Updates on Stated Income & Second Home Programs

CMHC SCHLCMHC surprised the market last week by eliminating its insured second home and stated income programs. Many believed that the Department of Finance (DoF) had something to do with it.

We asked the DoF directly. Here’s what they told us:

  1. I continue to be surprised when I hear that multiple insured loans are such a small percentage of CMHC business. I know of many current situations where people have at least two insured mortgages. Buy a house with 5% down, move in for a while, rent it out and buy another. Repeat process.
    In fact many current landlords who own multiple rentals built their inventory this way did they not? This strategy is now dead.

  2. Reply to KD – That was an abuse of the program – it was not meant to work that way. This abuse by lenders/brokers (not all but a fair amount) and underwriters/insurers not performing sufficient due diligence led to this.

  3. With all due respect Old Tyme Banker, if an insurer builds a program to provide second homes to be occupied by an immediate relative of the borrower but never asks to verify the identity of the immediate relative there is clearly a thought that so long as the loan is fully qualified and the relative occupies on the day of closing that the relative may not be the only occupant for the whole term of the mortgage. Really there is nothing wrong with that. The loans on these books are strong performers.
    Clearly the insurer and the lender recognise that there is a likelihood that the property may convert to a rental someday. Let’s face it: children buy their own homes eventually and parents move to care facilities eventually,that is the way the world works and there was never any requirement in the program that the borrower must sell the property when the relative moved out.
    So before we call that eventual outcome “abuse of the program” it’s good to actually understand the program.

  4. Ron, Kudos to you. I know you by reputation only, which is extremely reputable and beyond reproach.
    However, I understand the program more than you will ever know…let’s leave it at that.

  5. It isn’t “abuse” when you use a program to its full extent. And you may be a bit naive if you think CMHC did not know what the program would be used for… if you truly “understand the program”.
    When I asked a senior CMHC official about this program shortly after its launch I mentioned that it could be used for rentals his reply was simply ” we have strict credit guidelines for this program, and we aren’t concerned if strong borrowers use the program for rentals. We know it will happen”

  6. To broker
    Fraud is fraud You can colour false statements any way you want and call it “abuse” or a little slight of hand and try to rationalize by saying that fraud was built in to the product but it still required brokers / consumers to lie on applications
    So fraud is good because “good” people were involved ?

  7. I think it was more an unintended consequence of a well intentioned program. I wouldn’t call people who lived in a property and subsequently rented it out ‘fraudsters’.
    I thought second homes was created for events in our lives where owning two homes made sense. There are many situations where this occurs – employment in another city, a second family, helping their children etc.
    Using it to rent the property out was never a part of it, or use it to buy a seasonal cottage.
    I guess they figured the use of it for those situations was outweighed by it as a ‘nice to have’.

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