It could have been worse.
That’s the likely reaction of many after reading today’s OSFI notice about upcoming changes to mortgages and HELOCs.
Here’s what we now know…
- Contrary to some fears, mortgage holders in good standing will not have to be re-approved at renewal if they stick with their existing lender.
- This was the No. 1 industry concern in OSFI’s draft guidelines.
- OSFI says lenders can rely largely on people’s “good payment” records at renewal, which “is one of the best indicators of credit worthiness.”
The maximum loan-to-value on HELOCs will be cut from 80% to 65%.
- OSFI says, “HELOCs are inherently riskier products, given their revolving nature, persistence of debt balances and their ineligibility for mortgage insurance.”
- 65% LTV will be a hard limit that applies to all HELOC borrowers at all federally regulated lenders (i.e., it won’t be applied as a weighted-average on lenders’ portfolios).
- There’s no word yet on when HELOC changes will happen. “Later this year” is the most frequent guess we’ve heard from industry watchers.
- There’s hope that this guideline will be limited only to the line of credit portion of readvanceable mortgages. In other words, there’s nothing to suggest that people won’t be able to get a 65% LTV credit line, plus a 15% LTV mortgage, for a total LTV of 80%. (We won’t know this for sure until the final guidelines are released.)
- OSFI will not require that HELOCs be amortizing.
- In other words, interest-only HELOCs will likely survive, with no set repayment period.
- OSFI very wisely realizes that “the revolving aspect of a HELOC is a fundamental feature of the product.” Responsible borrowers rely on flexible interest-only payments for uses like investment financing, among others things.
These guidelines will not apply to insurers, only to lenders and institutions that acquire mortgages.
- OSFI says, “A separate guideline applicable to…mortgage insurers will be published for consultation at a later date.”
- No substantive changes will be made to OSFI’s draft guidelines on automated appraisals.
- OSFI’s March 19 guidance states that “Proper collateral management for residential mortgages (at origination, renewal or refinancing) should include a comprehensive, on-site appraisal, unless there are appropriate circumstances that justify the use of alternative approaches.”
- Mortgage applicants with a “relatively high LTV ratio,” unique properties, or less liquid properties (e.g., rural homes), will now more likely need an appraisal by a human appraiser versus an automated valuation system.
- We’re hearing more criticism lately about automated appraisals inflating values. This criticism may intensify if prices start falling.
- CIBC’s Ben Tal tells us that banks are increasingly opting for human appraisals to “protect themselves against mistakes” by automated valuation systems. “Real people appraising properties tends to lower the value of those properties,” he says.
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The speed at which OSFI has reviewed people’s comments and made decisions on these industry-moving policies is truly impressive.
Moreover, it’s relatively rare for OSFI to release interim updates like this after a comment period. It underlines the economic importance of these changes. (Stakeholders greatly appreciate these updates, so hats off to OSFI for keeping everyone in the loop.)
The final version of these guidelines will come “in the near future,” according to today’s release. That likely means later this month or July.
Sidebar: OSFI’s new mortgage policies are drafted for federally regulated lenders only, but regulators in certain provinces might also adopt them.
Rob McLister, CMT
Last modified: April 28, 2014
Unfortunately, the 65% limit on HELOCS will undoubtedly affect consumer spending in a negative fashion.
We are already on the verge of recession, and I fear that this unnecessarily harsh HELOC rule change will result in an economic slow-down, a reduction in the BoC overnight rate, as well as a revitalization of stimulus spending in Canada before too long.
Policy-led recessions are so mindless.
Thanks for this update Rob
Hey Rob
Just wondering if this new %65 HELOC rule is retroactive to all current HELOC’s, or does it just apply to new HELOC’s moving forward?
If it’s retroactive, that is a ton of new appraisals that will have to be ordered by banks to see if people are above the %65 value in their homes.
The logistics of this possibly being retroactive seem quite extensive and will affect a lot of homeowners.
>will undoubtedly affect consumer spending in a negative fashion.
That’s the point. Slowing spending of money people don’t have.
Not that I have any actual insight into this but it would surprise me if a regulator that is noticeably taking a soft stance would apply something that harsh.
My guess is that it’s not retroactive, or at most, they’ll force amortization of >65% at renewal to bring numbers in line.
Only OFSI knows the official answer to this, of course… And maybe even they don’t know yet. :)
I guess the wave of zero-down/40-yr renewals are safe? (from 2007-2008, hitting the 5-yr term)
The re-appraisal rule.. I’m almost certain this was meant as a diversion from the rest of the rule. It was so obviously over the top and harmful I think it was put in there only to focus the opposition on it. I don’t think it was ever seriously considered for implementation.
This allows them to drop the requirement now and show that they have compromised, without losing anything they actually wanted to enforce.
The following is taken from the letter OSFI released today. “Home Equity Lines of Credit (HELOCs) – OSFI is maintaining its position that the HELOC component of a mortgage be restricted to a maximum loan-to-value ratio of 65 per cent. HELOCs are inherently riskier products, given their revolving nature, persistence of debt balances and their ineligibility for mortgage insurance. However, HELOCs at or below an LTV ratio of 65 per cent will not be required to be amortized, as the revolving aspect of a HELOC is a fundamental feature of the product.”
Thanks for the post. That’s a million dollar question. I’ve heard speculation on both sides of the grandfathering issue. I’ll keep my lips tight until we get additional guidance on this point. Cheers…
Money you don’t have?
Like credit cards at 19% interest?
If your position is now that MEW is the only thing keeping the economy afloat, we’re in trouble. If you don’t want a policy led recession, lobby your senior levels of government for infrastructure projects. At historically low borrowing rates, floating some 30 year bonds to build subways &c in areas experiencing above normal unemployment is a no brainer. Or we could all move to Fort Mac, which seems to be official government policy.
•Contrary to some fears, mortgage holders in good standing will not have to be re-approved at renewal if they stick with their existing lender. ◦This was the No. 1 industry concern in OSFI’s draft guidelines.
◦OSFI says lenders can rely largely on people’s “good payment” records at renewal, which “is one of the best indicators of credit worthiness.”
So renewals are subject to more scrutiny, but existing lenders can consider replayment history and if it’s in good standing it trumps property underwriting?
Does that mean you can’t switch lenders?? What if your current lender offers you terrible rates? Something like that hurts brokers n\and borrowers. A ton of broker business is getting borrowers better rates when their current lender issues them a renewal letter with brutal rates.
◦There’s hope that this guideline will be limited only to the line of credit portion of readvanceable mortgages. In other words, there’s nothing to suggest that people won’t be able to get a 65% LTV credit line, plus a 15% LTV mortgage, for a total LTV of 80%. (We won’t know this for sure until the final guidelines are released.)
Rob,
Do the lenders not theoretically register the fixed portion (or the 15% LTV) in a first position with the revolving as a second, ie Scotia’s step program or Firstline’s Matrix…inherently the LTV or risk would still be 80%. If you would share your thoughts on this and maybe confirmation from one of your sources would be appreciated.
Great information as always!! Thanks.
Could you have previously found someone a better rate at renewal if his income, appraisal and/or credit were subpar, but his mortgage payment history was spotless?
So this water down version of the rules is good for people who want to keep on spending what they don’t have? I would not have a care in the world watching credit addicts fill their boots but as a Tax payer I am pissed at the thought that we will be paying the tab when this collapses.
Scotia registers an ‘unspecified’ mtg (no dollar amount) in first position. This covers off the whole borrowing limit (80%) inclusive of revolving credit and mortgage components. There is no separate registration for the revolving amount.
Registration doesn’t really matter. The line of credit limit would simply be fixed at 65%.
You can register a charge on title with no dollar amount? In what provinces?
Transfers have always required re-approval. Anyone can switch lenders if they qualify.
I would disagree with “A ton of broker business” comes from renewals. Renewals are a small part of broker business.
Everyone knows government doesn’t create jobs. If only it was that easy. Hey, PEI, get your shovels out because Ralph want to see a new Subway built from Charlottetown to Anne of Green Gables house.
I’m on the same side of the fence as you on this one, but there’s nothing we can do about taxpayer guarantees that have already been made, and CMHC has already withdrawn HELOC coverage.
In short, nobody gains by implementing new rules that spark the collapse. This beast will have to collapse under its own weight.
They built a bridge. Are you really young enough not to remember that? “Construction of the fixed link required over 5,000 workers ranging from labourers and specialty trades, to engineers, surveyors and managers. The economic impact of construction on Prince Edward Island was substantial, with the provincial GDP rising over 5% during the construction, providing a short-term economic boom for the Island.”
You are confusing solutions.
The optimal solution is not to restrict good borrowers in order to stop the “credit addicts.”
The optimal solution is to stop the credit addicts and leave the good borrowers alone.
I think calling the first 65% HELOC room and topping up to 80% with “regular mortgage” is a semantic trick that completely misses the point of the proposed regulation.
Usually the HELOC is second priority, but even if it weren’t, OSFI is not going to let you contort the way you count the debt.
You can bet the banks will do their best to get around any rule changes on technicalities. Remember when amorts were reduced from 35 to 30? Off the top of my head that reduced affordability about 7% for new buyers maxing out their credit. Then the banks all started advertising their skip a payment options, which conveniently enough improved affordability by about 7%. Funny how that works.
Let’s hope that OSFI is less amused by such antics.
I think it is you who is missing the point. This guideline addresses HELOCs, not mortgages. If you think a 65% LTV HELOC rule will prevent people from getting additional mortgage financing, you are uninformed.
I read through the Draft guidelines a couple times today and found a couple interesting parts that haven’t been discussed yet…
There is also a proposal to limit all non conforming properties to 65% LTV regardless of product. What do others understand the true meaning of “non-conforming” to mean?
Also it talks about having banks qualify all Variable and short term fixed(1,2,3,4yr) at the BOC MQR rate… which makes our job as mortgage planners very difficult because more borrowers will be forced into long term fixed rates at refinance regardless of it fits the plan due to qualification obstacles.
I have a friend at National Bank who said they have just started this on all conventional loans regardless of the LTV…
Hi IA,
Great question.
The general consensus when talking to non-prime lenders is that “non-conforming” refers to whether a mortgage conforms to that lender’s common lending practices. If true, it doesn’t appear that non-prime lenders will be cut back to 65% LTV.
That said, no lenders I talked to were 100% confident in this interpretation, which highlights the ambiguity in OSFI’s draft guidelines.
On the topic of qualifying conventional prime 1-4yrs & VRMs at the 5-year posted rate, I have a sneaking suspicion this policy will take effect at many, if not all, federally regulated FIs.
Cheers…
Interesting that they would note risk as a function of mortgage insurance when the number I’ve heard is that 80% of mortgage insurance claims don’t pay out. CBC Marketplace did an expose on this product that should be illegal. If someone gets a HELOC and buys term insurance that covers the HELOC for a lot less money than mortgage insurance, there is no difference in risk, except that the underwriting is already done, so if death occurs, the insurance will actually pay out.
Sigh.
I really wonder if this product really needed to be tightened that much considering so few people have actually heard of it, and banks would rather put you in a mortgage anyway.
Well said. So, what this does is allow only the wealthier to borrow (to invest, for one example), while those of lesser means have to continue to pay. On a 25 year amortization of a mortgage, you have only paid about 30% after 12.5 years, so if the house doesn’t appreciate, a HELOC will be an option pulled away from many that could previously have utilized it for whatever they wanted it for.
You are confusing mortgage default insurance (what Doug is talking about) with mortgage life insurance.
You are also wrong that banks prefer mortgages to HELOCs. HELOCs are higher profit.
Proposed HELOCs limit change will have very limited direct impacts to real estate market, which is the #1 potential risk to Canadian economy, if it is not retroactive to existed clients.