The Future of 85% LTV Bundles

golden percentage on wooden wallFederally-regulated lenders cannot lend more than 80% of a home’s value without the borrower getting mortgage insurance. But a few banks have developed a way around that.

What they do is loan the borrower 75-80% loan-to-value as a first mortgage. Then they facilitate a 5-10% LTV second mortgage with a separate private lender.

This allows for financing totalling 85% LTV with no insurance fee.

Optimum Mortgage, a division of Canadian Western Bank, had just such a product—until recently. It was called the Opti-85 Bundle, and here’s why it was pulled from the market.

According to Lester Shore, Vice President, Optimum Mortgage:

“The interpretation of the maximum loan-to-value ratio section of regulation B20, specifically the section that deals with structuring a mortgage or a combination of a mortgage and other lending products that exceeds the maximum loan-to-value limit, is presently under review by the regulator.

With an abundance of caution, we’ve chosen to withdraw the Opti-85 Bundle Program until such time that the regulator provides further clarification on this section.”

Brock Kruger, a spokesperson for banking regulator OSFI, says that OSFI does not prevent combo mortgages in general. He adds that mortgage combinations totalling 85% LTV “could technically be onside, but this is highly dependent on other conditions. For example, one must also verify whether the principles laid out in (regulation) B-20 are being met in their entirety.”

Equitable Bank is another lender offering an 85% LTV bundle mortgage. We haven’t heard any talk whatsoever about it pulling this product. Indeed, given Equitable’s conservative nature and prudent underwriting, one has to assume that it believes it is in full compliance with B-20 as written.

alternative-lendingHome Trust used to offer an 85% bundle but stopped a while back. “We were being prudent from a risk standpoint,” says President Martin Reid. (Home Trust does, however, allow second mortgages behind its first mortgages.)

Interestingly, Reid notes that 85% bundle mortgages actually perform better statistically than standalone 80% LTV mortgages. That’s because “the lender in second position tends to keep the mortgage current.” The second mortgage lender doesn’t want the borrower to default, in which case the first mortgage lender would have priority if the property was foreclosed on.

In any case, hopefully Optimum puts its Opti-85 mortgage back on the market. It would be sad to see these products regulated out of existence. 85% bundles offer a valuable alternative for borrowers who don’t qualify for traditional insured mortgages, and who don’t have a 20% down payment.

The truth is, these products are not a hazard. They are carefully underwritten and the bank or trust company (who’s lending against the first mortgage) does not incur a meaningful degree of extra risk.

It is the second mortgage lender, which lends its own uninsured capital, that takes the brunt of the risk. And, as mortgage professionals all know, second mortgage providers tend to be extra vigilant risk-conscious lenders.

Rob McLister, CMT

  1. The government now wants to regulate what a lender “facillitates” or to whom they refer a 2nd to?
    If the primary lender is underwriting THIER mortgage to B20 guidlines and the mortgage falls within those guidelines then by default the second mortgage would be meeting these guidelines as well.
    I think the bigger concern here is BIG BROTHER not only tells us who to lend to and how much even when its not insured they now want to control the lending practices of non-regulated private entities.
    Thier mandate is to oversee regulated lenders… telling them that a 2nd can’t be placed behind thier mortgage falls outside of this mandate. It doesn’t change the risk to the first mortgage and by extension to its shareholders or depositors.
    This is a slippery slope and I hope the other Alt lenders don’t roll over on this one as it appears Optimum has.

  2. If OFSI/CMHC wanted to allow 85% LTV mortgages, they wouldn’t have changed the lending rules.
    No matter how you package it, this clearly seems to be an offering specifically designed to circumvent the rule.

  3. Interesting that the major banks are backing away or quickly amending rules for allowing mortgage investments to be run under self administered RRSP accounts- this despite the large face BOLD print when you sign up, that THEY TAKE NO RESPONSIBILITY for the investments and that you alone are the decision maker and “at fault” maker when things go wrong. They are “just” administers of the plan.
    Normally that would/ should mean that their trustee relationship would be to follow the rules as set up by the PLAN HOLDER (subject to normal governing rules on the legality of investments)
    But these changes are apparently being implemented to “protect” the plan holder from himself. Now we have both gov’t and private companies out to save us from our foolishness of investing in mortgages!

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