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Top 10 Effects Of The New Mortgage Rules

top-ten-mortgage-rule-effectsWe may not go 10 for 10, but crystal ball-gazing is fun nonetheless.

In this humble of spirits, we present ten trends to watch out for in 2011, courtesy of Flaherty & Co.’s new mortgage regime:

  1. Lower purchase and refinance demand will depress mortgage volumes, sparking greater rate competition as lenders battle for less business
  2. A small portion of home buyers will sprint to buy homes with a 35-year amortization before March 18, followed by downward pressure on home prices after March 18 as the amortization reduction removes market liquidity
  3. Negative personal consumption and wealth will result thanks to equity take-out restrictions, rising rates and softening home prices
  4. Unsecured debt usage will increase as homeowners are restricted from accessing as much of their equity, leading to even greater bank profits in unsecured lending
  5. Default rates will see no material improvement
  6. No significant improvement will occur in the number of risky borrowers, due to no change in TDS limits or Beacon score requirements
  7. HELOC rate discounts will be less frequent as some non-bank offerings disappear and HELOC funding costs inch higher
  8. Banks will pick up mortgage market share
  9. More private lenders will offer high-interest uninsured 2nd mortgages to 90% LTV
  10. If amortization restrictions accelerate falling home prices, we’ll see somewhat greater default risk and more negative equity situations among low-equity homeowners

The Reason Bank CEOs are Superheroes (to their shareholders):

BankersIn one epic and brilliantly calculated move, bank CEOs like TD’s Ed Clark and BMO’s Bill Downe convinced Canadians they had consumers’ interests at heart, and convinced the Finance Department to:

  • Overlook credit card debt, a market that’s yielded double-digit growth for banks and funded $260 billion of purchases last year
  • Ignore the risk of unsecured lines of credit (ULOCs) so banks can continue offering them to their customers when 85% LTV refinances aren’t enough [Brokers don’t generally sell ULOCs.]
  • Quash broker’s primary source of growth (first-time buyers) with amortization restrictions
  • Cut off consumers’ ability to refinance profitable high-interest consumer debt into low-interest mortgage debt
  • Eliminate HELOC competition from non-deposit-taking lenders which rely on securitization (HELOCs have been massive money-makers for banks, with 170% growth over the last decade. HELOCs now account for 12% of household debt. Banks like TD, BMO, and RBC are largely unaffected by the new HELOC rules because they don’t depend on securitization. )
  • Increase HELOC funding costs at banks with broker channels (like Scotiabank and National Bank—both of which securitize some of their readvanceable products, according to sources)
  • Brush aside the consultative recommendations of CAAMP aimed at permitting well-qualified borrowers to retain mortgage flexibility in exchange for tighter borrower qualification standards
  • Make it harder for more people with collateral charge mortgages to change lenders (Thanks to the lower 85% LTV refi maximum. Bravo to TD’s Ed Clark on this one.)

In short, the big bank CEOs orchestrated a virtuoso performance for their shareholders, at the expense of sensible mortgage holders. It’s moves like this that justify every crumb of their $5 to $15 million+ compensation packages.

Rob McLister, CMT