Based on CMHC’s debt ratio distribution, up to 15-20% of high-ratio buyers may no longer qualify for the same home they could buy yesterday. Maybe more. That’s because today’s new mortgage qualifying rate (MQR) policy could push them above the 39% GDS limit.
Many young buyers will now be riding pine until they scrape together a bigger down payment, get a raise, settle for up to an ~18% cheaper home or find a co-buyer.
Thankfully, the feds did add one key exception for buyers who already have a firm purchase agreement, dated Oct. 16 or before. That would theoretically exempt folks, for example, who bought on pre-sale and won’t close for a few years. Unfortunately, lots of lenders will still enforce the MQR when these people go to apply, thus limiting their options. Nevertheless, this attempted foresight gives federal regulators at least 20 IQ points on B.C. politicians, who recklessly applied B.C’s 15% foreign buyers’ tax retroactively.
Low-Ratio Implementation Date Pushed Back
The Department of Finance (DoF) says it won’t enforce the MQR on low-ratio insured mortgages until Nov. 30. Its original proclamation said Oct. 17. More on that.
Mortgage finance companies now have another six weeks to find balance sheet buyers for their low-ratio refis, rentals, jumbos and long-am mortgages. We’re hearing that most of the big boys have found funding backups for these loans, albeit at material rate premiums for deals closing on or after Nov. 30. These rate surcharges will make MFCs more prone to undercutting from deposit-taking lenders, and set back mortgage competition by 5-10 years.
Time for Higher Covered Bond Limits
With policy-makers’ unilaterally deciding to pare back government’s role in mortgage-backed securities, perhaps it’s time to rethink covered bond limits. The DoF is still talking a big game about maintaining mortgage “competition” (in some parallel universe). But on earth, the reality is that there’s no liquid market to sell uninsured mortgages at competitive economics, except the covered bond market.
Unfortunately CBs are accessible mainly to banks, and CBs can’t comprise more than 4% of their assets. But foreign investors have been eating up covereds at near 0% coupons. Since the DoF is now heaving billions worth of low-ratio mortgages onto banks’ balance sheets, the least they could do is give banks more leeway to sell these uninsured NON-TAXPAYER-BACKED mortgages to willing investors (I wonder if we emphasized these words enough for housing critics. Thinkin’ I might need a bigger font…).