+) or the poor college kids with student debts. Both are extremes at each end while most of the people in the middle don’t really care … because they already put down 10%.

  27. If the monthly occupancy cost of living in an apartment is, say, $900 and a PIT payment is, say, $900 then keep the policies affecting these situations loose. If the PIT payment is substantially in excess of typical shelter costs then tighten those policies. A credit history will give a good indication as to whether or not the borrower would choose to lose their 900 a month home in order to live in a 900 a month apartment . . . or under a bridge. And, yes, I know . . . sometimes #$#@ happens and mortgages will go delinquent in both scenarios.

  28. Forget it Howard…I’ve spelt out how crazy no down payments are. I even asked a simple question earlier and got no response because they didn’t like the answer. Like you said, somewhere down the line home ownership became a right now we’re all paying for it.

  29. @ Howard,
    I have been reading your postings on this site for some time and people like you absolutely make me sick. As a student in my early 20’s who just purchased his first home (last year thanks to CMHC 5/35 program), I must make you sick too.
    People from your generation (my parents and grandparents) have left my generation saddled with debt and a weak economy thanks to the great years you all enjoyed through the 80s, 90s and 00s. We face rising taxes, a weak job outlook (even with a uni degree), and potentially decreasing home values in the futures, while you saw your house price double in the last 10 years I am sure.
    For many students these days, 30-50k in student debt is common after finishing there schooling (age 22-23)…which can take anywhere from 5 to 15 years to pay off (presumably during which time you cannot obtain a conventional mortgage because your debt load is too high). So you’re saying around age 30 we can begin saving for our 10-15% downpayment and building our credit…get real. Maybe we should rent off of you during that time and make you richer??!!
    I am a second year medical student and let me tell you first hand that how many “good potential doctors” I have seen choose to not pursue med school after their undergrad so as to begin working and not be drowned with debt until their mid-30s. These are the “good doctors” that I hear my grandparents wishing for so often after they’ve been to a medical appointment.
    You probably think I’m pulling this a bit too far from the point at hand but I just want to let you know that these things (debt, mortgages, home ownership, etc…) effect you and me in more ways then the value of your home.
    I hope one day you can walk into my emergency room and I can somehow repay you (with “superb” medical care, of course) and your generation for the lovely surprise you left to mine.

  30. JP Koning: nice catch. it’s amazing that that document has not received ANY media coverage or analyst questions. Home Capital got through their entire earnings call without a single question on ACM.

  31. @ David
    I laugh that you think you know me based on my comments. I’m in my early 30s so please don’t recite your sob stories of “poor you”. I’ve heard the “so expensive university tution” story so many times it makes me sick (maybe you are trying to drum up more business for the medical system). It is your choice to go to medical school and take on that student debt. Stop blaming society for your choices. I know over a dozen medical students right now and half of them choose their specialites on “how much $$$ they will make”, so please stop with the poor “med student stories” too. I graduated with student debt and so did my wife and it didn’t stop me from living within our means and still buying a home before I was 30 (with 25% down). It is not impossible and in fact was not even that hard with starting job salaries in the mid 30K range and mortgage rates over 6% at the time. You are exactly the college graduate that my original point was about and you proved me right. By the way, the unemployment was far worse than it is now in the early 90s not that you have anything to complain about anyway since you will be working in Health care. But thanks again for proving my original point.

  32. This chatter is bordering on irrelevance. What is relevant is that no one has a right to keep strong borrowers out of the market because they choose not to put down 5% or want to extend their amortization. How you manage your own affairs doesn’t matter. All that matters are two common sense questions –> Does the person qualify and are they a low risk of default.

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