HELOC LTVs Could Drop From 80% to 65%

65-percent-ltvThere’s a good chance we might see new restrictions on HELOCs, possibly within the year.

Last week, Canada’s top banking regulator Julie Dickson explained why to BNN:

“We started to see [HELOCs] being used as a substitute for a mortgage. Instead of having a mortgage on a house, you had a HELOC only, and that is not what these HELOCs were designed for originally. That’s why we suggested in the guideline strongly that there be a loan-to-value ratio of a maximum of 65%.”

Julie-Dickson-OSFI“We want the (underwriting) practices at the banks buttoned down,” Dickson added, saying that some financial institutions were not following underwriting policies “to a T.”

As with OSFI’s other pending mortgage guidelines, the new 65% LTV HELOC change is up for public comment until May 1.

The Downside…

If OSFI were to impose this 65% LTV limit on all borrowers (regardless of qualifications), some would view it as one of the most over-reaching consumer lending rules OSFI has enacted; painting all borrowers—strong and weak, responsible and overleveraged—with the same brush. Hopefully exceptions will be made for strong borrowers.

It’s vital to note that HELOCs support a host of valid uses. Many people rely on them for investing purposes, educational borrowing, contingency funds, value-added renovations, etc. Moreover, unlike high-ratio mortgages, HELOCs present no taxpayer risk because they’re not backed by the government. They also impose minimal insolvency risk to banks, to the extent that borrowers are well-qualified and maintain 20%+ equity.

On a related note, OSFI’s draft guidelines suggest it might also require federally regulated institutions to limit interest-only periods on HELOCs to five years. This would be a senseless restriction for people who use HELOCs for retirement planning. In such strategies (e.g., the Smith Manoeuvre), interest-only payments and 80% LTVs are sometimes essential. In these cases, HELOC borrowing is generally offset by the income-generating assets purchased with those funds.

Other Comments…

Regarding the recent 2.99% mortgage “sales,” Dickson said it is “very important” to make sure consumers “can not only pay a 2.99% (rate) but can actually pay the 5-year Bank of Canada posted rate.” It’s not a coincidence then that OSFI’s proposed guidelines talk about using the 5-year posted rate to qualify a much broader range of borrowers.

Dickson refused to answer questions on whether a reduction in CMHC portfolio insurance would create challenges for banks.

BNN interviewer Howard Green also tried to get her to comment on whether bankers might be afraid to speak out against over-regulation because of retribution from regulators and examiners. Dickson dismissed that as being a material issue in Canada. Some in the industry, however, would certainly differ with her on that point.

Rob McLister, CMT

  1. Hi Tomas, That’s true, albeit a very small fraction of HELOCs were insured in the past, hardly enough to present any material taxpayer risk. With new approvals going forward, this is not a concern. Cheers…

  2. Excellent points Rob. I think this unfairly limits the lenders from using discretion when it comes to their lending guidelines and unfairly limits Canadian consumers from being able to arrange their affairs.
    There’s another angle here: What impact would this tightening liquidity have on the economy? Would a significant number of investors have to deleverage in order to meet the 65% LTV requirements? Will this impact investment in the stock market materially?
    Furthermore, what leverage will the consumer have who is currently in a callable HELOC at or near 80%? If they’re not in a position to go to 65% at another institution, they’re at the mercy of flexible pricing w/ the current institution.
    They’re really backing people up against a wall here.

  3. Great comments here. While a HELOC can be abused by some the vast majority of Canadians use them prudently. Everyone interested should submit written comments to OSFI and copy their MP before the May 1st deadline.

  4. Thanks Gord. I would suspect (hope) that any LTV reductions wouldn’t be applied to existing borrowers who are utilizing over 65% LTV. At this point, however, no one knows what exceptions would be permitted if this guideline took effect.

  5. Mortgage: The charging of real (or personal) property by a debtor to a creditor as security for a debt , great, our regulator doesn’t think a heloc is a mortgage,,,

  6. Thanks Rob, good insight here, particularily clearing up the timeline of the possible implementation of the rules.
    In the end; all of these proposed changes are the function of fear. Fear of a hard landing in property values which will send a shockwave through the economy.
    So many HELOCS have been used to put down payments on rental properties or frittered away on pointless renovations (do you really need a new kitchen as often as a new car?) that property values continue to be distorted.
    The truth is, as Rob says: it makes no sense to paint all borrowers with the same brush and the government actually knows it. However; regulators regulate and they need to do something even just to try to fix a problem that’s too late to be fixed. So OSFI attacks HELOCS because they are non-amortizing.
    The property value issue will still come to haunt us but the regulator can say “not our problem, we changed the regs”
    It’s all about CYA.

  7. Why doesn’t OSFI focus on credit cards or the shady trading practises of some FI’s. Or work with the OSC on some of the other shady things going on in the markets than mess around with HELOC’s and knocking them back to 65%. The HELOC is hardly an issue.

  8. I think that this is just further proof the government is in fact intervening in the mortgage market. They just did not want to do it directly and face the political risk if things go really bad. Politics at its finest I think.
    Please keep it coming Rob, brokers and consumers alike need to be informed so we can adapt our businesses well in advance.

  9. For perspective, a Nov 11 Leger Marketing surveyed folks who had HELOCs. They used the money as follows:
    37% home reno
    17% car
    11% “living expenses”
    11% vacation
    9% rental property
    5% children’s education
    That doesn’t total 100%, so presumably the remaining 10% is “whatever”.

  10. LTV 80% is just not good enough of a cushion to protect consumers. Anyone who did a heloc just before the crash of 07/08 will most likely have authorized limits near or over 100% LTV now. The average consumer does not think “LTV” when they use their heloc. Yet their risk exposure is constantly changing with market value fluctuation and they don’t even know it. The way heloc is being pushed by bankers and brokers alike should be a cause for concern. When there is variable comp for selling helocs or 60 day o/s, there is real economic incentive for the bank/broker to be pushing this on unsuspecting consumers whether they need it or not. The whole mortgage supply chain has a hand in this issue and if it all blows up, everyone can point finger at someone else while consumers are left holding the bag. So 65% LTV is prudent medicine to protect consumers from bankers/brokers.

  11. You are making ridiculous broad-based claims with nothing to back them up.
    Most people use credit lines conservatively. Protecting idiot borrowers from themselves is no reason to take options away from the majority of careful borrowers.

  12. If the person getting the HELOC is so qualified, wouldn’t they be able to get some other type of loan for the same purpose?
    Looking at the big picture, is the issue here simply that there aren’t a lot of other loan options for people? i.e. HELOCs have become the loan of choice because the other Line of Credit / Loan options are generally not competitive?

  13. Also important to note that most if not all mortgage specialists and brokers don’t have a rubber stamp to approve applications, but rather have to send through underwriters as a practice of checks and balances. If it is the right product for the client I will always encourage it, but will also tell people when they shouldn’t have a credit line.
    As for compensation…I’d rather get paid now rather than wait 60 days and have a chance to get nothing, so your point on this is irrelevant.

  14. Hi Rob, great post. I was wondering if you could clear something up for me regarding HELOC’s. For the purposes of determining oustanding HELOC credit, is it the amount of the full HELOC as registered on title, or is it the actual amount borrowed thus far.
    For example, if someone has a $200,000 HELOC, but has only utilized $50,000 of it to date, do regulators / banks report the former or the latter as the total amount of HELOC credit outstanding? Thanks.

  15. making it nearly impossible for the average guy like me to invest into rental properties, thanks julie dickson and your team for making rich richer and the poor poorer once again

  16. Leger survey trumps the TD one because it describes actual HEOC usage versus aspirational usage.
    65% LTV HELOC is more than sufficient to fund vacations, education, cars and “living expenses”?
    Accessing home equity is also possible via a sale of the property? Second mortgage?

  17. I know some folks who used their HELOC conservatively.
    Step 1: buy a Toronto home
    Step 2: chop it up and rent to 8 individual tenancies
    Step 3: take out a credit line and buy a dry cleaning shop
    Step 4: use the dry cleaning cash flow to pay the monthly on the interest only line.

  18. Let’s do a run down of consumer debt options:
    HELOC, 3.5%
    Canada Student loans, 8%
    Bank Car Loans, 7.5%
    Visa, 19.99% purchases, 21.5% cash adv.+1% fee
    Home Depot card, 28.8%
    HBC, 29.9%
    Hmmmmm, now ask yourself the obvious: Why are the banks not alarmed about the banking regulator interferring in their business?

  19. Oh one last thing. Capital one funds HBC cards, Citibank funds Home depot. Desjardins funds Rona cards, TD owns CUETS financial who funds Mastercard for the credit unions… and on…and on…and on.

  20. I’m still dumbfounded by this.
    If someone has 65% LTV in their house and they’re not allowed to take out equity via HELOC at a nice low rate they’re likely just going to get a higher rate bank credit line.
    Come renewal time, what do you think they’ll do? Refinance? Or renew and keep the higher credit line?
    If they want to curb stupidity do the higher LTV’s 90-100%. That’ll still punish some good borrowers but a whole lot less than the HELOC.
    People will still find ways to get their money – they’ll just pay more for it.
    Also, like I said before, look at the CC’s and higher rate items before the HELOCs. I was looking forward to 70% LTV so I could take out some money and use it for investments. Or put a wack on my RRSP.
    Way to go OSFI.

  21. This article seems to contain two misconceptions. The OSFI’s mandate is not to protect consumers (responsible or otherwise) from themselves, it is to protect financial institutions’ solvency.
    And how can you say poor HELOC lending can’t put the taxpayer at risk? Bank deposits are guaranteed by the CDIC, a Crown Corporation. If a regulated institution were to fail, the taxpayer would be the ultimate guarantor of some of its debt.

  22. What taxpayer risks? HELOCS are secured and callable or if over 80% LTV at origination, CMHC insured.
    Besides foolish armageddon senarios dreamed up by G.T. and his greater fools, where is the taxpayer risk?

  23. Maybe you should read page 13 of this BoC report.
    Since you will probably ignore this link, here is a sample:
    “Secured PLCs, which are mostly secured by housing assets (i.e., home-equity lines of credit), have risen sharply both in absolute terms and as a share of total consumer credit. In 1995, secured PLCs represented about 11 per cent of consumer credit; by the end of 2011, this share was close to 50 per cent”

  24. Hi Ralph,
    Thanks for the post. We’re certainly aware of OSFI’s mandate but the effect of an LTV reduction directly impacts consumers all the same.
    Regarding taxpayer risk, the story does acknowledge “minimal insolvency risk.” Practically speaking, I’d have no hesitation in saying that HELOCs will not trigger a CDIC bailout. This is why:
    * HELOCs are a fraction of banks’ credit risk. Take BMO for example, which does a relatively high proportion of HELOC lending. HELOCs comprise just 4% of its risk-weighted assets, per OSFI-enforced Basel II measures. For most banks, HELOCs are an even smaller slice of overall business.
    * Secured credit lines are granted to qualified homeowners with stricter qualification criteria than a regular mortgage.
    * Borrowers have the option of interest-only payments in a worst case (even though only 7% of people use them, according to RBC)
    * HELOCs are backed by significant equity. In a doomsday scenario where home prices plunge and unemployment spikes to obscene levels, banks would have far greater problems than HELOC defaults.

  25. I agree with the fact that it will push consumers to leverage credit cards and the end result is worst for the consumer. And your right about the ivory tower in the end they will get their pound of flesh from the victimized consumer!!

  26. Why don’t you look at the stress test scenarios that the Federal Deposit Insurance Corporation (USA) and the European Banking Authority subject their banks’ balance sheets to? A bank regulator’s job isn’t to make sure banks don’t go bust in good times. How does an 8.1% decline in GDP, 36% decline in house prices and 13.3% unemployment grab you? That’s an example of a worst case scenario that bank balance sheets are expected to withstand.

  27. And people who have earned that privilege shouldn’t be left with fewer options because of people who haven’t.

  28. Personally, I think OSFI has a point.
    I’ve always felt that 80% was a risky arbitrary number for HELOCs. It could also be though that 65% might be an overly conservative arbitrary number. Why not something like 75% for the first $200000 of the home, and then 65% thereafter? Again, arbitrary. I do note however, that many banks already have a limit of 65% after a certain cutoff, although that cutoff is generally much higher than $200000.
    P.S. I’d hazard to say that if more people are discouraged from using the Smith Manoeuvre by the elimination of perpetual interest-only loans, that might actually be a good thing.

  29. I agree that HELOCs wouldn’t be banks’ biggest problem if things went South.
    I can confirm the OSFI’s mortgage substitute theory. A few years ago, I talked to Scotiabank about a conventional, purchase money mortgage, and they offered to do the whole thing on a HELOC with no accompanying mortgage. Not much different from a pick-a-pay option ARM when you think about it. I wonder how many of these types of deal have been written in Canada?
    RBC seems to be pushing HELOCs with big ads in the national newspapers right now, bragging about having lower rates than their competitors. Maybe OSFI is just trying to get out in front of what they see as an emerging trend.

  30. Agreed VAW, my anecdote does not apply to everyone.
    The Leger survey clearly states how HELOCs are being used by folks out there.
    Cars, vacations, renos, oh my!

  31. 65% LTV HELOC is more than sufficient to fund vacations, education, cars and “living expenses”?
    Firstly, it’s stupid to imply that HELOCs are widely misused based on some survey you don’t even link to that says some people use them for cars and vacations.
    The fact that some people abuse them is a secondary issue. That is no justification to take away choices from responsible people.
    65% is not enough when you have a mortgage also. Only long-time home owners have enough equity to permit a HELOC with a 65% LTV limit.
    Lastly, why should low-risk homeowners need to sell a property or pay a much higher 2nd mortgage rate when they want to borrow?
    What you’re saying makes no economic sense.

  32. Mortgage: The charging of real (or personal) property by a debtor to a creditor as security for a debt , a heloc is a mortgage

  33. It’s DIFFERENT here
    It’s DIFFERENT here
    Our borrowers never lie (never lie)
    It’s DIFFERENT here
    It’s DIFFERENT here
    Our lenders always verify (verify)
    Collateral values
    will keep going up
    until they reach the sky (reach the sky)
    It’s DIFFERENT here
    It’s DIFFERENT here
    Like no place else on earth
    Our borrowers
    don’t even really need the money
    because they’re all High Net Worth (high net worth)
    It’s DIFFERENT here
    It’s DIFFERENT here
    We don’t write those kind of loans
    It’s DIFFERENT here
    It’s DIFFERENT here
    Why rent when you can own?

  34. All this brings up a bigger question – should it be OSFI’s role to set LTV limits on secured borrowing that isn’t government insured? As Flaherty mentioned, isn’t this the whole point of a bank, to price and allocate capital? Why even bother having banks if the government is determining all the rules?
    The current “conventional” LTV limits are arbitrarily based on where CMHC takes over, but it needn’t be like this. I’d like to see banks making their own rules (200% LTV? go for it) but have to meet stringent risk-weighted capital tests that are administered by OSFI, not sweetheart ratings agencies. The problem in the US wasn’t lenders mispricing risk – it was regulators believing (or being conned into believing) they weren’t.
    After all, consumer credit extended to clients with net-negative worth (especially a large percent of Canadians that don’t own real estate) is technically done so at an infinite LTV.

  35. Would anyone know if all HELOC lenders require that you have your mortgage with them to get a HELOC? I was just declined by TD for this very reason…that because my mortgage is with Home Trust, they cannot give me a HELOC. Called Scotia, ING, they said the same thing. No ability to shop around for HELOCs. Must go with your mortgage holder.

  36. Heck I remember the old days when the neighbor around the corner took out a second mortgage and everyone whispered about it as if it were a funeral.

  37. In the doomsday scenario that of course, will never happen because, well, Canada, and everything, but in that scenario, 2nd lien gets zilch. That means it’s not actually secured by much of anything.

  38. All of a sudden the price of credit doesn’t change the appetite for it? Great! BoC should just raise rates tomorrow, no risk in doing that.

  39. Please quantify the taxpayer risk your suggesting? You do know that CMHC only insures a small fraction of total HELOC’s?
    CMHC = Insurer

  40. People like you want to obscure CMHC’s benefits to taxpayers and focus only on what you perceive as taxpayer risk. It’s a slanted view that is devoid of credibility.
    You should move to a country where you can’t get mortgage insurance on a rural property, or where you have to wait until you’re 35 to own, or where you’re forced to pay 2% higher rates because there is no developed securitization market. You’d be happier there, and most of us would be happy to see you go.

  41. CIBC and BMO will go second behind a conventional 1st charge. CIBC will give you a discounted rate of P +0.50% and BMO normally doesnot unless they have the first charge as well…

  42. So you’re advocating the elimination of 80% LTV HELOCs to save people from buying cars, vacations, and renos? People were buying these things before.
    Why would you expect consumers to pay for cars using auto loans and vacations on CCs when HELOC is the cheapest financing option?

  43. They can get some other type loan, but being secured, the HELOC is the cheapest option.
    If you were offered a CC with 18% or 12% interest and all other terms being equal, which would you take?

  44. Al , TD has pretty much shut the door on all lending unless its real tight, any lose holes, or not a good reason “Why” you need it it will be declined . They took the worst when it came to OSFI audit so All lending regardless of type is white gloved . RBC came away all thumps up so they are pretty much back to normal , but they will NOT go in 2nd position. what i would do is try again at TD with a good MMS rep, have to find one online as the branch will not advise you one. a good MMS rep will come up with a viable excuse, the bad excuses are, ” pay off debts”, “for future use”, “investments”… sorry those don’t work any longer if you use for renos, they may ask for floor plans & proof you will be doing the reno! I’m not kidding they are just brutal. good excuse would be to pay for funeral expenses for a relative, probate fees, something kinda sad works since its unlikely they will ask for many details. make the amount reasonable then later have it increased at branch level if required.

  45. People were buying these things before.
    They were paying cash before. The debt to income statistics show we’re at a record, and have never before been close. And, if I may add a personal opinion, I think financing a vacation you can’t pay cash for is a moron move. Not quite credit-card-cash-advance-at-the-casino moron, but close. If you’re seriously advocating that using HELOCs to fund that sort of consumption is a valid lifestyle choice, it’s indicative of the problem we’re facing. This is what credit tightening looks like. Get used to it.

  46. It’s because your 1st mortgage is with Home Trust.. a ‘B’ lender.. most lenders won’t go in 2nd positions behind them… you should either payout home trust (but you probably can’t do it as they won’t allow payouts unless through a sale) or wait til your mortgage matures and get out of home trust, or ask for Home trust’s Equityline Visa.. it’s a secured line of credit but at higher rates… 9.99%…
    you should also know that TD will not go behind another lender in 2nd position for a line of credit.. new policy from a just over a year ago… there are some credit unions that can help you once you get out of home trust..

  47. What if you want to borrow from the line of credit to buy income paying mutual funds under the direction of a financial planner. Banks won’t allow that?

  48. Or, feel free to call CIBC and see what they can do since it seems they are able to do it.

  49. steve thats incorrect TD WILL go in 2nd position underneath another lender, as long as its not a re-advanceable ( credit unions) they will go under any lender prime +1.50 for helocs you can request an exception on rate discount if its a good deal
    there is a list of approved OSFI lenders . home trust is not one of the approved lenders on TD list.

  50. think about it , if you request to a lender to draw out money for investments purposes how is the lender know for sure your not buying 100,000 shares of a penny stock? you could try but i can tell you right now as of 2 months ago, good luck at TD . the reason has to be legit & believable . now if you state you will PROVE you WILL be buying income producing mutual funds then maybe again the problem is you need the funds for the buy, they won’t release you the funds till they see proof. you can try but it will either be a real good believable lie or show me your cards. if you try again do not do it at the branch EVER, that will always be your first road to decline, find a MMS rep from whatever bank your odds go up 75-80% .

  51. You’re an advocate. I’m just writing on a blog.
    Brokers often use the words prudent, conservative, responsible when talking about HELOCs, citing delinquency rates as validation.
    I gave a concrete listing, and an anecdote, of what HELOCs are used for.
    80%, 65%…it’s all arbitrary. Please entertain us with why 80% is the “right” number?

  52. Your BOSS doesn’t agree according to Q2 2012 Data:
    • Tim Hockey, President and CEO, TD Canada Trust said, “…We have the largest (HELOC) portfolio…”
    • “…We are seeing a little bit of (HELOC) market share loss…but on the other hand we are getting it back on the mortgage side.” (Source)
    • “…We often sell our HELOC…as a much more flexible option for…a mortgage”

  53. “Brokers often use the words prudent, conservative, responsible when talking about HELOCs, citing delinquency rates as validation.”
    Yes they do, because it’s true.
    HELOC arrears are so small that they are trivial. Yet you and these other alarmists talk about HELOCs like they’re going to bring down the financial system. Listen to yourself man. You are making no logical sense.
    Your anecdote is an isolated case. It is worthless from a policy standpoint. That Leger survey does not invalidate the fact that HELOCs serve important roles for responsible borrowers.
    If LTVs are all arbitrary numbers in your opinion, then logically there is just as much argument to leave them as is.
    The fact is, the government has determined that 20% equity is correlated with low default risk. You seem to think you’re smarter than the data and regulators, insurers and lenders. I don’t even know you but I can tell by your writing that you’re not.

  54. …citing delinquency rates as validation.”
    Yes they do…

    I think you fell into his trap. Delinquency rates don’t measure borrower prudence, they measure real estate prices and unemployment. By the time delinquency rates start to indicate a problem, years of bad underwriting are often on the books.
    That Leger survey does not invalidate the fact that HELOCs serve important roles for responsible borrowers.
    True, but it does show that many borrowers are irresponsible. Pop quiz: Is a borrower who uses a $30k HELOC at 4% to pay off $30k of CC debt at 10% a responsible borrower, generally?
    I remember when these things were introduced: They were a specialty product aimed at HNW, entrepreneurs and high but variable income, and you had to sit down with your banker and tell him what you were going to DO with the money. And it isn’t like I’m old.
    Once you start giving these to anyone who has equity and hasn’t defaulted recently, you really have to admit that you’re writing option ARMs: There’s an interest-only loan sitting on someone’s books with no mandated amortization. Go ahead, build a portfolio of loans not guaranteed to pay down principal over time and tell me they’re safe.

  55. Saying that arrears don’t reflect borrower strength shows how much you really know. And “bad underwriting??” You don’t even have an inkling of how lenders underwrite. That’s obvious. No “A” lender is taking stupid risks in this market.
    Who cares if some people don’t know how to manage their money. You’re saying that we all should suffer for it? That is insane!!
    There are NO large portfolios of loans not being paid down. I read here this week that only 7% of people pay interest only. You keep spewing outlandish claims and expect people to buy what you’re selling? You need to find a more ignorant audience.

  56. Who cares if some people don’t know how to manage their money. You’re saying that we all should suffer for it? That is insane!!
    No, it’s obvious. How do you think lenders are compensated for their bad loans? Higher interest on the good ones. And I don’t know what you think I’m ‘selling’. This is what credit tightening looks like. Get used to it.

  57. To be truthful, I did not fully read your anecdote. I tend to keep scrolling when I come across that word. I think that anecdotes are not useful and often counterproductive in any intelligent debate (except politics of course), as one can often be found to support a point of view, especially from anonymous internet users. We could have 1% unemployment, yet you could still find someone with a down on their luck story.
    I wasn’t advocating a specific number for an LTV max, but the current 20% equity seems sufficient unless you have a model that predicts >20% declines to house prices across the board (and price-to-rent ratios are no such model). Maybe the econ people at the Big 6 do expect such a decline, I really couldn’t comment on that.
    Also, I’m not a broker and don’t work in the RE industry, but I do have a readvanceable HELOC, which currently has no balance and gives me peace of mind as a bit of a safety net.

  58. See, this is where the debate is becoming futile. I was not advocating that consumers purchase vacations on credit cards vs. paying for them in cash. But if they choose to do that, then who am I (or you) to say otherwise if that option is available to them? That is called free will and your boderline totalitarian views are dangerous, especially when you paint everyone with a HELOC with the same brush stroke.
    You also said that consumers were paying cash for cars and vacations before. Since you didn’t provided any data, survey etc., should I assume you are referring to the 1950’s and 60’s? Auto leasing and financing were on fire until the most recent recession and subsequent credit crunch. That’s probably why consumers started using HELOCs to fund vehicle purhcases, because of credit tightening in the auto sector.
    You should focus less on name calling and bullying and direct your energy towards more productive things.

  59. You read my mind. I’ve also taken notice in the last few months, this site is becoming more and more like that of G.T. Lots of anecdotes, data cherrypicking and bullying from a select few.

  60. CMHC actually does provide pecuniary benefit to Canadians. When discussing risk/reward of the CMHC, folks often don’t discuss the billions the feds have made off the enterprise. Without CMHC what would happen? Add these sums to the national debt? Seems very risky to me…
    Could you provide the names the countries with the mortgage insurance policies you stated (I wasn’t aware of this)? If they’re not in the G8 (or even G20), I don’t see what relevance they have as a comparison.

  61. Fair enough Dave.
    HELOCs are supposed to be for short term financings. They are almost always callable.
    The possibility of a bank calling a line is great than zero. Therefore putting HELOC money into something illiquid is not responsible or prudent…that’s where i’m coming from.
    If / when you use your HELOC and you deploy the funds for something like financial assets to earn a spread…well that’s perfectly fine.
    LOCs have been called en masse before.

  62. It’s going to 65% VAW. My personal acquaintances who use HELOCs do in fact mirror the Leger survey.
    Of five, 2 are cars, 1 is reno, 2 fund small businesses. And the two car folks are going interest only on their monthly.
    Please enlighten us with your experiences.

  63. Agreed, Google anyone on here making repetitive and ridiculous comments with the word mortgage “NAME MORTGAGE” and you will find some busy busy trolls.
    The most interesting fact I find about GT and his greater fools is no one of credibility gives him any! Even David Suzuki can find a wide audience in Oiltown Alberta that respect his credentials!

  64. I’m not quite certain your post isn’t a joke, but I’m going to respond anyway. Who’d have thought Godwin’s Law applied to mortgage broker blogs?
    You’re using micro to look at macro problem, and that’s the problem. History has shown that: a) absent regulations, banks will make enough bad loans in good times that they’ll go bust in bad times. b) when they go bust, savers, prudent borrowers and the uninvolved suffer. Thus, governments decided that banks need strict regulation, AGES AGO. They’re STILL getting into trouble (Google “Global Financial Crisis” or “Bank Failure Friday” or “European Debt Crisis” for details) but it doesn’t hurt as bad as it used to — and that’s saying a lot, as it hurts pretty bad right now.
    Ed freakin’ Clark is asking the government to forbid his bank from making certain loans, and you’re calling ME totalitarianish? Read your history. This is what credit tightening looks like. Get used to it.

  65. How much more interest would people have to pay exactly? I’d say it’s insignificant with a default rate under 1%. Regardless, people would gladly pay 5-10 basis points more for the option of having a higher loan-to-value.

  66. How much more interest would people have to pay exactly? I’d say it’s insignificant with a default rate under 1%.
    Nope, they have to pay interest so the bank wins OVER THE WHOLE CYCLE, not just at the low when nothing is going wrong.

  67. Don’t mislead people Tomas. When was the last time banks called in HELOCs “en masse” on borrowers who were paying as agreed?
    Practically speaking, they don’t do that. Worst case, they would reduce the limit but still let you pay down what you already borrowed in a normal fashion.

  68. Tomas,
    The Leger survey has several omissions. For one, it doesn’t break down HELOC usage by dollar amount. That’s important.
    For example, 11% of people may have used HELOCs to finance part of a vacation, but that doesn’t necessarily mean 11% of HELOC balances consist of vacation spending.
    The 5% of people who borrowed from HELOCs to fund worthwhile educational expenses could have easily borrowed more than the “vacationers.” We don’t know.
    This survey also notes that 25% of those with HELOCs haven’t used them. Many of those are people who simply want a HELOC for emergency purposes. Reducing LTVs could eliminate this safety net for thousands of people with mortgages at 65-80% LTV.
    You also have to remember that the classes of borrowing you deem inappropriate might be done by the same minority of borrowers. For example, those 11% who allegedly use HELOCs for living expenses could theoretically be the same small minority who use them for “vacations.”
    Surveys aside, it’s a given that HELOCs are regularly used to advance one’s family and financial goals. The question that should be asked is: How much more do these positive HELOC uses and economic benefits offset the systemic risk?
    Making across-the-board LTV reductions without considering individual borrower qualifications would have unnecessary net consequences. There are far more surgical and effective ways to reduce risk, with fewer economic repercussions.

  69. Thanks Appraiser.
    I’ve seen both HELOC limits and utilization quoted, depending on the context. Banks often have to report HELOC exposure, which is usually reflective of the approved limit.
    That said, if there’s an example where you’ve seen ambiguous figures reported, I’m certainly happy to confirm what they refer to.

  70. Rob,
    Whether credit driven consumer spending is a net economic benefit is beyond the scope of this blog.
    My actual point is that your pronouncement about HELOC users being “responsible and prudent” is made more credible by illustrating actual HELOC uses.

  71. Tomas,
    The impact of mortgage/HELOC policy changes, economic or otherwise, is the scope of this publication.
    Regarding the second point, there are types of usage and there is quantity of usage. These are two distinct concepts. One cannot focus on the former and ignore the latter.
    Unfortunately there is not a lot of good public data on HELOC usage. The opinions shared here are formed from available research, lender discussions, and knowledge accumulated from working with hundreds of HELOC clients.
    There will always be what some deem to be “inappropriate” uses of credit. That can’t be avoided without legislating peoples’ borrowing habits. Good lending policy is better made by evaluating the overall net economic benefit (which encompasses consumption effects, risks to the system, certain socioeconomic impacts, etc.).

  72. It’s actually a bad thing if qualified homeowners are barred from employing leveraged investment strategies like the Smith Manoeuvre.
    Research has proven these strategies to be valuable and to work effectively.
    I would also add that interest-only payments are necessary to avoid tax issues and to accelerate the conversion of bad debt into good tax-deductible debt.

  73. Hey Rob:
    Fantastic reporting as always. I wish I could share your optimism that strong borrowers will not be capped at 65% LTV in a HELOC.
    I’m baffled by the OSFI rationale for treating a HELOC as a “non-conforming” loan. While, the OSFI Guideline accurately characterizes the term “non-conforming” in Note 15 – as a loan to a borrower that is deficient in some way; non income qualifying, low credit scores, high debt service ratios or elevated credit risk due to an illiquid property, it then twists the definition where it comes to a HELOC. It changes the definition of “non-conforming” to be about the actual features of the HELOC product itself – without regard to borrower quality – it’s unprecedented.
    I remember a time when a mortgage broker might sheepishly explain to a “non-confirming” borrower that it was He, the Borrower, that was Sub-Prime – not the Interest Rate (or any other feature) of the loan. Now it seems that we have to explain it to our government..
    When Finance Minister Jim Flaherty killed off CMHC HELOC insurance last year, he stated ”They’re used to buy boats and cars and big screen TVs…”. While I disagreed with his comment, I thought I understood his motivation. Maybe the Taxpayer shouldn’t insure HELOCs – but it doesn’t mean that every single HELOC borrower is fiscally irresponsible or not credit worthy. Now I’m not so sure he gets it at all.
    If OSFI is already managing HELOC LTV levels on a portfolio basis at any given federally regulated bank, why do they need to extend their reach to capping individual borrowers into a HELOC at 65% LTV? Painting all HELOC borrowers with the same “non-conforming” brush is an abusive use of the term and unfair to the hundreds of thousands of well qualified Canadian HELOC borrowers in a sound financial plan.

  74. Thanks Sandy, The fact that HELOC borrowers meet some of the industry’s strongest qualification criteria seems to be lost in translation with officials. Regulators and lenders know full well (or should know) who the “higher-risk” HELOC borrowers are. They have the ability to easily segment these folks and apply different qualification criteria to them–leaving prudent borrowers with their options intact. Let’s see if they do the right thing. Just six days left for public comments at: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=4831

  75. Good point. The loan-to-value of a $20,000 credit card debt might as well be 1,000,000,000,000,000% because there is no “value,” only “loan.”
    Regulators are barking up the wrong tree with HELOCs. It would take the likes of a job loss for someone not to pay a debt secured by their shelter.

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