1-in-6 High-Ratio Buyers Could be Benched

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…).

  1. Has anyone seen the RMBS market that CMHC predicted would magically appear? It was supposed to be this wondrous place where lenders could securitize uninsured conventional pools at reasonable spreads. Could Finance be any more insincere when they put out press releases boasting a “Competitive” market? Earth to Ottawa. Illiquidity doesn’t spur competition.

    CMHC should have started an RMBS market before these changes were announced. It could have provided a guarantee that gradually declines to zero over time. Apparently no one in Finance thought of that, maybe because they don’t bother consulting anyone but their own actuaries.

  2. What restrictions are there to selling uninsured mortgages in covered bond form? I’m not aware of any except for the 4% limit on chartered banks (to prevent subordinating gov’t g’teed depositors too much). The relative absence of a non-insured RMBS market (there are a few big bank issues besides just covereds) has been because it is hard to compete with gov’t backed CMHC programs like bulk portfolio insurance and the CMB program. Perhaps as the government pulls back there will be more incentive to develop a market, although probably at higher overall rates. But if those rates are closer to where a true private mortgage market would clear though, is it really a problem?

    1. Hi Eric, The 4% rule is the headline restriction but there are other technical limitations. Finn Poschmann lays out some of them here: https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/e-brief_214.pdf

      Your last question captures the heart of the current policy debate, which is, do the benefits of federal mortgage sponsorship outweigh the costs? Parliament clearly felt they did when it established NHA MBS in 1985, in part, to transfer oligopoly profits back into consumers pockets. Removing that sovereign guarantee and privatizing the mortgage market would cost consumers billions because bank challengers can’t match the Big 6s’ funding costs. With less competition, borrowing costs surge and financing options disappear. Australia is a case study on that.

      Should we privatize anyway? We should if the taxpayer risk is greater than the reward. But that’s simply not the case, and we’ll show the math that explains why in CMT’s upcoming story on risk sharing.

      1. Do you have a pointer to why Australia is such a bad market? I googled for mortgage rates and found this:
        The rates there look about 1% above competitive rates here, which, since the Reserve Bank of Australia’s policy rate is 1.5% and the Bank of Canada’s is 0.5%, superficially looks like Australian spreads are just as competitive as Canada’s.

  3. CMHC should not even exist. Lenders should have to go in the open and free markets to find the funds. CMHC distorts the true costs of borrowing. Remove socialist CMHC and see what price the market would charge lenders? Why do bankers and lenders hate the free and open market ? Why don’t they want to even share some of the risk? Remove CMHC and you have no borrowers left in this bloated housing bubble where risk is not properly priced into rates.

    1. Spoken like a true housing cynic whose ignorance of reality shows in every nonsensical sentence of his comment.

      Tony, if you in your infinite wisdom can demonstrate how Canadians win by paying crazy rates and relying on 6 banks for over 90% of our mortgages, maybe you’d be taken seriously.

    2. This comment really does not deserve a response but let’s just say Tony is not correct. One of the hallmarks of our country is support for Canadians to form households and own their own homes. CMHC has performed their function flawlessly for decades and been one of the only crown corporations that returns money to the taxpayer every single year. Their are at least 20 different effective ways government can address the housing bubble without dismantling CMHC which would simply mean Canadians would pay higher interest rates for mortgages. If Tony’s objective is just for everyone to pay higher interest on their mortgage that is the real case he should make.

    3. And Tony…one more item of reading material for you…Do a google search on Moses M Coady and micro – finance, union organization, founding of credit unions…Not a socialist…this guy was not a socialist…you will be surprised.

    4. Tony, CMHC was established in 1935 to help kick start the Canadian economy out of the Great Depression. During this time R.B. Bennett was Prime Minister of Canada…he was a conservative, not a socialist…Just so you know… wow, who knew my degree in history would come in handy?

  4. I agree with Tony. All CMHC does in 2016 not 1935 is flood the market with cheap money. Now you have people with $25,000 eligible for $500,000 dollar homes. And that $25,000 is a loan from their in-law’s line of credit who bought a house in 1982 for $40,000 and now have a $800,000 heloc loan for 80% of the its current value.
    This is a multiplier effect. The new housing rules will slightly reduce the flood of money in the market.
    The only way to actually clean it up is: 1. Recession (normally every 10 years) 2. Stock market crash (causes liquidity crises as people sell asset to cover loans on securities. 3 Interest rate rise (not going to happen).

    Personally as a taxpayer I want CMHC to divest. They have made tonnes of money on premiums now its time to pull out and not take losses. Why can’t the government play it smart?

    1. Dennis your comment is pure illusion. There is no longer any “flood” of money going into housing, not relative to the past. Insurance and securitization have already been cut way back.

      If you have a problem with insurance, whine to parliament. They have made it LAW that all bank mortgages over 80% loan to value be insured.

      If you think getting rid of CMHC will help your taxes, answer this. How will you replace CMHC’s $20 billion of profit over the past decade? How will you replace the lost tax revenue from the housing sector? Your idea is devoid of rationality.

  5. You mean under 80% be insured… If these morgages were not insured how would you repackage them as AAA bonds and sell them off?

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