Death Sentence for Extended Amortizations?

No-26 Housing commentator Garth Turner cites insider info that long-term amortizations are about to go extinct, at least where the federal government has jurisdiction.

In a blog post today, he writes:

Last week the CEOs of the monster banks were given a clear message that 30-year mortgages need to be wiped away. Completely. In fact, they’ll be banned. That letter will go out next week, the result of a decision made jointly by the Department of Finance, OSFI (the bank regulator) and the Bank of Canada.

This applies to mortgages that: (a) are from lenders subject to federal regulation, and (b) have 20% or more equity. Amortizations on prime mortgages with less than 20% equity are already capped at 25 years.

If true (with emphasis on the word “if”), this news could:

  1. Increase monthly payments on new conventional mortgages by about $53 per $100,000 of mortgage, other things being equal.*
  2. Potentially impact even smaller non-bank lenders (e.g., First National, Street Capital, MCAP,…). That’s because, as Turner adds:“Regulated financial institutions will also be prevented from buying any securities which are made up [of mortgages] with 30-year ams.

    Virtually all non-deposit-taking lenders rely on securitization and/or selling mortgages directly to banks.

  3. credit-unionMake provincially-regulated credit unions the only game in town for amortizations over 25 years. That would provide credit unions who keep long-amortization mortgages on their balance sheets with another advantage versus the banks. CUs already sidestep federal mortgage rules by offering HELOCs above the federal 65% loan-to-value (LTV) maximum, higher LTV stated income mortgages and mortgages with lower qualification rates.

As noted, none of the above has been confirmed. So the above should be considered speculation until it is. We’ll do more digging and report back.


Update, May 10, 12:40 p.m. ET:  We’ve contacted the Department of Finance (DoF) for comment. Banking sources have confirmed reports of the DoF contemplating amortization guideline changes for conventional mortgages. But there’s no confirmation on what, if any, moves will be made. Assuming the DoF acts on this issue, an alternative possibility is that conventional borrowers be made to qualify at a 25-year amortization, but still be allowed to set payments at a longer amortization.


Update, May 10, 10:21 p.m. ET:  From the DoF: “As a matter of course, the
Department does not comment on what specific measures it may or may not be
considering. However, we can confirm that no announcements from the Department
of Finance related to uninsured mortgages are planned.” Turner says the guidance would likely be sent directly from OSFI to the banks with less fanfare than a big public announcement. At least one bank we spoke with earlier is currently considering tightening conventional amortization rules. It’s unclear if that is on the asking of OSFI or just an internal bank decision.

*  Assumes a fixed rate of 2.89%, 20% or more equity and an amortization reduction from 30 years to 25 years.

Rob McLister, CMT

  1. Rob, a report on Greatest fools, blog of the day? Sorry, I will have to pass.
    Honey boo boo’s Mom is getting married which is probably more relevant to the mortgage market than any of GT’s wild speculations.

  2. Normally I would agree, but he does have some inside connections, and previously when he reported on regulatory changes ahead of time they ended up happening. I wouldn’t be so quick to dismiss this.
    Does seem odd though. What’s wrong with 30/35 year mortgages with 20% down? Now that CMHC is essentially out of the bulk insurance business I don’t see how that’s the government’s business.
    If the market isn’t slowing fast enough for them, there are so many better ways to put the brakes on.

  3. I would be surprised if Garth was wrong on this. His sources are usually bang on. You think he doesn’t have connections to the government. That’s a foolish comment by someone who lacks the ability to see patterns.

  4. Canadians are living and working longer. The 25 year amortization rule of thumb made sense 40 years ago. Today what makes more sense is an age qualifier. For instance if you are 18 to 35 then a 35 year amortization is fine, 35 to 50 then max of 30 years, 50 plus and 25 year amortizations remain the max. Or some such similar formula.
    extended amortization also ought to notionally consider the remaining economic life of the property, physical and functional.

  5. Rob, I know I’m stating the obvious — but as usual “* all other things being equal” is used to dodge the point completely.
    This is part of the Fed’s frenzied ongoing attempt to engineer a soft landing in housing. If it works then all other things will *not* be equal, because prices will be lower. I expect the housing industry to cry about the injustice done to the first-time buyer like they’ve done for the last mortgage changes, when frankly the first-time buyer needs what the Fed is trying to arrange: lower prices.

  6. If this is true it’s just the latest sad case of Flaherty-Knows-Best telling responsible Canadians how to spend their money. Where is YOUR fiscal prudence Mr. Finance Minister?

  7. MF, “Other things being equal” is used merely as a boilerplate caveat to make quick comparisons possible. In cases like this, it means that all other factors (of which price is only one) remain constant. If amortizations are reduced further it will obviously apply downward pressure on values. But amortizations are only one variable so it’s not a guarantee of lower prices. Moreover, even if prices fall as we suspect, stricter amortization rules would potentially force well-qualified conventional borrowers to allocate more cash flow to their mortgage (albeit a somewhat smaller mortgage for new purchases). That’s despite more preferable uses for those funds in many cases. In any event, there are lots of implications here but it doesn’t make sense to speculate in depth until we can confirm if/how the policy is actually changing.

  8. Only in Canada does the government try to get this involved in controling the price of something they do not own.
    There is no such thing as “protecting the first time homebuyer”. What’s next? Protecting the first time car buyer? protecting the first time crib buyer?

  9. Yes, I understand. But since the Fed is doing this explicitly to cool the housing market, why dismiss the possibility in a footnote?
    If this change does happen, why do I get the feeling that CAAMP is going to come out swinging under the banner of protecting the first-time buyer? Their lobbying seems aimed at proptecting the status quo, which is *not* good for first-time buyers.

  10. Nice choice of words. “Cool” the housing market. What happens if F overdoes it and that “cooling” of real estate turns into cryogenic freezing? It’s not Finance’s mandate to destroy home equity for 10 million families. That is exactly what it’s doing.

  11. If Wyne succeeds in reducing the auto insurance by 15% and Flaherty succeeds in banning the 30 y mortgages, next I can see the Feds mandatory halving the gasoline price, no other way choice.

  12. Completely agree. Banks already have HELOCs with unlimited amortizations. Who cares of they have 30 year, 40 year or 100 year amortizations on uninsured mortgages?

  13. Dave, Flaherty is operating under the belief that the alternative to a soft landing is a hard landing (i.e. your cryogenic freeze scenario). I don’t envy his position trying to skirt the edge. However, either outcomes presumes dangerous overvaluation and I think that’s a fair call.
    If 10 million families are blindly budgeting that overvaluation into their retirement plans, they’re in for a shock. That equity will simply go back to where it came from — nowhere — sooner or later. If you’ve done your math, you should be OK. If you haven’t, then sorry, but that’s what you get for playing monopoly with a real banker.

  14. Exactly. Why on earth is the Canadian Gov’t is trying to control house prices via gov’t provided mortgage insurance?
    They don’t own the houses, and have no business trying to manage the prices of houses.
    They simply should not be in the mortgage insurance business.

  15. They do own something. Canadian currency, the price of which is reflected in rates…which they can’t touch, so rules instead…

  16. When government backing for mortgage insurance got cut back from 30 years to 25 years, some people complained that it was ‘government interference.’ Nonsense of course.
    This time, however, it sounds like government interference.

  17. When I was 21 and bought my first rental property I amortized it at 17 years because after playing with a mortgage calculator that was the best way to balance my budget without a lifetime of debt. I would recommend everyone budget this same way. If you want to shave off $20 a month (or whatever) and go from 25 years to 30 years then the government should probably step in and save you from yourself. Especially when I did it at half the amortization period. And yeah, I know prices are doubled, but that’s because the government extended the leash it used to have. Either way, people need to be protected from their own stupidity – there’s plenty of that going around.

  18. I’d like to see the Minister publish some real analysis of market conditions and the expected impacts of his policies. My read of the data – and I have published it, in the Fall 2012 CAAMP report – is that the housing market was already in a soft landing 6 months before he announced the changes last June. If I am right, his efforts to further weaken the market are highly risky. I don’t believe I’ve seen a real rebuttal of that analysis.

  19. Why the heck is it the governments and ultimately the taxpayers responsibility to protect the artificially and credit bubble driven equity in 10 million peoples homes? Take a look at the record levels of indebtedness in Canada. That is the real problem. Once these bafoons cannot consume more debt the consumer driven economy is in trouble as signs are starting to show now. Once these “emergency” low rates even hint at normalizing upon the mountain of consumer debt in Canada the economy will be screwed for years to come. Stop thinking so myopically and selfishly about your own little world and consider the bigger longer term picture for a change. A credit driven debt bubble is no good for anyone and your days of recklessly piling heaps of debt on unsuspecting morons that don’t know any better are over.

  20. Try to keep up. This has nothing to do with mortgage insurance. They’re saying the amortization changes apply to uninsured mortgages.

  21. How many stupid people have to do stupid things to justify depriving the majority of smart people?

  22. You certainly had no problem with it when the government controlled the home price to the upside by offering zero down and 40 year mortgages and cranked up CMHC to 600 billion did you? I bet you were licking your chops then weren’t you? Now your the victim and how can the government mess with my industry like this… wah wah wah. Selfish greed – plain and simple.

  23. @Will Dunning
    I don’t think he knows the expected impacts of his policies. That’s the problem. I think the plan is to keep adding new rules each year until one breaks the camel’s back.

  24. When the stupid people put the smart people and everyone else in jeopardy, that’s when. When the average dept is 160% that’s when. Kinda like right now. I’d rather take a small hit on all people then go down with stupid.

  25. Maybe we are focusing on the wrong side of this equation. It is not about protecting real estate markets from a hard landing, but rather protecting FIs from themselves. If left to their own devices banks would have us locked in perpetual financial slavery extracting every cent of interest from the public.
    Maybe if that money went into local/regional/ national economies instead
    of the bank’s collective pockets, we as individuals and as a nation would be far better off…just saying

  26. If a reduced amortization keeps prospective buyers out of the housing market does any one have any predictions on how that will affect rental prices in major Canadian cities?

  27. Flaherty and Co. want consumer debt to be a particular % of GDP.
    Can anyone see any reason for him to stop before then?

  28. Rents would definitely move higher if investors can’t get a 30 year amortization anymore. Existing rental mortgage rules already make it tougher to finance rentals.

  29. Maybe the real stupid people are the ones who impinge our freedoms by overestimating the jeopardy created by the other stupid people.

  30. There was no need to Increase the amort from 25 to 40 for *every* applicant, then or now. People enjoyed it then, so what’s wrong in pulling it back now?

  31. Yes I agree there was no need to increase amortizations from 25 to 40 for *every* borrower, but there is clear utility for *some* borrowers. Longer amortizations give people more financial options, and not just to overextend themselves. The return of 40 year amortizations would be positive if used responsibly and if people are qualified at 25 years.

  32. And if a fully private sector entity wants to step up to either lend or provide insurance for 40 year terms then they should do that. I suspect the reality is that there is no market there without a government guarantee.

  33. Amortization length shouldn’t be a public or private issue. It should be a common sense issue. The only relevant question should be, is the borrower qualified enough to warrant a longer amortization. Everything else is secondary.

  34. I agree there are responsible borrowers, who would benefit from longer amort giving more flexibility (no sarcasm here). Question then is why only have 40 years amort, why not have 50 years (after all people are living and working longer)?
    As always, there will be boundaries set by regulations, no escaping that even at 40/50 years. So I think a responsible borrower needing financial flexibility can recognize this fact of life and arrange his/her finances and returns accordingly. Its not that complicated.

  35. Wow she is getting married, what buffet is the reception at, the desert selections will be awesome. No need to worry about Garth’s amortization scare as we can charge it to my new Capital One card that is interest only, and a low rate of 21.9% plus it has wage loss insurance on it. Gives me such piece of mind knowing my mortgage will be paid for in 25 years instead of 30.

  36. With all due respect, you are obviously wrong Will. You can “read” the data however you want when it comes down to it. How do you explain 100% price increases in 10 years??? The market is over valued and that is obvious to even the uneducated.

  37. ManyFranks
    This is a pointless statement:
    “the first-time buyer needs what the Fed is trying to arrange: lower prices.”
    Besides first time buyers, who cares what first time buyers need? What about the other 90% of home owners? They (we) do not “need” lower prices.

  38. What is happening with the Credit Unions regulations at this point in time? Are we still hearing amortizations over 25y are being placed by them, are they still placing HELOCS over 65%? Are the banks also still reversing the registration priorities on Heloc/Mrtg combos to get around this & back up to 80% LTV also?

  39. Hi Specialist,
    The maximum amortization on a high-ratio insured mortgage is 25 years, regardless of the lender.
    For uninsured mortgages (or those with 20%+ equity), a small number of non-federally regulated lenders offer payments based on a 35 year amortization.
    As for HELOCs, CUs are still offering revolving HELOCs above 65% loan-to-value.
    At the banks, the rules permit them to offer 65% LTV revolving portions + 15% amortizing mortgage portions, for 80% total.

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